Modern Economic Thought II Lauren Rudd – Instructor/Moderator October 6, 2010 [email protected] RuddReport.com Tel: (941) 346-5444 1
Dec 25, 2015
Modern Economic Thought II
Lauren Rudd – Instructor/Moderator
October 6, 2010
RuddReport.com
Tel: (941) 346-5444
1
Immigration
• Legal and illegal immigration
• Economic immigration as human capital investment
• Effects of immigration
• Effects of illegal immigration
• Reform of immigration law
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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
ImmigrationU.S. Immigrants by Country of Origin, 2007, measured in 1000’s
Mexico
China
Philippines
India
Columbia
Haiti
Cuba
Vietnam
Dominican Republic
El Salvador
0 50 100 150 200
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 factors7
Economic Effects
• Personal gains– Economic benefits exceed costs
• Other issues– Uncertainty and imperfect
information
– Backflows
– Skill transferability
– Self-selection8
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
Wag
e R
ate
United States Mexico
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Du Dm
aA
bd D
B
We
Wag
e R
ate
We
c f F C
Wu
0 0
Wm
Immigration impacts wages, employment, and output
g
G
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
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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
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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 issue17
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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
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Performance and Policy
• Real GDP– Corrects for price changes
• Nominal GDP– Uses current prices
• Unemployment
• Inflation – Increase in overall level of prices
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
Economic Performance
• Output growth– 3.1% per year 1995-2005
• Unemployment rate– 4.6% in 2007
• Inflation rate– 2.7% in 2007
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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
23-24
GDP Per Person 2007
Zimbabwe $188
United States $45,845Canada $38,345
Japan $33,576United Kingdom $35,134
South Korea $24,782France $33,187
Russia $14,692Saudi Arabia $23,243
Burundi $371Tanzania $1,256North Korea $1,900India $2,659China $5,292Mexico $12,774
U.S. dollars based on purchasing power parity
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Savings and Investment
• Saving– Tradeoff current for future
consumption
• Investment– Financial investment
– Economic investment
• Banks and financial institutions
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Shocks
• Demand shocks and flexible prices– Price falls if demand low
– Sales unchanged
• Demand shocks and sticky prices– Maintain inventory
– Sales change
– Business cycles
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Expectations
• The future is uncertain
• Expectations affect investment
• Shocks – What happens is not what you
expected
• Demand shocks
• Supply shocks
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Sticky Prices
• Explain fluctuations is GDP• Average months between price changes
Coin-operated Beer 4.3
Laundry Machine 46.4 Microwave Ovens 3.0
Newspaper 29.9 Milk 2.4
Haircut 25.5 Electricity 1.8
Taxi fare 19.7 Airline ticket 1.0
Veterinary service 14.9 Gasoline 0.6
Magazine 11.2 Computer software 5.5
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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