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Modern Economic Thought II Lauren Rudd – Instructor/Moderator October 6, 2010 [email protected] RuddReport.com Tel: (941) 346-5444 1 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 6 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 9 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 10 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 11 Migration Model • Overall effects: – World output up – Efficiency gains • Other effects – Brain drains – U.S. natives lose wage income – U.S. businesses gain income 12 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 13 Migration Model • Unemployment in Mexico – Which workers migrate? • Fiscal impacts – Fiscal burden > taxes paid • Wages will not equalize • Research findings are mixed 14 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 15 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 16 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 17 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 19 Performance and Policy • Real GDP – Corrects for price changes • Nominal GDP – Uses current prices • Unemployment • Inflation – Increase in overall level of prices 20 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 22 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 23 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 25 Shocks • Demand shocks and flexible prices – Price falls if demand low – Sales unchanged • Demand shocks and sticky prices – Maintain inventory – Sales change – Business cycles 26 Expectations • The future is uncertain • Expectations affect investment • Shocks – What happens is not what you expected • Demand shocks • Supply shocks 27 Demand Shocks Flexible Prices Price $40,000 $37,000 $35,000 DH DM DL 900 Cars per week 28 Demand Shocks Price Fixed Prices $37,000 DH DL 700 900 1150 DM Cars per week 29 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 30 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 31 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 32