Should a country limit unskilled immigrant workers to safeguard national productivity growth?

There are about 245 million migrants worldwide – around 3% of the world population. Roughly one-fifth are tertiary educated. Middle-income countries have a smaller proportion of immigrants than high-income countries (about 1% versus 12%). But for a number of middle-income countries with more immigrants than others, there is uneasiness about relying on unskilled foreigners as they strive to leap from low-wage labor and imitation to high-skilled labor and innovation. There are palpable concerns in Malaysia, for example, with some 2.1 million registered immigrants – about 7% of its population - and likely over 1 million undocumented immigrants. Things reached a crescendo early last year when all new hiring of unskilled foreign workers was suspended as the Malaysian government re-evaluated the management and need for foreign workers. The freeze was subsequently lifted for select sectors amid complaints of labor shortages.

How exactly do unskilled immigrant workers –with at most secondary education - fit into a dialogue about national productivity growth? Such a discussion would revolve around the components of labor productivity improvements - total factor productivity (TFP) growth, a rise in the average skill level, and physical capital deepening (keeping in mind that TFP growth can be facilitated by the other two components).

In a recent Research & Policy Brief (RPB), we discuss the channels through which unskilled immigrant labor affects labor productivity. We also attempt to summarize relevant empirical evidence. In sum, although unskilled immigrant workers have low formal human capital, they can still contribute to productivity improvements by helping the national economy become more efficient and by generating incentives for the native labor force to upgrade their skills.

Channels: How might unskilled immigrant labor affect productivity?
Mechanical (immediate) channels comprise (i) physical capital dilution from an overall increase in workers; and (ii) lower skills intensity following the increase in the proportion of unskilled workers. Both adversely affect labor productivity.

Dynamic channels come into play as firms and workers adjust. Positive effects could arise from:

1. Complementarity of immigrants vis-à-vis natives, when they are heterogeneous in skills. This can spur efficiency and higher skills intensity of the native workforce through task reallocation and specialization. The increase in the supply of workers for manual jobs allows natives to focus on more complex tasks. The re-entry of high-skilled natives, namely tertiary-educated women, into the labor force is also possible when low-cost domestic household services become available.
2. Scale and agglomeration economies, even if immigrants and natives are homogenous. An increase in labor supply can lower the cost structure of firms, supporting output expansion. This effect is particularly potent amid labor shortages and opportunities to enter new markets. Moreover, the pooling of task-specific labor can generate ideas for simple process improvements.
3. Increased competition, which, among similar workers, may incentivize natives to perform tasks more efficiently and to upgrade their skills.
4. Directed technological change, where firms adopt technologies and physical capital that are more suited to the efficient and intensive use of unskilled workers (i.e. possibly less “modern” but factor-supply appropriate), and which may contribute to increases in TFP.

Negative effects, on the other hand, may be triggered by:

1. Poor social cohesion, because of trust and communication barriers. Immigrant diversity has been found to have some costs in terms of cohesion, notwithstanding overall beneficial effects.
2. Physical capital-skill complementarity, whereby physical capital deepening is reduced as capital is less complementary to unskilled labor than skilled labor. This could lower TFP growth. 

Empirical evidence: What is the net impact on productivity of an influx of unskilled immigrants?
For a sense of net effects –positive or negative, we looked at 22 primary studies. Explicit analysis on skilled versus unskilled immigrants is rare. So, most of the econometric results pertain to the effects of total immigrants. They remain instructive, given the overwhelming direction of migrant flows from less educated to more educated countries.

Our simple tabulation suggests that overall, total immigrant effects on labor productivity are statistically insignificant to positive. Our review preceded a new IMF study which explicitly analyzes the effects of skilled and unskilled immigrants on labor productivity for a panel of advanced economies. That study finds that unskilled immigrants have, on average, a statistically significant positive impact on labor productivity.

In our RPB, broken down to the three components of labor productivity, positive effects from total immigrants are especially apparent through TFP. There is no statistically significant impact on physical capital per worker suggesting that capital accumulation need not be adversely affected. Human capital per worker is somewhat negatively affected, indicating that immigrants’ compositional effect on skills tends to outweigh the effect on natives’ skills upgrading. In the studies that analyze labor productivity alongside all its three components, positive immigrant effects on TFP more than offset the effects on physical capital and human capital per worker.

Outcomes vary across countries. Positive productivity effects from total immigrants are obvious for the U.S. - analysis using state-level data links task specialization of less-educated natives, induced by unskilled immigrant inflows, to TFP growth. Studies suggest that the complementarity and scale channels operate in Malaysia, but also that automation is somewhat hindered. Actual empirical evidence of net productivity effects seems mixed, and not representative enough of the economy as a whole, tending to focus on the manufacturing sector. In contrast, there is also the unique example of a large influx of skilled immigrants into Israel (fleeing the collapse of the Soviet Union) not having positive effects on productivity in the manufacturing sector.

More than anything, the cross-country evidence highlights that underlying the likelihood of positive net productivity effects is how immigrants link to specific gaps in the economy – regardless of skill level. And the response of agents, markets and institutions in host countries.

Reframing the problem
The economic case for an outright ban on unskilled immigrant workers is weak. But understanding economic needs, improving immigration systems, and incentivizing behavior that benefits the economy as a whole are imperative. To be fair, anxieties in middle income countries are not misplaced. However, foreign workers form a broader conversation on overall labor skills and technologies. For instance, how do nations ensure quality human capital amid brain drain? Middle-income countries in fact have emigrants that number two times immigrants - about 3% of their population. And high-skilled immigrants tend to leave a broad range of countries for a narrow selection of mainly high-income countries.