Modern Economic Thought II

Lauren Rudd – Instructor/Moderator

October 6, 2010

LVERudd@aol.com

RuddReport.com

Tel: (941) 346-5444

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Modern Economic Thought II

Immigration

Immigration

• Legal and illegal immigration

• Economic immigration as human capital investment

• Effects of immigration

• Effects of illegal immigration

• Reform of immigration law

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Immigration Facts

• Economic immigrants

• Legal immigrants– Averaging 1 million per year

– Quotas, refugees, and H1-B provision

– One-third of population growth

– One-half of labor force growth

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Immigration Facts

• Illegal immigrants– Estimated from Census data

– 350,000 per year on average

– High proportion from Mexico and Central America

– Total of 12 million residing in 2007, half from Mexico

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ImmigrationU.S. Immigrants by Country of Origin, 2007, measured in 1000’s

Mexico

China

Philippines

India

Columbia

Haiti

Cuba

Vietnam

Dominican Republic

El Salvador

0 50 100 150 200

Source: U.S. Citizenship and Immigration Services 6

Decision to Migrate

• Earnings opportunities–Increase value of human capital

• Moving costs

• Distance– Follow beaten path

• Age

• Other factors7

Economic Effects

• Personal gains– Economic benefits exceed costs

• Other issues– Uncertainty and imperfect

information

– Backflows

– Skill transferability

– Self-selection8

Migration Model

• Understand economic outcomes

• Assumptions– U.S. and Mexico

– Labor demand greater in U.S.

– No long-term unemployment

– Labor quality the same

– Migration has no cost

– Wage differentials key factor

– Migration is legal 9

Migration Model

Wag

e R

ate

United States Mexico

Quantity of Labor(Millions)

Quantity of Labor(Millions)

Du Dm

aA

bd D

B

We

Wag

e R

ate

We

c f F C

Wu

0 0

Wm

Immigration impacts wages, employment, and output

g

G

10

Migration Model

• Wage rates will equalize

• In the U.S.:– Wage rate falls

– Employment up

– Output up

• In Mexico:– Wage rate rises

– Employment down

– Output down 11

Migration Model

• Overall effects:– World output up

– Efficiency gains

• Other effects– Brain drains

– U.S. natives lose wage income

– U.S. businesses gain income

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Migration Model

• Complications and modifications

• Migration costs not zero

• Remittances redistribute income

• Backflows: temporary migration

• Immigrant workers as complementary vs. substitute labor

• Expansion of capital in some industries

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Migration Model

• Unemployment in Mexico– Which workers migrate?

• Fiscal impacts– Fiscal burden > taxes paid

• Wages will not equalize

• Research findings are mixed

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Illegal Immigration

• Employment effects

• Two extreme views

• Fixed number of jobs in economy– Immigrant employment decreases

domestic employment 1-for-1

• Immigrant work undesirable– No domestic workers displaced

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Illegal Immigration

• Wage effects– Substitute labor vs. complementary

labor

– Unskilled labor wages stay low

• Price effects– Cheap labor keeps prices low

• Fiscal impacts can be sizeable

• Other concerns 16

Immigration Reform

• Long history of immigration quotas

• Immigration Reform and Control Act of 1986

• Legal immigration limit up to 700,000 per year

• 2007 proposal to reform immigration law defeated

• Remains controversial issue17

Modern Economic Thought II

Introduction to

Macroeconomics

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Macroeconomic Overview

• Long-run economic growth and short-run fluctuations

• GDP, inflation, and unemployment

• Sustained increase in living standards

• Savings and investment• Shocks and sticky prices

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Performance and Policy

• Real GDP– Corrects for price changes

• Nominal GDP– Uses current prices

• Unemployment

• Inflation – Increase in overall level of prices

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Performance and Policy

• Can governments:– Promote economic growth?

– Reduce severity of recession?

• Is monetary or fiscal policy more effective at mitigating recession?

• Is there a tradeoff between inflation and unemployment?

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Economic Performance

• Output growth– 3.1% per year 1995-2005

• Unemployment rate– 4.6% in 2007

• Inflation rate– 2.7% in 2007

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Economic Growth

• Standard of living measured by output per person

• No growth in living standards prior to Industrial Revolution

• Modern economic growth– Output per person rises

– Not experienced by all countries

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GDP Per Person 2007

Zimbabwe $188

United States $45,845Canada $38,345

Japan $33,576United Kingdom $35,134

South Korea $24,782France $33,187

Russia $14,692Saudi Arabia $23,243

Burundi $371Tanzania $1,256North Korea $1,900India $2,659China $5,292Mexico $12,774

U.S. dollars based on purchasing power parity

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Savings and Investment

• Saving– Tradeoff current for future

consumption

• Investment– Financial investment

– Economic investment

• Banks and financial institutions

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Shocks

• Demand shocks and flexible prices– Price falls if demand low

– Sales unchanged

• Demand shocks and sticky prices– Maintain inventory

– Sales change

– Business cycles

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Expectations

• The future is uncertain

• Expectations affect investment

• Shocks – What happens is not what you

expected

• Demand shocks

• Supply shocks

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Demand Shocks

Cars per week

Pri

ce

DMDL

DH

900

$40,000

$37,000

$35,000

Flexible Prices

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Demand Shocks

Cars per week

DMDL

DH

700 900 1150

$37,000

Fixed Prices

Pri

ce

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Sticky Prices

• Explain fluctuations is GDP• Average months between price changes

Coin-operated Beer 4.3

Laundry Machine 46.4 Microwave Ovens 3.0

Newspaper 29.9 Milk 2.4

Haircut 25.5 Electricity 1.8

Taxi fare 19.7 Airline ticket 1.0

Veterinary service 14.9 Gasoline 0.6

Magazine 11.2 Computer software 5.5

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Sticky Prices

• Many prices sticky in short run– Consumers prefer stable prices

– Firms want to avoid price wars

• All prices flexible in long run– Firms adjust to unexpected, but

permanent changes in demand

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Inventory Management

• Computerized inventory tracking

• Unexpected changes in demand easier to observe

• Firms make better output and employment decisions

• Less severe business cycles

• Only two mild recessions since adoption – Possible explanation