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Immigration economics

Many countries are currently focused on amending and considering immigration changes because they realise that immigration reform can be a powerful toll to enhance the economic prospects for their country. In Bermuda the government has ended term limits in an effort to boost the economy. The United States is also currently considering major immigration reform that has the potential to assist boosting their middling economy as well. Can immigration reforms help economies grow? We will briefly review Bermuda’s current situation and consider the link between immigration and economics.

Bermuda’s Labour Force Long-time readers of this column are already familiar with Bermuda’s potential growth rate as measured by its change in the labour force and productivity which has been laid out in prior writings. As previously outlined in the article “Bermuda’s New Normal”, we stated that population growth is the source for all future growth in the labour force. All other factors being equal, a shrinking or smaller workforce limits how much any given economy can produce. The confluence of an ageing demographic, a lower fertility rate and a recent net negative immigration rate is likely to put pressure on the growth of Bermuda’s labour force in the near future. Given the inevitable ageing of the population and assuming no net benefit from immigration, we have estimated Bermuda’s labour force could actually shrink about 1.4 percent per year (see exhibit 1). This presents a very large obstacle to overcome and would negatively impact the potential output of the island.

Unfortunately, the long run effects of demographics are essentially not reversible. Bermuda has already received a large share of its “demographic dividend”: a rise in the rate of economic growth due to a rising share of working age people in the population, as a result of the ‘baby boomer’ generation. This is a one-time benefit and as the dependency ratio (the ratio of non-working people, i.e. children and retirees, to the working population) increases the island will receive less and less benefit from its size of labour force. The only way to counteract this drag is to foster an immigration policy to offset the decline. To simply stem the total potential decline in the labour force over the next ten years, immigration policies should target a roughly 1.4 percent annual net migration ratio — roughly 500 people per year. This accommodative immigration policy should be focused on promoting new business formation. Without a pro-immigration policy, it is very unlikely that Bermuda will be able to grow economically. It is quite simple; a larger domestic population creates more aggregate demand and more potential customers for all sorts of business.

Most mainstream economists would agree that more immigration is, on balance, beneficial for the economy. According to the Center for Global Development, the elimination of worldwide immigration restrictions could nearly double the world gross domestic product.

Does Immigration Really Boost the Economy?The common negative adage is that foreign workers coming to Bermuda harm local citizens by taking jobs that would otherwise be filled by Bermudians. The implication of this argument is that Bermuda should limit immigration because this would result in more jobs for the estimated 7.8 percent of unemployed Bermudians who are desperately searching for work. The major problem with this argument, however, is it blatantly ignores the fact that new immigrants actually help grow the local economy by bringing new skills and business that create new jobs that benefit everyone here.

One has to realise that immigrants tend to be highly entrepreneurial and they are leaving their home country for a very good reason: they feel their skills can be better put to use in Bermuda.

By applying their new and specialised skill set in Bermuda, the country benefits from “comparative advantage” — different sets of workers can specialise in jobs they have an advantage in. As a result the economy’s productivity and innovative base is also enhanced. These aspects make the local economy more efficient and propel economic growth.

At the end of the day, immigration is not a zero sum game. Immigrants grow the economy by creating jobs not costing jobs. The National Foundation for American policy estimates that each highly skilled worker in a technology firm is associated with the creation of five additional workers. Similar figures have been quoted in reference to expatriate executives here in Bermuda.

Studies have also shown that it is not just in the high-skilled category either. In fact testimony given to the House Committee on Agriculture by economist James Holt suggests each low-skilled immigrant worker is associated with the creation of three additional “upstream and downstream” jobs. In fact the influx of cheaper labour can actually make lower margin businesses such as restaurants and farming feasible. Without cheap labour certain industries just can’t run.

On the surface the concept of increasing the supply of labour should drive down the price. That is, assuming all things equal, higher supply and similar demand lowers the wage factor of workers. A study by the Brookings Institute actually suggests things are more complicated than that and “suggests that, on average, immigrants raise the overall standard of living of American workers by boosting wages and lowering prices”.

The main reason for this is that immigrants are not competing for the same jobs. Rather they are filling jobs that local employers cannot fill. Think of the care giver who allows a higher skilled worker to return to his/her productive role at work. Immigrants also contribute to the overall demand for other services they need, which in turn keeps others employed.

There is one other important aspect worth consideration. It is myopic to think that job risk is simply dictated by local immigration flows. The labour force of today, and increasingly in the future, is sourced globally and competes globally.

Greater levels of technology including economical transport and communication options, only augments this trend. Cheap productive labour in other nations competes with Bermuda every day and has nothing to do with immigration policies. More attractive immigration policies can only help mitigate these completive pressures by encouraging businesses to choose Bermuda as their domicile.

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd.

Estimating Bermuda’s Shrinking Labour Force

Year: Workforce estimate

Estimating Bermuda’s Shrinking Labour Force

2010: 41,586

2011: 40,958

2012: 40,352

2013: 39,768

2014: 39,206

2015: 38,665

2016: 38,146

2017: 37,647

2018: 37,169

2019: 36,710

2020: 36,271

Reduction in labour force: -12.8%

Annualised reduction: 1.4%

Major assumption: Age stratification is equall;y distributed in groups and unemployment rate is 0%

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Published February 04, 2013 at 8:00 am (Updated February 03, 2013 at 5:12 pm)

Immigration economics

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