This essay is based on the working paper “Immigration, Innovation, and Growth” by Stephen J. Terry, Thomas Chaney, Konrad B. Burchardi, Lisa Tarquinio, and Tarek A. Hassan.
The United States is among the countries most open to immigration, with one in seven Americans having been born abroad. It’s also one of the most innovative countries in the world, and American workers earn among the highest wages globally. However, this triad of facts does not necessarily mean that immigration is at the origin of American creativity or wealth.
The fierce political controversies surrounding the economic contribution of immigrants suggest that policymakers and voters alike are ambivalent about the economic benefits of immigration.
My colleagues Stephen Terry, Konrad Burchardi, Lisa Tarquinio, and Tarek Hassan and I explore the impact of recent immigration waves on the innovation of US firms and the wages of American workers.
Immigration Induces Local Firms to Innovate More
We first document that when a county receives an influx of foreign-born immigrants, local firms file more patents compared with firms in similar counties that do not receive immigrants. The effect is sizable. The influx of 10,000 foreign migrants over five years (about one standard deviation of county-level immigration) induces an increase of 25 percent in the flow of patents filed locally over five years from 460 to 580 patents per 1,000 residents.
Immigration Benefits Local Workers
We also find evidence that local workers on average benefit from the arrival of foreign migrants. Again, the effect is sizable. The influx of 10,000 foreign migrants in a county induces an 8 percent increase in the average wage of local workers over five years. This effect is not driven by high-earning migrants (average wages are computed after removing foreign-born workers), nor by the departure of low-wage workers.
Not Every Worker Benefits Equally from Immigration
The positive impact of immigration on local innovation and local wages is, however, not uniform. Less-educated local workers do not benefit from immigration, although they do not suffer from decreased wages either. Workers without a high school diploma see no change in their wages (neither positive nor negative), and those with only a high school diploma witness only a small improvement (less than 1 percent). High-skilled workers, on the other hand, experience large wage gains (as much as 15 percent).
Not Every Migrant Brings the Same Benefits
Just as higher-educated local workers benefit more from immigration, higher-educated migrants bring more benefits to the local communities where they settle. The least-educated migrants (high school education or less) do not bring detectable benefits for local innovation and wages, while the best-educated migrants (college education or more) induce significantly more innovation and wage growth than does the average migrant.
Correlation Versus Causation
The association of immigrants with regions that experience accelerating innovation and high wage growth does not necessarily mean that immigrants cause innovation and growth. It could simply be that migrants decide to settle in counties which would have experienced high innovation and wage growth even without immigration.
To understand whether immigration has a causal impact on innovation and growth, we isolate cases where, because of historical shocks, a county happens to host a large community of individuals who share a specific foreign origin. For example, the first historical wave of immigration from India in 1900 happened at a time when the Central Valley of California was economically booming, due in large part to the nascent oil industry and the increase in agricultural productivity allowed by irrigation canals. As a consequence, a large fraction of those early Indian migrants settled there. In recent decades, some of the newly arriving Indian migrants settled in the Central Valley, attracted by its large preexisting Indian American community.
Why Do More Migrants Lead to More Innovation and Higher Wages?
The positive impact of immigration on innovation and wages can be understood through simple economic theory. An influx of workers pushes wages down, because more workers compete for the same jobs. This effect is, however, counteracted by more innovation, as the increase in the labor force allows local firms to scale up their R&D activity. Local innovations increase labor productivity and push wages up. We find that, in the United States over the period 1975–2010, the positive force (innovation) dominates the negative force (downward pressure on wages).
Policy Implications
Our research shows that immigration is, overall, economically beneficial for local workers and firms. We also find that more-educated migrants have the strongest positive impact on innovation and growth and that more-educated US workers benefit the most from immigration.
This suggests that a two-pronged policy can harness the benefits from immigration. First, the United States should undertake a reform of its immigration system to allow more immigrants in, in particular those who are highly educated. Second, the United States should invest in the education of native workers, as higher-educated workers benefit more from immigration and are therefore less likely to push back against immigration reform that accepts more migrants.
Read the full paper here.
Thomas Chaney is a professor of economics at the University of Southern California.
This essay is part of the Immigration Research Brief Series. Research briefs highlight economic effects of immigration and enhance our understanding of today’s immigration systems.
