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Modern Economic Thought II
Lauren Rudd – Instructor/Moderator
October 6, 2010
[email protected]
RuddReport.com
Tel: (941) 346-5444
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Modern Economic Thought II
Immigration
Immigration
• Legal and illegal immigration
• Economic immigration as human
capital investment
• Effects of immigration
• Effects of illegal immigration
• Reform of immigration law
-3
Immigration Facts
• Economic immigrants
• Legal immigrants
– Averaging 1 million per year
– Quotas, refugees, and H1-B
provision
– One-third of population growth
– One-half of labor force growth
4
Immigration Facts
• Illegal immigrants
– Estimated from Census data
– 350,000 per year on average
– High proportion from Mexico and
Central America
– Total of 12 million residing in 2007,
half from Mexico
5
Immigration
U.S. Immigrants by Country of Origin, 2007,
measured in 1000’s 0
50
100
150
200
Mexico
China
Philippines
India
Columbia
Haiti
Cuba
Vietnam
Dominican Republic
El Salvador
Source: U.S. Citizenship and Immigration Services
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Decision to Migrate
• Earnings opportunities
–Increase value of human capital
• Moving costs
• Distance
– Follow beaten path
• Age
• Other factors
7
Economic Effects
• Personal gains
– Economic benefits exceed costs
• Other issues
– Uncertainty and imperfect
information
– Backflows
– Skill transferability
– Self-selection
8
Migration Model
• Understand economic outcomes
• Assumptions
–
–
–
–
–
–
–
U.S. and Mexico
Labor demand greater in U.S.
No long-term unemployment
Labor quality the same
Migration has no cost
Wage differentials key factor
Migration is legal
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Migration Model
Mexico
United States
Wu
We
Wage Rate
Wage Rate
a
b
d
g
A
D
We
Wm
B
G
Du
0
c
f
Quantity of Labor
(Millions)
Dm
0
F
C
Quantity of Labor
(Millions)
Immigration impacts wages,
employment, and output
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Migration Model
• Wage rates will equalize
• In the U.S.:
– Wage rate falls
– Employment up
– Output up
• In Mexico:
– Wage rate rises
– Employment down
– Output down
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Migration Model
• Overall effects:
– World output up
– Efficiency gains
• Other effects
– Brain drains
– U.S. natives lose wage income
– U.S. businesses gain income
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Migration Model
•
•
•
•
•
Complications and modifications
Migration costs not zero
Remittances redistribute income
Backflows: temporary migration
Immigrant workers as complementary
vs. substitute labor
• Expansion of capital in some
industries
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Migration Model
• Unemployment in Mexico
– Which workers migrate?
• Fiscal impacts
– Fiscal burden > taxes paid
• Wages will not equalize
• Research findings are mixed
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Illegal Immigration
• Employment effects
• Two extreme views
• Fixed number of jobs in economy
– Immigrant employment decreases
domestic employment 1-for-1
• Immigrant work undesirable
– No domestic workers displaced
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Illegal Immigration
• Wage effects
– Substitute labor vs. complementary
labor
– Unskilled labor wages stay low
• Price effects
– Cheap labor keeps prices low
• Fiscal impacts can be sizeable
• Other concerns
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Immigration Reform
• Long history of immigration quotas
• Immigration Reform and Control Act
of 1986
• Legal immigration limit up to 700,000
per year
• 2007 proposal to reform immigration
law defeated
• Remains controversial issue
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Modern Economic Thought II
Introduction to
Macroeconomics
18
Macroeconomic Overview
• Long-run economic growth and
short-run fluctuations
• GDP, inflation, and
unemployment
• Sustained increase in living
standards
• Savings and investment
• Shocks and sticky prices
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Performance and Policy
• Real GDP
– Corrects for price changes
• Nominal GDP
– Uses current prices
• Unemployment
• Inflation
– Increase in overall level of prices
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Performance and Policy
• Can governments:
– Promote economic growth?
– Reduce severity of recession?
• Is monetary or fiscal policy more
effective at mitigating recession?
• Is there a tradeoff between
inflation and unemployment?
21
Economic Performance
• Output growth
– 3.1% per year 1995-2005
• Unemployment rate
– 4.6% in 2007
• Inflation rate
– 2.7% in 2007
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Economic Growth
• Standard of living measured by
output per person
• No growth in living standards
prior to Industrial Revolution
• Modern economic growth
– Output per person rises
– Not experienced by all countries
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GDP Per Person 2007
U.S. dollars based on purchasing power parity
United States
Canada
United Kingdom
Japan
France
South Korea
Saudi Arabia
Russia
Mexico
China
India
North Korea
Tanzania
Burundi
Zimbabwe
$45,845
$38,345
$35,134
$33,576
$33,187
$24,782
$23,243
$14,692
$12,774
$5,292
$2,659
$1,900
$1,256
$371
$188
23-24
Savings and Investment
• Saving
– Tradeoff current for future
consumption
• Investment
– Financial investment
– Economic investment
• Banks and financial institutions
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Shocks
• Demand shocks and flexible
prices
– Price falls if demand low
– Sales unchanged
• Demand shocks and sticky prices
– Maintain inventory
– Sales change
– Business cycles
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Expectations
• The future is uncertain
• Expectations affect investment
• Shocks
– What happens is not what you
expected
• Demand shocks
• Supply shocks
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Demand Shocks
Flexible Prices
Price
$40,000
$37,000
$35,000
DH
DM
DL
900
Cars per week
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Demand Shocks
Price
Fixed Prices
$37,000
DH
DL
700
900
1150
DM
Cars per week
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Sticky Prices
• Explain fluctuations is GDP
• Average months between price changes
Coin-operated
Laundry Machine
Newspaper
Haircut
Taxi fare
Veterinary service
Magazine
46.4
29.9
25.5
19.7
14.9
11.2
Beer
Microwave Ovens
Milk
Electricity
Airline ticket
Gasoline
Computer software
4.3
3.0
2.4
1.8
1.0
0.6
5.5
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Sticky Prices
• Many prices sticky in short run
– Consumers prefer stable prices
– Firms want to avoid price wars
• All prices flexible in long run
– Firms adjust to unexpected, but
permanent changes in demand
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Inventory Management
• Computerized inventory tracking
• Unexpected changes in demand
easier to observe
• Firms make better output and
employment decisions
• Less severe business cycles
• Only two mild recessions since
adoption
– Possible explanation
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