Immigration benefits us all – now the IMF gets in on the act

Only a short time after the Foged & Peri paper (summarised here) found that an “influx” of immigrants to Denmark benefited the both high-skilled and low-skilled workers in the local population, the IMF has examined whether or not those results apply to other advanced economies.

And, guess what? They do! Unsurprisingly.

In order to do so, the study uses a fairly nifty approach to accounting for potential reverse causation between migration and GDP per capita (since migrants might prefer moving to countries with higher GDP per capita in the first place). The study uses a “gravity model” to instrument for the share of migrants in a country, including various “push” factors (such as growth in the origin country, demographic variables etc.) and other controls, proving once again that describing something as “gobbledygook” just because you don’t understand it isn’t a particularly sensible thing to do.

The paper’s main findings are threefold. First, a 1% point increase in the proportion of population made up by migrants actually increases GDP per capita by 2%. Interestingly, this benefit arises via an increase in labour productivity, rather than an increase in the proportion of the population that is of working age.

For example, high-skilled immigrants can increase productivity through innovation and positive spillovers on native wages, while low-skilled workers can increase productivity by enabling native workers to re-train and move into more complex occupations (exactly as was found by Foged & Peri). An alternative mechanism cited by the IMF study suggests that the presence of low-skilled female immigrants increases the provision of household and child-care service, thereby increasing the labour supply of high-skilled native women. This result is robust to controlling for technology, trade openness, demographics, and country development.

Second, these benefits arise from both low-skilled and high-skilled migrants. As above, both skill-types affect GDP per capita through increasing labour productivity, rather than via increasing the proportion of the population that is of working age. However, the effect does appear to be more statistically significant for migration by low-skilled workers than it is for high-skilled migrants.

The study suggests that this difference could reflect differences in the impact of high-skilled migrants across different countries, but this seems unlikely to be sufficient to render the impact insignificant. More likely is the second reason posited by the study – namely, that high-skilled migrants initially might have to obtain jobs for which they are over-qualified, thereby meaning that their impact on the incentives of high-skilled native workers to retrain etc. is limited at first.

Third, the benefits to native workers arise across the entire income distribution. Both low-skilled and high-skilled immigration increase the GDP per capita of those in the bottom 90% of the income distribution by roughly the same amount, while high-skilled immigration increases the GDP per capita of those in the top 10% of the income distribution by roughly twice as much as does low-skilled immigration.

However, the study does not really examine the distribution within the bottom 90% particularly closely – the study just looks at the estimated impact of immigration on the Gini coefficient to conclude that the distribution within the bottom 90% would not be changed significantly. The study should, instead, have looked at, say, the impact of immigration on each decile or quintile of the income distribution separately so as to give a more complete picture of the impact of immigration across the income distribution.

The paper (and particularly the blog post linked to above) ends by getting somewhat more political. In particular the study suggests that there is a need for improvement in terms of providing support for native workers that want to re-train, find a new job etc. However, these policy suggestions are made without taking into account the fact that some countries do already have plentiful such schemes in place, to the extent that increasing the provision of such schemes in those countries might not be efficient. Of course, that’s not to say that some countries would benefit from increasing the provision of such schemes.

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Grammar Schools: Sam Freedman really should know better

Over the past few days there as been quite a bit written about whether or not selective schools (i.e. allocating children to schools at age 11 based on ability) are beneficial or not, either in terms of social mobility, educational outcomes or other areas. This stems from rumours that Theresa May is reviewing current ban on Grammar Schools.

A number of commentators have claimed that re-introducing academic selection at 11 years old is a bad idea. For example, Sam Freedman, an executive director of Teach First and someone who really should know better has claimed that selective education is bad for social mobility; societal integration; accuracy of assessing ability; and/or promoting parental choice of school.

However each of Freedman’s supposed criticisms are not supported by the evidence.

First, there is strong evidence to support the idea that grammar schools actually improve social mobility and countries with selective systems tend to be no less integrated than those without. In making his claim that grammar schools harm social mobility and lead to decreased integration, Freedman cites this webpage. However, the results displayed on that webpage rely solely on correlations and does not try to control for any other factor that might account for the apparent relationship between deprivation and performance. For example, the difference in wages between grammar and comprehensive educated people could simply reflect the fact that grammar schools select those who are more likely to obtain a better wage anyway and enable them to reach their full potential, whereas those students would be held back if they were forced to attend a comprehensive. It also does nothing to account for different demographics beyond an entirely arbitrary and undefined measure of “deprivation”.

Indeed, the webpage cited by Freedman seems to view social mobility as being achieved by “preventing the gifted from reaching their full potential” rather than “allowing everyone to reach their maximum”. However, there is a substantial weight of evidence that indicates that selective schools not only enable the most-skilled to achieve their full potential, but also substantially improved outcomes for the less-skilled. For example, Dale & Krueger states that “students who attended more selective colleges earned about the same as students of seemingly comparable ability who attended less selective  schools. Children from low-income families, however, earned more if they attended selective colleges.”

Similarly, Galindo-Rueda & Vignoles finds that “the most able pupils in the selective school system did do somewhat better than those of similar ability in mixed ability school systems. Thus the grammar system was advantageous for the most able pupils in the system, i.e. highly able students who managed to get into grammar schools.

In other words, selective schools incontrovertibly enable the highly-skilled to achieve their full potential as well as benefiting children from low-income families. This result is also supported by a study commissioned by the Sutton Trust – despite their avidly anti-selective school bias leading them to try to weasel their way out of the positive grammar school effect, the study finds that grammar schools tend to increase student performance by roughly two grades per subject taken at GCSE.

Second, Freedman’s claim that the 11-plus is poor at assessing ability does not stand up to scrutiny. Freedman claims that 70,000 students are wrongly classified by the 11-plus test – it is not clear if Freedman means 70,000 over the entire span of grammar schools’ existence, or 70,000 “mistakes” every year. If the former, then the proportion of mistakes made is clearly tiny as millions of people would have taken the 11-plus since it was first used. If the latter, then assuming that all 700,000 11 year olds take the 11-plus (not an unreasonable assumption) that gives a “failure rate” of just 10%. Clearly this is not very large. And those that suggest that even a single failure is unacceptable when it comes to a child’s education are being completely impractical since no educational system exists that can completely eradicate failures.

Finally, Freedman claims that grammar schools are “anti-choice”. However, this is clearly false – there is an obvious mechanism by which grammar schools promote choice of school. Specifically, the presence of an 11-plus test gets parents thinking about what will happen after the test, encourages them to research different schools and think about what school(s) would be best for their child. In other words, the 11-plus exam incentivises parental involvement in school choice, thereby promoting it.

Hence, Freedman is incorrect on every single point he mentions about selective schools. From someone that high up in Teach First, that is simply unforgivable.

Art and Economics

Art and economics probably aren’t the most natural of bedfellows. In my latest attempt at pretending to be sophisticated, and as part of a summer trip gallivanting around Barcelona, I ended up visiting (among all the other wonderful culinary and cultural delights) the city’s Museum of Contemporary Arts (MACBA).

The ground floor of MACBA is taken up with an exhibit by Andrea Fraser, called “L’1%, c’est moi”, which tries to present information and musings about the art world, with particular focus on individuals that have obtained and developed large personal collections of art. Unsurprisingly, Fraser’s angle is one of how those individuals with their own art collections are, for want of a better word, dubious (both in terms of their ethics and in terms of how they have been able to afford to obtain their art collections).

Indeed, one of the more wide-reaching points that Fraser tries to make is that an increase in inequality (it is unclear is Fraser is referring to wealth or income inequality) has enabled those individuals to build their collections. To that end, one of the “artworks” included in the exhibit was a short report, presumably put together by Fraser herself, that purports to demonstrate that rising inequality has benefited art collectors. In other words, Fraser is claiming that increasing inequality has enabled art collectors to benefit from increases in the value of their art collections.

However, Fraser’s “analysis” is pitiful at best. For a start, it is widely acknowledged that (income) inequality now is at roughly the same level as it was about 200 years ago (see, for example, here), yet Fraser chooses to focus solely on the past 50 years to try to bolster her claim that inequality is exceptionally high. Fraser does not extend her analysis back far enough in time to enable the conclusions she makes to be supported by the evidence. In fact, this is borne out by the graph on page 3 of Fraser’s report (reproduced below) showing that income inequality has been pretty much constant 50 years – hardly a marked increase in inequality at all.

Inequality

Moreover, the graphs Fraser included in the MACBA exhibit indicate that her understanding of statistical analysis does not extend even as far as the well-known maxim that “correlation does not imply causation”. To be fair to Fraser, a few economic researchers also don’t understand this concept particularly well. Nonetheless, in using the graph shown below, Fraser tries to support her claim that increases in inequality are leading to increases in the value of art.

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She does not, it seems, realise that there are plenty of other alternative reasons for the observed relationship – for example, it could be that the increase in the value of art is itself causing, or that both an increase in the value of art and the share of income obtained by the top 0.01% is driven by a common third factor (such as, for example, the rate of return on other investments).

The potentially absurd inferences that can be obtained by relying just on correlations can be seen even better in the graph below. The black dashed lines show the growth in the number of prisons and museums in the US over time, while the solid red line shows the US prison population. If one were to rely on correlations to make inferences, one would draw the conclusion that one way to reduce the US’ prison population would be to decrease the number of museums in the US. This shows the sheer ridiculousness of drawing conclusions from simple correlations alone.

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Hence, it’s clear that Andrea Fraser really should have put a bit more thought/work into the “analyses” she included as part of this exhibition.

PS. As a bonus piece of artsy mumo-jumbo economics, here is a description of an artwork by Adrian Melis. Enjoy

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George Osborne: A solid, but not spectacular Chancellor

As announced last night, George Osborne is no longer Chancellor of the Exchequer. Plenty of articles have already been written regarding how he’ll be remembered and whatnot (see, for example, here), but what really matters in an evaluation of his performance as Chancellor is focusing on the long-term impact of his main policies.

Of course, the main focus of Osborne’s term as Chancellor was “austerity” (or, as it is described in technical terms, a “fiscal consolidation”). There is lots of debate as to whether austerity is harmful or is beneficial to growth in the short-run – for example, Alesina & Ardagna, and some parts of the IMF, find that fiscal consolidations actually increase short-term growth, whereas the likes of Guajardo et al. and other parts of the IMF believe that fiscal consolidations harm short-term growth.

However, what really matters in evaluating the impact of austerity is its likely affect on long-term growth. Here, none of the aforementioned studies have anything to say, but there are good reasons to believe that austerity is beneficial for long-term growth. For example, it seems plausible that the amount of time required for a country to re-establish any lost credibility (either with taxpayers or the central bank) that arises from running continually large fiscal deficits could be relatively high – convincing people that a country is now fiscally responsible is unlikely to be the matter of a few years’ work.

In other words, it is plausible that it could take longer than just a few years for people to change their opinion regarding a country’s fiscal responsibility, such that the full impact of fiscal consolidations are only likely to be felt far into the future. Moreover, even though a recent working paper (by Fata & Summers) suggest that fiscal consolidations hamper long-run growth, those papers are based on a methodology that is fundamentally flawed.) Hence, austerity per se could have been a good policy of Osborne’s.

However, Osborne erred when he cut government spending on investments and infrastructure. At a time of incredibly low interest rates, it would have made sense to borrow to invest in projects that would have reaped a return in the future – the costs of borrowing are low, while the expected future benefits of such investments are likely to be high (in terms of their impact on future growth and on future tax revenues). Therefore, Osborne’s focus on cutting all, rather than just day-to-day, spending was misguided. Just as misguided (for the same reasons, since it prevented Osborne from borrowing to invest in infrastructure) was his Fiscal Charter.

Similarly, protecting spending on the NHS and on international development meant that there was little incentive for those departments to find savings despite the fact that they, and the NHS in particular, is bloated and full of inefficiencies (witness the large NHS deficits). If those departments had not had their budgets protected, a more efficient and equitable distribution of the cuts to day-to-day spending could have been achieved (since if the NHS or development budgets had been cut slightly, then other departments’ budgets would not need decreasing as much). Likewise, the triple lock on pensions. So, another negative point for Osborne there.

On the other hand, Osborne did set up the Office of Budget Responsibility (OBR), which was undoubtedly a very good thing. Although not quite as dramatic as Labour granting the Bank of England (instrument) independence in 1997, this step was important since it enabled and promoted independent oversight of government forecasts and spending plans. Moreover, it added much-needed rigour to Treasury analysis, evaluation of government performance against fiscal targets etc. since those working in the Treasury know that people at the OBR will review and evaluate any plans and forecasts.

Getting on to some of the smaller issues, the pasty-tax debacle was also a negative point. Specifically, the introduction of the tax was actually a decent idea – it removed some of the myriad of exemptions that apply to VAT, thereby simplifying the tax system – but the subsequent reversal of the policy in the face of (relatively small) public backlash was weak and disappointing to see. Likewise, the introduction of the National Living Wage policy was a good idea, but restricting it to over 25s seems rather a cop-out, and instead the minimum wage should (and could easily) have been increased to the level of the NLW, thereby benefiting more people without substantially increasing businesses’ costs.

There are also things that Osborne couldn’t really do much about, but for which some might blame him anyway. The lack of productivity growth might be one, but that’s more the responsibility of other departments than it is the Treasury. Failing to meet, or continually adjusting, his fiscal targets could be another – but Osborne was hampered in meeting those because of sluggish growth in the global economy.

Overall, then, it seems as though there are plenty of things over which Osborne can be criticised (e.g. refusing to borrow to invest, protecting certain departments’ budgets), but equally there are plenty of policies he introduced that are worthy of praise (e.g. the OBR, consolidating day-to-day fiscal spending). As such, Osborne will most likely go down in history as fairly middle of the road – some good bits, some bad bits, but generally not outstanding in either category.

Pesky immigrants, coming over here, making our lives better

Further to a previous post about how immigration can benefit the global economy, it’s also important to examine how immigration can affect the people in areas to where people have migrated. One of the main arguments used by those that try to claim that immigration is harmful is that immigration hurts the wages / employment of the low-skilled because supposedly cheaper immigrants take those jobs away from domestic workers. The fact that this argument is based on the false “lump of labour” theory has been covered well elsewhere (see, for example, here), but it can also be tested empirically.

To that end, a recent paper by Foged & Peri investigates the impact of immigration on domestic workers of various different skill types. To do so, it makes use of a quirk in the system that Denmark used to re-locate successful asylum-seekers and the fact that in subsequent years, relatives of those asylum seekers came to join them. Specifically, between 1986 and 1998, Denmark distributed refugees across the country taking into account only the refugee’s family size, the nationality of the refugee (so as to try to achieve “clusters” of refugees that would help each other out), and the availability of housing in each area.

In this way, the location of refugees was almost entirely independent of local labour market conditions. (Note that it is not entirely independent because there is likely to be some relationship between an area’s labour market and the availability of housing.) Nonetheless, this distribution of refugees was followed by a period between 1995 and 2003 in which immigrants from various regions moved to Denmark (most of these were from the likes of the Former Yugoslavia, Somalia etc. and were trying to escape local conflicts).

The people in this “new wave” of immigrants tended to settle in areas where earlier refugees/immigrants with the same nationality had settled – in this way, the initial distribution of refugees (that was mostly independent of labour market conditions) also drove future immigrants’ decisions of where to settle. Hence, the increase in immigration to Denmark from 1995 on can be used to assess the impact of immigration on the labour market in Denmark since the locational decisions of those immigrants was mostly independent of the labour market conditions themselves. (This is important because otherwise the results of an analysis of the impact of immigration on the labour market would be biased if the amount of immigration to a particular area itself was affected by the labour market in that area).

Therefore, in order to assess the impact of immigration on Danish workers, the paper uses a “longitudinal cohort study” – i.e. a frequent survey of a large group of people over a prolonged period of time (in this case, the Danish Integrated Database for Labour Market Research). This survey contains information related to someone’s age, municipal location, whether or not they are employed, their occupation, the number of hours they work, their salary etc. Coupled with information on where immigrants settled as per the previous paragraph, this dataset thus enables the researchers to investigate the impact of immigration on domestic workers.

The results of the study are extremely interesting. Contrary to the fallacious argument that low-skilled workers are harmed by immigration, the results of this study indicate that immigration actually benefits low-skilled workers in multiple ways.

First, immigration motivates and enables low-skilled workers to progress into more complex occupations. Second, these more complex jobs are associated with higher wages, such that immigration actually increases the hourly wage of low-skilled workers. Third, immigration does not result in (some number) of low-skilled workers becoming unemployed. In other words, immigration doesn’t force low-skilled workers out of a job, but instead enables them to obtain better jobs.

In addition, the study also looks to see if the impact of immigration falls different across different sets of low-skilled workers. It finds that the positive impact of immigration is felt most strongly by those low-skilled workers that are either young (less than 46 years old) or have not been in their jobs very long (less than four years), but also that there are no statistically significant negative effects for older workers or those that have been in their jobs a long time.

Overall, therefore, this study is pretty conclusive that immigration is beneficial to low-skilled workers and that those that claim that immigration harms those on low wages really don’t know what they’re talking about.

The cost of Brexit (part 2 of who knows how many)

In response to the Treasury’s report on the costs of Brexit (and, obviously, to my blog post covering that report) a group calling themselves “Economists for Brexit” published a pamphlet which they claim contains a more reasonable estimate of the impact of Brexit on the UK economy.

Unsurprisingly, they find that, contrary to the Treasury’s report (and, indeed, the vast majority of economic reports published on this issue), that Brexit would benefit the UK economy by increasing GDP growth by about 0.5% points per year on average (with the majority of this increase coming in 2020, the final year of their forecast).

Equally unsurprisingly, their estimate is fundamentally flawed. In an impressive attempt to hide these flaws, the report contains only a two page summary of the model they have used to obtain their results, but even then the numerous flaws are apparent.

First, the report assumes that leaving the EU would mean that the UK would be able to remove EU-set trade barriers to non-EU countries, but would still keep the same terms-of-trade it currently has with EU countries. Moreover, it assumes that all trade barriers will reduce by half over the next five years. These assumptions drive the report’s “finding” that Brexit would increase UK living standards by 3.2% by 2020. However, the report does not provide any evidence to support the validity of either of these assumptions. Indeed, there is plenty of evidence to suggest that they are not valid – for example, they assume a rate of decrease in trade barriers not seen since the 1960s.

Second, the report assumes that the 0.8% GDP net saving from the UK not having to contribute to the EU budget would be passed-on entirely to taxpayers in the form of an income tax cut. This is extremely unlikely to happen – due to the current government’s austerity policies, any savings from Brexit are likely to be used to reduce the government deficit rather than hand out a (potentially politically damaging) tax cut.

Third, not only does the report assume that there would be a reduction in regulation if the UK were to leave the UK (which is an unproven assumption), the report then assumes that this reduction in regulation would have exactly the same effect as a 2% point decrease in the employer rate of NI. One hopes that those writing the point must have released how barmy such an assumption is – the report doesn’t contain even a passing attempt to justify how a decrease in regulation would have exactly the same impact as reduction in employer NI. Indeed, it is barely possible to conceive how anyone could think this was a reasonable assumption.

Anyway, moving on. Finally, the report assumes that the government deficit is unchanged due to the aforementioned assumptions resulting in the government’s revenues not changed. However, this fails to recognise the possibility that some of the money that was spent on EU goods and services previously could now be spent on UK goods and services, thereby potentially increasing tax receipts. Conversely, the report also assumes that non-UK people and businesses won’t decide to move away from the UK, which would result in a decrease in tax revenues.

And all of this is to say nothing of the fact that the report has excluded countless other factors that could be detrimental to the UK. For example, the report does not even mention the potential impact Brexit could have on immigration (note that the vast majority of studies find that immigration is beneficial for the country to which immigrants relocate and this is even true for low-skilled workers in that country). Nor does it cover the costs associated with the uncertainty that would be created and persist for a number of years regarding exactly what form of agreement between the UK and the EU would be put in place post-Brexit.

In essence, the study published by the “Economists for Brexit” group is so full of holes it is no surprise that they were only able to find eight professional economists to support it. Contrast this to the almost 200 economists (including yours truly) that are signatories to a letter in the Times stating that “[l]eaving would entail significant long-term costs.” That in itself should be damning enough.

Why the difference between correlation and causation matters

A blog post by a member of the Economic Policy Institute (a US think-tank) has claimed that the decline in Trade Union membership is the cause of the increase in (a single measure) of inequality in the USA.

The blog post looks at how membership of Trade Unions and the share of income that goes to the top 10% change during the period 1917-2012, notices that they appear to be negatively correlated, and therefore concludes that decline in trade union membership is responsible for the increase in inequality.

First, it is important to note that inequality has actually decreased over time, rather than increased as the article claims (see, for example, here and here). Moreover, the blog’s use of a very specific measure of inequality, focusing solely on the income share of the top 10%. It does not take into account any other factor that determines the level of inequality within a country – for example, whether the majority of income in the top 10% is distributed evenly across that 10%, or is concentrated in the top 1% or even the top 0.1%.

Indeed, a more comprehensive measure of inequality (such as the Gini coefficient) takes into account the distribution of income across the entire spectrum rather than merely focusing on a subset of that distribution. When looking at such measures over time, it becomes apparent that inequality across the entire distribution of incomes has barely increased since the 1960s, despite the measure used in the blog post having increased since that time.

(And that is not withstanding other ways in which inequality might arise, such as via the distribution of wealth, access to healthcare, and/or access to education.)

Second, the author’s evidence to support their argument that a decline in trade union membership is responsible for the increase in inequality  consists solely of the fact that the measure of US inequality they choose is negatively correlated with US Trade Union membership.

There are plenty of examples of two series being correlated over time, despite there not being any way in which a causal relationship can exist between them. For example, Tyler Vigen presents such examples as Arcade revenues being correlated with number of Computer Science PhDs being awarded, and there being a strong correlation between Maine’s divorce rate and per capita consumption of margarine.

Moreover, the article’s “analysis” fails to account for the countless other factors that could have affected inequality over the course of the almost 100 years covered. For example, demographic changes, changes in the industries, technological developments, new infrastructure, changing societal attitudes individually and together are likely to have contributed to the changes in inequality. Indeed, the correlation between the US Trade Union membership and the chosen measure of inequality appears to be the large increase in TU membership and the large decrease in inequality between 1936 and 1945. And it’s not as though there were other things going on during that period of time at all!  Despite this, the article attributes the changes in inequality solely to changes in Trade Union membership.

Finally, the article does not even try to come up with a mechanism by which Trade Union membership can affect inequality beyond a vague description of how trade unions increase bargaining power. There are no doubt plenty of other things that are negatively correlated with the measure of inequality used in the report and that the report’s author presumably also thinks is just as likely a reason for changes in inequality as is Trade Union membership (US military strength might well be one, as could the number of black and white television sets in use).

I look forward to the Economic Policy Institute writing about those in due course.