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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{ 4 comments }

bbartlog November 28, 2006 at 11:07 am

So we're supposed to add the increased income of immigrants to our growth numbers? Sort of gets back to the old 'Who is Us?' question. From a descriptive standpoint I don't doubt that there are places where this corrected growth figure would be useful, but since the intent is clearly to turn it around and use this prescriptively to justify unskilled immigration, I'll take issue with that side of it.

Suppose that there are two countries of equal population size, one with per capita income of $30,000 and one with per capita income of $3000. Half the people in the poor country move to the wealthy country, and after the dust settles the per capita income there is $24,000, while in the poor country it has dropped to $2000. Both countries have (nominally) experienced steep declines in per capita income, but by the corrected measure we should really be interested in the overall growth in income of all people, which is positive (+11%). However, this tells us *nothing* about whether the original inhabitants of the wealthy country are better off. If a third of each citizen's income is used to finance public goods it's quite possible that they will be worse off.

spencer November 28, 2006 at 4:17 pm

In period one income is 100 and the population is also 100. that gives us a per capita income of 1.

In period 2 income is 110 and the population is 105. that gives us a per capita income of 1.05 or a 5% increase.
But part of the increase in the population from 100 to 105 stemmed from immigration.

Consequently, the immigrants are included in the calulation of per capita income in each year and over the given period.
The fact that immigration accounted for part of the increase in population — and the immigrants output also accounted for part of the total income –does not create a distortion to the per capita income measure.

bbartlog November 29, 2006 at 1:05 pm

Not a distortion perhaps, but it does understate the gains made by immigrant individuals (or indeed all individuals); I think the point being made is that what looks like a fairly puny year on year growth rate doesn't reflect the fact that large gains in human income have taken place. If we had a way of measuring the income of all people rather than just tracking incomes on a nation by nation basis we would have a different and probably higher figure for growth.

trampjuice January 6, 2008 at 9:22 am

This is ascribing the type of mass immigration depicted in the 'gangs of new york' as being responsible for all economic growth, based on ever cheaper labour producing goods cheapy. This lead to poor wages at the bottom who compete in the labour market, and outragoius wealth at the top with the idle property owners reaping the gains. Per capita incomes only rose as the productivity of labour rose – and that was all due to increasing capital – not labour.

Unlimited immigration is a logical fallicy – Along the same lines – why should there be any gain in real wages for natives to have children if we can import them far cheaper than having these workers take time off.

In the modern world all growth in income is from increasing capital instensity through machines not mass immigration – capital structures are invested in as the need to be efficient raises itself by haveing to save labour – more work for less of a workers time. The rise in per person productivity raises per person wages broadly,while the idle rich lose out.
African states have unlimited population growth, Mexico's population grew from 30m in 1950 to 110m today. They are no richer.

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