Friedman On Growth Measurements and Immigration

by Don Boudreaux on November 27, 2006

in Immigration, Myths and Fallacies, The Hollow Middle

I thank Bob Higgs for drawing my attention to a short but insightful 1974 article, in the March/April 1974 issue of the Journal of Political Economy, by Milton Friedman.  (For those of you with access to JSTOR, here’s the link.)  I’m giddy with pride that my most-recent column in the Pittsburgh Tribune-Review reminded Bob of this article, by Friedman, entitled "A Bias In Current Measures of Economic Growth."

Here’s an excerpt:

It is common practice to measure the growth in economic welfare in a country over any considerable period by the rate of growth in real per capita income.  However, this measure can be seriously biased for a period during which the country experienced substantial immigration or emigration.

Consider the United States from, say, 1870 to 1914.  During that period, real per capita income as measured by Simon Kuznets grew at the annual rate of about 2 percent.  However, there was heavy immigration, reaching a peak rate of over 1 1/4 million persons a year in 1907.  By 1914, roughly one-third of the total population of the United States was foreign born or of foreign or mixed parentage, and one-fifth of the population over 14 years old was foreign born.  Their counterparts in 1870 — for, of course, we want to measure the growth in economic welfare for a "representative" population, not for a collection of identical and aging individuals — lived and worked in other countries, not in the United States.  We have every reason to believe that their 1870 counterparts had lower incomes than the then population of the United States — presumably that is why the United States experienced heavy immigration, not emigration.

The foreign-born in 1914 probably also had lower incomes than the rest of the U.S. population, but again the fact of continued large-scale immigration, let alone a wide variety of historical evidence, suggests that their incomes in the United States were substantially above the incomes that they could have received in the countries from which they came.  In any event, the incomes of the 1914 foreign-born are included in the aggregate income underlying the 1914 per-capita income estimate, while the incomes of their counterparts in 1870 are completely excluded.  The result is to bias the estimated rate of growth downward.

One of the great economic achievements of the United States in the period from 1870 to 1914 was the absorption of millions of residents who came to the United States with little but their bare hands, were able to make a better life for themselves than in their countries of origin, and to lay the foundations for a still better life for their children.  Yet not only is this achievement not recorded positively in the common measure of economic growth, it actually enters as a negative factor, reducing the measured rate of growth.

Just so.


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