Wharton’s Exequiel Hernandez discusses his new policy brief about the economic impact of immigration.
In America’s heated debate over immigration, there’s plenty of divisive rhetoric punctuated by strong emotions and precious few facts. Immigrants have been characterized as criminals who take well-paying jobs from Americans and damage the economy. President Donald Trump was elected, in part, on his promises to build a border wall with Mexico, to ban Muslims from entering the country, and to narrow the path to citizenship. Since taking office, his administration has implemented policy changes that increase scrutiny of immigrants, including not extending work permits or protections for certain nationalities and tightening visas for high-skilled workers. While the measures have led to numerous lawsuits and more shouting matches among TV pundits, effective reform remains elusive. That’s because the debate often fails to focus more broadly on the whole economic picture, according to Wharton management professor Exequiel Hernandez.
In a new brief for the Penn Wharton Public Policy Initiative, Hernandez explained that jobs and wages are only part of the story. His research shows that immigrants have a powerful effect on both capital investment and innovation, and their presence in a community can positively influence a firm’s operations. All these factors can lead to greater economic growth, suggesting that policymakers should consult with firms before making decisions regarding immigration.
“The bigger picture here is that the economy isn’t just powered by jobs and wages, it’s also powered by capital investment and innovation that makes both workers and capital more productive — and all three of those are affected by immigration,” Hernandez said. “You can’t pull one lever back and not hurt the other two. “
Hernandez spoke about the topic on the Knowledge@Wharton radio show, which airs on Wharton Business Radio on SiriusXM. (Listen to the podcast at the top of this page.)
Three Sides to the Story
In the sharp political divide over immigration, it’s easy to ignore the effects of capital investment and innovation. Jobs and wages are a highly visible and accessible part of the economy that resonate with everyone. In addition, the research around investment and innovation is newer, Hernandez said, so it hasn’t had time to penetrate the discussion.
But that research is robust, fact-driven and brimming with far-reaching implications.
“What the research is showing is that there’s a pattern that goes something like this: A group of migrants starts moving into a certain place, and eventually they are going to form a cluster. Those migrants aren’t isolated from their homes, so they communicate back and forth, they bring ideas, they bring skill, they bring some of their own money,” he said.
“But what’s not talked about is that a few years later, companies from [these migrants’] home countriesactually follow them into that place and set up factories and retail stores and research centers, and they make productive capital investments,” he noted. “Those factories employ not only immigrants, they also employ more Americans than immigrants. That pattern of migration being followed by foreign investment, by capital that comes into the U.S., is not talked about, but it’s a very common pattern.”
“I think we focus on the immediate effect of jobs and wages, and not on the long-term benefits.”
Hazleton, Pennsylvania, is an example. The city has undergone a rapid demographic change in the last 15 years, when Latinos began filtering in to fill jobs created by factories and other businesses taking advantage of tax incentives to expand. The city’s Hispanic population surged from under 5% to about 30%.
The ethnic and racial tensions in Hazleton have been well-chronicled in the news, and elected leaders have faced pressure from longtime residents who want the city to pull in the welcome mat to immigrants. But what’s being overlooked in the coverage is the economic growth experienced there. Hazleton has a revitalized downtown, impressive job numbers and unprecedented innovation, Hernandez said. Several Mexican-owned firms have opened there, creating jobs and a channel for money to flow back and forth across the border.
“I think what Hazleton has learned is that overall, immigration is very, very positive to revitalize areas, to bring forward investments, to create novel products, novel services,” Hernandez said. “But it just takes a little bit of time. I think we focus on the immediate effect of jobs and wages, and not on the long-term benefits.”
The ‘Job-stealing Immigrant’ Myth
“If I could dispel one massive misconception that is driving a lot of the anger about the issue, it is that low-skilled workers are taking jobs and lowering the wages of natives,” Hernandez said.
There simply isn’t the data to support that claim, he says. Myriad quantitative research, including a 2017 report from the National Academies of Science, Engineering, and Medicine, shows that low-skilled immigrants have virtually no effect on the jobs and wages of low-skilled American workers. “If any group is hurt most by low-skill immigrants,” Hernandez writes in the brief, “it is other low-skill immigrants.”
However, there is a positive correlation between high-skilled immigrants and their American counterparts. When firms hire these immigrants, those foreign workers bring with them skills that are complementary to their American colleagues. A knowledge transfer takes place, new ideas emerge and innovation follows.
A disproportionate number of patents are filed by foreign-born workers. On the entrepreneurial side, about a quarter of American entrepreneurs are immigrants; 31% of VC-backed startups are founded by immigrants; and about 40% of VC-backed startups have at least one immigrant founder, according to statistics on Crunchbase.
So, the net effect of immigration on the U.S. workforce is “unambiguously positive,” Hernandez said.
“Immigrant workers are not identical to American workers in terms of their skills and interests and even the jobs that they want,” he said. “They will fill different jobs; they will fill different roles within a company that will allow that company to hire more American workers. We need to shift the conversation from immigrants being identical or substitutes to being complements.”
“If I could dispel one massive misconception that is driving a lot of the anger about the issue, it is that low-skilled workers are taking jobs and lowering the wages of natives.”
Foreign Capital Chases Immigration
From the President to small-town mayors, politicians tout the importance of attracting foreign investment, yet they fail to connect it to immigration, Hernandez said. There is a growing body of evidence that shows foreign firms prefer to plant themselves on American soil that has already been tilled by a thriving immigrant population.
Just look at Honda Motor Co., Hernandez said. The company’s story reflects the tremendous uncertainty that firms face in going abroad. Back in the 1950s, the Japan-based operation was a small motorcycle manufacturer that wanted to expand to the U.S. market.
“They weren’t sure where to go; they weren’t sure what the market needed,” Hernandez said. “They decided to go into Los Angeles, in part because there was a reasonably big Japanese community there. They thought, ‘We can learn something from this community. We can use them as a gateway into the rest of the country.’ And the rest is history.”
According to Hernandez, for every 1% of growth in the immigrant population of a state, there is a 50% greater chance that a company based in the immigrants’ homeland will choose that location when expanding to the U.S.
That’s why it’s important for politicians courting foreign investment to think beyond tax incentives and consider whether immigration policy has a chilling effect on the economy.
“What my research shows is that just being welcoming to immigrants, having a population of immigrants, has a much stronger effect than any of those expensive levers that politicians use,” Hernandez said. “I think one of the best policies you could have is, how do we make this place friendly to foreigners? Of course, not in a way that you’re harming local workers. One doesn’t imply the other. But if you’re a politician thinking long term, that can be one of the best things you can do.”
Let the Cash Flow
Immigrants invite foreign capital, which increases in trade, which translates into economic growth.
In his research, Hernandez found that immigrants affect trade before they affect capital investment. If two locations — say, New York City and Mexico City — share an immigrant population, the firms that exist in both places are far more likely to forge opportunities to trade. That benefits the firms because the more markets they can access, the more they will hire locally. But it also benefits consumers.
“We need to shift the conversation from immigrants being identical or substitutes to being complements.”
Hernandez offered a unique thought experiment to illustrate the cycle:
“If you just think of your local supermarket and all the products on the aisles, then start removing the ones that are somehow influenced by foreigners — the food, the beauty products, the toys — the aisles become very empty. Now think of what you like to consume in terms of entertainment — music, movies, TV shows. You take away the foreign directors, the foreign talent, and your experience in entertainment would be much worse. This shows that the basket or mix of products that benefits you as a consumer would be much less enjoyable.”
Firms Need a Seat at the Policy Table
Companies should be a more powerful driver in the discourse over immigration. After all, Hernandez said, it’s the firms that are making decisions about hiring high- and low-skilled immigrants, about making capital investments and about pursuing innovation. Firms are making decisions about whether to set up shop in certain cities — or leave for more welcoming locales.
“We need to have firms involved in the conversations,” Hernandez said. But as a management professor, he also understands why that is tricky. Many businesses are afraid to jump into the fray or take a position on immigration out of fear of alienating customers who feel differently. That’s why Hernandez hopes the rigors of scientific research will help bring some much-needed order to the chaos.
“Economic debates about immigration policy often remain mired in verifiably false rhetoric about jobs and wages, while ignoring the capital and innovation effects. Putting all three factors of the growth equation together illustrates how complex the policy issue of immigration really is from a strictly economic perspective,” he wrote in the paper. “Failing to understand the multiplicative relationship between labor, capital and innovation will result in failed economic policy — a truth that extends beyond the issue of immigration, of course.”
result in failed economic policy — a truth that extends beyond the issue of immigration, of course.”