Immigrations Impact on GDP per Capita

Spencer Hoge
Mark Moeller
Kami Richmond

ECO 3421
TR: 3:05-4:15 PM

Introduction:
Immigration is a hot button political issue, especially in recent years due to the influx of
immigrants fleeing the violence in the Middle East for European OECD countries. It is the aim
of this paper to provide an unbiased, quantitative, economic answer to a highly politicized topic.
Some arguments suggest that immigrants are a drain on the host countries' economies. While the
majority of the literature on immigration's effect on the host country has been in regards to native
born employment, this paper differs in that it considers how immigration affects per capita GDP
of the host country. The aim of this paper is to conclusively prove if immigration affects per
capita GDP and if so to what degree immigration effects it. One would expect the effect on per
capita GDP to represent how the average citizen in the host country personally feels the effects
of immigration. If immigration has a negative effect on per capita GDP, than the average host
country citizen should expect their annual income to decrease. On the other hand if immigration
has a positive effect on per capita GDP the opposite would be true and the average citizen would
see an increase in their annual income. Essentially this study uses the effects of immigration on
per capita gdp to represent how immigration affects the ordinary life of average citizens.
Our research found that immigration has a statistically significant, positive, effect on per
capita gdp. As the inflow of immigration increases by one percent the per capita gdp goes up by
0.3 percent. Though this seems like a small amount, it was significant, and if scaled up to a ten
percent increase in inflows of immigrants the per capita GDP will increase by a full three
percent. This means that an increase in the percentage of inflows of immigrants will result in a
real increase in per capita GDP, i.e. increased immigration leads to greater annual earnings for
average citizens.
These findings are significant because they expand upon the findings of previous research
on the effect of immigration on host countries economies and they provide a concrete, unbiased
answer to a common political issue- the effect of immigration on the average citizen. In laymans
terms, the idea that immigrants negatively impact the earnings of ordinary citizens is simply
wrong. An increase in the inflows of immigrants will produce an increase in per capita GDP, thus
the average persons annual earnings will increase.

Literature Review:
The body of work analyzing the economic effects of immigration on OECD countries is
vast and still vigorously debated. This is in part because it is a topic hotly debated by politicians
and thus kept at the forefront of the media. As a whole, most of the literature is in agreement that
immigration has either no significant impact, or a positive impact on the host countries native
born employment rate as well as per capita Gross Domestic Product or wage rate.
One of the most comprehensive papers in recent years was by Ekrame Boubtane,
Dramane Coulibaly, and Christophe Rault. In their paper Boubtane et al. used a Panel VAR
method to find how economic conditions of host countries are changed by immigration. Using
annual data for 22 OECD countries from 1987 until 2009 the authors analyzed net migration rate,
unemployment and employment rate (as a total and among native- born citizens specifically) to
determine their effects on real GDP per person of the total working age population. The authors
made three specific findings regarding immigration; the host countries economic conditions
influenced the net migration inflow because during periods of growth the demand for labor
increases and this demand is partially satisfied by immigrants. (Boubtane, et al., 2013) Also, the
government responds to the market with changes in immigration policy (Boubtane, et al., 2013).
This alone suggests that the issue of immigration is twofold, economic and political, and they are
inseparable. Overall the authors came to the conclusion that immigrant inflow produces a
positive response in GDP per person and a negative response to the unemployment rate
(Boubtane, et al., 2013). Furthermore there was no reduction in job prospects for either native or
foreign- born workers (Boubtane, et al., 2013).
Our paper seeks to replicate the findings of Boubtane et al. regarding the effects of
immigration inflows on GDP per person. If they were correct in their findings then it should be
possible to replicate them. Additionally it is important to recognize that these authors also
acknowledged the marriage of politics and economics. This marriage is why the issue is so
prevalent and settling it is so urgent. A definitive answer to the economic impact of immigration
should lead to a political answer. Hopefully our paper will contribute to this growing body of
unbiased literature on the issue.
The findings of Boubtane et al. confirmed the earlier findings of Francesc Ortega and
Giovanni Peri from their paper. Ortega and Peri wanted to know the aggregate effects of
immigration on host countries. To do this they analyzed total employment, hours worked,

physical capital accumulation, and total factor productivity using hours worked, employment
rate, and a measure of capital stock in 14 different OECD countries over 25 years, isolated to
specifically measure the effects of immigration. What they found was that a difference in levels
of income per capita between destination and origin positively, as well as other exogenous, pushfactors are good predictors of the variation in immigration (Ortega, Perri, 2009). Immigrants
must be certain they will be able to cover the cost of immigrating before they actually move and
are more likely to immigrate due to push factors in their native countries (Ortega, Perri, 2009).
This leads to an increase in labor supply (in the country receiving immigrants) which does not
have a crowding out effect on the host countries native born workers in the short or long run
(Ortega, Perri, 2009. Ortega and Peri actually found that immigration increases employment and
investment responds to the increase in labor supply rapidly and vigorously. The net effect of
immigration, according to Ortega and Peri, is an increase in total GDP in the short run and no
effect on wages, average income per person, or native born employment rate.
Javier Ortega expanded upon the effects of immigration on native born citizens through
his study on the effects immigration has on the equilibrium wage and labor demand rates of the
host country. Javier Ortega studied how time and changes in the flow of unemployment to
employment across various countries affected wages and labor demand. Basically Ortega used
his model to determine the equilibrium wage and demand for labor before and after immigration.
What he found was that immigration aids native born citizens by increasing labor demand, which
leads to increased wages (due to workers greater bargaining power caused by more jobs) (Ortega,
2001). Unlike Francesc Ortega and Peri, Javier Ortega found that immigration does affect wages,
though indirectly, by increasing labor demand (Ortega, 2001). This relates to our research
because one would expect the increase in wages to increase per capita GDP; as wages increased
per capita GDP would as well. Since it is immigration that affects the increase in wages it should
follow that immigration has a similar effect on GDP per capita. Our paper is an extrapolation
upon the findings of Javier Ortega.
Javier Ortegas findings might seem to indicate that the increased supply of labor from
the influx of immigrants creates a demand for labor, but according to Jean and Jimenez in the
long run there is no significant impact on unemployment (Jean, Jimenez, 2007). In the short run
immigration increases the labor supply while simultaneously increasing demand for goods and
services (from the immigrants) which increases labor demand (Jean, Jimenez, 2007). Immigrants

effectively fill a void in the demand for labor left by the native born population and these same
immigrants bring with them an increase in demand for goods and services and supply of labor
(Jean, Jimenez, 2007). In terms of Javier Ortegas paper this represents a new equilibrium
following an influx of immigrants which positively impacts unemployment rates in the short run.
Jean and Jimenez findings reinforce Javier Ortegas and also explain the apparent problem if
creating demand by supplying labor.
It is worth mentioning that not all findings support the conclusion that immigration has a
positive impact on native born employment. Simonetta Longhi, Peter Nijkamp, Jacques Poot did
a meta- analysis on the impact of immigration on the employment of natives in which they found
a miniscule, but still statistically significant, decline in the native born employment. This effect
was greater in females than men, and less that 1% in total, but it seems to differ from the rest of
the literature (Longhi, Nijkamp, Poot, 2008).
Our study expands upon the current body of literature by analyzing the effect of
immigration on per capita GDP. Most previous studies put to rest the issue of immigration
crowding out native born workers by analyzing immigration's effect on employment. Rather than
repeating this process this study seeks to discern the effects immigration has on per capita GDP.
Immigration may not have a crowding out effect on employment, but perhaps it drives the per
capita income down by decreasing wages because immigrants are willing to work for less.
Additionally this study seeks to add to the current literature by recreating the findings of
Boubtane et al. The main focus of this paper is per capita GDP, unlike the existent literature, so it
will provide a more in depth analysis of how the inflow of immigration and other factors affect
GDP per capita.
Data:
Data for the econometric model we built comes from the World Bank Indicators, The
Heritage Foundation, and OECD Data. The paper analyzes 25 European OECD countries
through the use of annual data spanning across the years of 2000 to 2014. To account for having
panel data, an id variable was created that dummied for every country to discern the difference
each country had on GDP per capita as well. A dummy variable that disaggregated the countries
was necessary to minimize bias from aggregation in found in a pooled OLS technique. The use
of panel data suits a fixed effects method, which produces results that are more representative

and have less multicollinearity. The OECD Data on migration was used for the data on the
inflows of foreign population by nationality, which is the total number of foreign population.
Since the inflows of foreign population was given as an aggregate number, we took the log of
this data in our model to make it an elasticity that would be easier to interpret and compare to the
log of per capita GDP.
The effect of immigrants is being measured by its impact on the per capita GDP of all
OECD countries in the study. The per capita GDP data utilized is the one provided by the World
Bank Indicators and is measured in current U.S. dollars. Furthermore, the per capita GDP
includes the sum of the gross value added by resident produces and product taxes minus
subsidies not included in the value of the products. Since per capita GDP is nonlinear and a large
aggregate number, the log of per capita GDP was used as the dependent variable. This measure
ignores depreciation of fabricated assets or depletion of natural resources (The World Bank,
2015). The use of per capita GDP as the dependent variable lead to the inclusion of the following
independent variables in the econometric model to reduce specification bias. The independent
variables include: foreign born participation rate, native born participation rate, foreign born
employment, native born unemployment, the Index of Economic Freedom, and trade as a
percentage of GDP.
The OECD Data on migration was used for data on the native unemployment, foreign
employment, and for the data on the foreign and native participation rate. Employment was
measured in terms of foreign born employment (which captures the employment of immigrants)
as a percentage of total foreign employment. People who were between the ages of 15-64 were
and worked a minimum of at least one hour were counted as employed (OECD Data, 2015).
Native born unemployment was captured as a percentage of total native employment. People
who were between the ages of 15-64 were and worked a minimum of at least one hour were
counted as employed. People who were unemployed were people who had actively looked for
work within the prior four weeks, but were still without work (OECD Data, 2015). The foreign
and native born participation rate calculates the share of the employed and unemployed
population of the total foreign and native population respectively that are between the ages of 1564 that have worked at least one hour which would cause a change in the per capita GDP (OECD
Data, 2015).

The Index for Economic Freedom was taken from the Heritage Foundation. The overall
economic score was used in our model to account for political and country risks that would
impact per capita GDP. The risk accounted for in the overall score are property rights, freedom
from corruption, fiscal freedom, government spending, business freedom, labor freedom,
monetary freedom, trade freedom, investment freedom, and financial freedom. The index is on a
scale of 0 to 100 with 0 having the least economic freedom and 100 having the most economic
freedom (The Heritage Foundation, 2015). Trade as a percentage of GDP was included in our
model because of the importance trade has on GDP levels. Although the Index for Economic
Freedom measures trade freedom, it does not account for trade levels which is why we included
it as a separate variable. The trade data was taken from the World Bank Indicators (World Bank,
2015).
To test the impact of the introduction of the euro on countries GDP a dummy variable
was created where a zero was denoted in a country did not use the euro as their currency and a 1
for the year the euro was adopted and every subsequent year. To test the possibility of a structural
break due to the Great Recession a dummy variable was created for the year 2007 when the
recession began. Years prior to 2007 were given a value of zero and years 2007 and later were
given a one. . Table 1, pictured below, displays the summary statistics for the variables in the
entire sample.
Table 1. Descriptive Statistics

Table 1 displays the summary statistics for the variables in the entire sample. The mean
elasticity of per capita GDP in current U.S. dollars is 10.277. This can be untransformed and
interpreted as a mean per capita GDP of $28,853 current U.S. dollars. The range of elasticity for
per capita GDP is 8.311 and 11.642, which can be transformed and interpreted as a range of

$4,069.84 to $113,731.99 current U.S. dollars. The mean elasticity of the inflow of foreign born
population by nationality is 10.9852, which can be transformed into an inflow of 58,994.53
foreign born individuals. The mean foreign born employment rate is 59.82 percent and the mean
native born unemployment rate is 7.72 percent. The mean foreign born participation rate is
slightly lower than the native born participation rate at 70.85 and 71.27 percent respectively. The
mean overall score on the Index for Economic Freedom was 69.33 with a range from 52.8 to
82.6. The mean for trade as a percentage of GDP was 105.26 percent with a range of 45.59
percent to 371.44 percent.

Methodology:
This point of this paper is to measure the effect of immigration on gdp per capita. The
original regression used gdp per capita as the dependent variable, and country, year, if the
country has adopted the euro or not, foreign born labor participation, native born employment,
native born unemployment, foreign born employment, foreign born unemployment, native born
labor participation, inflows of immigrants, trade as a percentage of gdp, economic freedom.
This early regression showed severe problems with multicollinearity, heteroscedasticity
and autocorrelation. A test for multicollinearity produced a VIF score of over 1000. The
independent variables were immediately reviewed to see if any could be eliminated without
affecting the data greatly. Native born employment is expected to be highly correlated with
native born unemployment, so it was dropped from the model- as was foreign born
unemployment. The variables remaining included country, year, if the country has adopted the
euro or not, foreign born labor participation, native born unemployment, foreign born
employment, native born labor participation, inflows of immigrants, trade as a percentage of gdp,
and economic freedom. These variables proved to be statistically significant as well, with pvalues less than .05. In addition to refining the variables, this paper utilizes a type of panel data
called fixed effects. This is due to both heteroskedasticity and autocorrelation occurring from
using multiple countries over multiple years. Fixed effects controls for this problem.

For the next step the data was graphed to observe any patterns that might be occur when
they are plotted over time. The graphic representation of the relationship between gdp per capita
and time showed a potential break from 2007 to 2008 which was predicted by the Great
Recession. Later a dummy variable would be added for the years greater than 2007. Gdp per
capita showed a potentially logarithmic relationship, and thus the independent variable was
transformed from gdp per capita to the natural logarithm of gdp per capita, which represents the
elasticity of gdp per capita. The graph of inflows of immigrants with time also showed a
logarithmic relationship and it was the only other variable to be transformed into a natural
logarithm. The natural log of inflows of immigrants represents the elasticity of the inflow of
immigrants. Upon running the regression with the natural logs of gdp per capita and the inflow
of immigrants both the variables p-values decreased while the adjusted R- squared went up,
suggesting this was a better model. The model with the log of inflows can be compared to the
original linear model because both models have linear independent variables. The R- squared for
the model with the log of inflows of immigrants was higher and the p-value of the inflows
variable was lower, thus it is a better model to use the log of inflows of immigrants.
To compare which model was better, the log of gdp per capita or linear gdp per capita,
called for a MacKinnon, White, Davidson test. A Z variable was created using Z1=ln(yhatlinear)yhatlog. After running the linear model including Z1 these were the results Table 2:

The p-value of Z1 is statistically significant, thus the null hypothesis (the linear model is
the true model) is rejected. Next another Z variable is created using Z2=Antilog(yhatlog)-yhat.
This variable, Z2, is included in the regression of the logarithmic model to test if the true model
is the log model. The results are as shown below in Table 3:

This shows that Z2 is not statistically significant, so the null hypothesis is not rejected.
There is not enough statistical evidence to suggest that the true model is not the logarithmic
model. In conclusion, the logarithmic model is the better of the two models.

Results:
Results for the fixed effects (within) regression are presented and analyzed in this section.
Table 4: Fixed Effects (within) regression

The regression shows that the native foreign participation rate is statistically significant
and that with a 1 percent increase in the native born participation rate the log of per capita GDP
increases by 0.0313231. The untransformed interpretation is that when native born participation
rate increases by 1 percent that per capita GDP increases by 1.0318 percent. Foreign born
employment also showed to be statistically significant and had a positive correlation with
GDPpc. With a 1 percent increase in foreign born employment the lnGDPpc increases by
0.003048. The untransformed interpretation is that when foreign born employment increases by 1
percent that per capita in GDP increases by 1.003 percent. The log of the inflow of foreign
population by nationality also show a positive and statistically significant relationship with per
capita GDP. When the log of the inflows of immigrants increases by one percent the lnGDPpc
increases by .2928679. The untransformed interpretation is that when the inflows of foreign born
population increases by 1 percent than the GDPpc increases by 0.3 percent. The relationship
between the Index of Economic freedom and the per capita was also found to be statistically
significant and positive. When the overall score for economic freedom increases by 1 point than
the lnGDPpc is 0.0313231. The untransformed interpretation is that when the score for economic
freedom increases by one point that GDPpc in current U.S. dollars increases by 1.0318 percent.

Trade as a percentage of GDP is also found to be statistically significant and increases when
lnGDPpc increases. When trade makes up one more percent of GDP then the ln GDPpc is
0.006384092. The untransformed interpretation is that when trade as a percentage of GDP
increases by one percent than GDPpc in current U.S. dollars also increases by 1.0063 percent.
When OECD countries changed to the euro currency there were also positive impacts on GDP
per capita at a statistically significant level. When countries changed to the euro the lnGDPpc
increased by 0.2677049. The untransformed interpretation is that when countries changed to the
euro their GDPpc increased 1.307 percent.
For our model the R squared explains 64.12 percent of the variance in the per capita GDP
in current U.S. dollars. This makes us confident that our findings are significant in predicting
changes in the per capita GDP, although admittedly not completely inclusive of all factors
affecting per capita GDP.
To summarize, we conclude that native born participation rate, foreign born employment,
inflows of foreign born population, economic freedom, trade, and adoption of the euro are all
statistically significant and increase GDP per capita. These findings do not support our
hypothesis that increased inflows of foreign population drives per capita GDP down. One
possible reason our hypothesis is not supported is because our data does not segregate the
inflows of foreign population into skilled and unskilled categories. Without distinguishing
between the two it is not possible to tell if the net effect of an increase in the inflows of the
foreign population would raise or decrease the per capita GDP. Another reason for findings
contradictory to our hypothesis is due to an increase in the size of the labor force. According to
basic labor economics, when the size of the labor force increases than the total GDP will rise.
Another finding of our research is that the relationship between many of our explanatory
variables and GDP appears to be unit elastic. A 1 percent increase in native born participation
rate, foreign born employment, economic freedom, and trade all result in approximately a 1
percent increase in per capita GDP in current U.S. dollars. However, adoption of the euro results
in a slightly higher increase with an increase in per capita GDP of 1.307. The implication of this
finding is that countries who adopt the euro have a healthier economy. However, this is not
universally true and perhaps this finding is instead indicating that OECD countries that use the

euro have higher GDPs because of higher amounts of interaction through reduced trading costs
and increased mobility of people as well as goods.
The most intriguing of our findings is that effect of the inflows of foreign population has a
positive effect on per capita GDP. Our hypothesis that increased inflows of foreign population
would adversely affect the per capita GDP reflects a larger problem found in society: the
perception that increased mobility of foreign labor is harmful. Although crowd out is feared by
native born populations of developed countries, in many instances foreign labor possesses a
different skill set than the native population. One possible reason that foreign labor increases the
per capita GDP is because they provide labor in an occupation that native born laborers find
undesirable.

Conclusion:
This paper empirically examines the relationship between inflows of foreign population
and the per capita GDP in current U.S dollars. The research is conducted using a fixed effects
(within) regression model for the 25 different OECD nations over the years spanning from 20002014. Our results provide evidence contrary to our hypothesis that an increase in inflows of
foreign populations causes a decrease in per capita GDP. Instead we find that an increase in the
inflows of foreign population into an OECD nation increases the per capita GDP in current U.S.
dollars. Therefore, our most important conclusion is that the stigma associated with allowing
inflows of foreign populations into a developed OECD country is not supported by empirical
evidence. Moreover, our research findings could have serious implications for OECDs future
policies regarding the number of foreign nationals they allow on an annual basis. Unfortunately,
our results cannot be applied to the impact of refugees on OECD countries because of other
factors not controlled for in our model.
Our evidence that per capita GDP is positively influenced by rises in the number of the
foreign population can possibly be explained for the following reasons. The countries who are
more open to inflows of foreign population also are more open in other aspects, such as trade
openness. The inflows of foreign population could be composed of a greater proportion of high

skilled labors than low skilled laborers which would cause the net effect on per capita GDP to be
positive. Our research has found evidence that inflows of foreign populations increase per capita
GDP, which should help erode the stigma that immigrants hurt developed countries economies
and should be considered when tackling future immigration policy.

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