1. Modern Economic Thought II Lauren Rudd – Instructor/Moderator October 6, 2010 LVERudd@aol.com RuddReport.com Tel: (941) 346-5444 1

2. Modern Economic Thought II Immigration

3. Legal and illegal immigration Economic immigration as human capital investment Effects of immigration Effects of illegal immigration Reform of immigration law -3

4. 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

5. 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

6. Immigration U.S. Immigrants by Country of Origin, 2007, measured in 1000’s Mexico China Philippines India Columbia Haiti Cuba Vietnam Dominican Republic El Salvador 0 50100150200 Source: U.S. Citizenship and Immigration Services 6

7. Decision to Migrate Earnings opportunities –Increase value of human capital Moving costs Distance – Follow beaten path Age Other factors 7

8. Economic Effects Personal gains – Economic benefits exceed costs Other issues – Uncertainty and imperfect information – Backflows – Skill transferability – Self-selection 8

9. 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

10. Migration Model Wage Rate United States Mexico Quantity of Labor (Millions) Quantity of Labor (Millions) DuDu DmDm a A b dD B WeWe Wage Rate WeWe cfFC WuWu 00 WmWm Immigration impacts wages, employment, and output g G 10

11. 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

12. 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

13. 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

14. Migration Model Unemployment in Mexico – Which workers migrate? Fiscal impacts – Fiscal burden > taxes paid Wages will not equalize Research findings are mixed 14

15. 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

16. 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

17. 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

18. Modern Economic Thought II Introduction to Macroeconomics 18

19. 19 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

20. 20 Performance and Policy Real GDP – Corrects for price changes Nominal GDP – Uses current prices Unemployment Inflation – Increase in overall level of prices

21. 21 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?

22. 22 Economic Performance Output growth – 3.1% per year 1995-2005 Unemployment rate – 4.6% in 2007 Inflation rate – 2.7% in 2007

23. 23 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

24. 23-24 GDP Per Person 2007 Zimbabwe$188 United States$45,845 Canada$38,345 Japan$33,576 United Kingdom$35,134 South Korea$24,782 France$33,187 Russia$14,692 Saudi Arabia$23,243 Burundi$371 Tanzania$1,256 North Korea$1,900 India$2,659 China$5,292 Mexico$12,774 U.S. dollars based on purchasing power parity

25. 25 Savings and Investment Saving – Tradeoff current for future consumption Investment – Financial investment – Economic investment Banks and financial institutions

26. 26 Shocks Demand shocks and flexible prices – Price falls if demand low – Sales unchanged Demand shocks and sticky prices – Maintain inventory – Sales change – Business cycles

27. 27 Expectations The future is uncertain Expectations affect investment Shocks – What happens is not what you expected Demand shocks Supply shocks

28. 28 Demand Shocks Cars per week Price DMDM DLDL DHDH 900 $40,000 $37,000 $35,000 Flexible Prices

29. 29 Demand Shocks Cars per week DMDM DLDL DHDH 700 900 1150 $37,000 Fixed Prices Price

30. 30 Sticky Prices Explain fluctuations is GDP Average months between price changes Coin-operated Beer4.3 Laundry Machine46.4 Microwave Ovens3.0 Newspaper29.9 Milk2.4 Haircut25.5 Electricity1.8 Taxi fare19.7 Airline ticket1.0 Veterinary service14.9 Gasoline0.6 Magazine11.2 Computer software5.5

31. 31 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

32. 32 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