TFP and Immigration

One crucial aspect about the CBO’s assessment of the Senate immigration bill keeps coming back to me:

In CBO’s view, enactment of S. 744 would lead to slightly higher productivity of both labor and capital because the increase in immigration— particularly of highly skilled immigrants—would tend to generate additional technological advancements, such as new inventions and improvements in production processes. CBO estimates that total factor productivity (TFP, the average real output per unit of combined labor and capital services) would be higher by roughly 0.7 percent in 2023 and by roughly 1.0 percent in 2033, compared with what would occur under current law. The increase in TFP would make workers and capital alike more productive, leading to higher GDP, higher wages, and higher interest rates.

Where exactly does this increase in TFP come from? It seems intuitively plausible that a dramatic increase in skilled immigration might lead to some increase in useful inventions and improvements in production processes, though of course inventions and improvements in production processes generated overseas would also benefit the U.S., as high-level innovations travel reasonably well across borders. Having a more skilled workforce might increase the “absorptive capacity” of U.S. firms, i.e., the capacity of U.S. firms to deploy new innovations, whether developed in the U.S. or elsewhere. 

But as the CBO acknowledges, the bulk of the immigrant influx under the Senate immigration bill will consist of less-skilled immigrants, and I am not aware of work which suggests that a dramatic increase in less-skilled immigration, and a concomitant decrease in the average skill level of the working-age population, will tend to boost TFP. I can imagine some channels via which this could happen, e.g., lowering the cost of outsourcing household production might allow innovators to do more innovating, or perhaps a larger population, regardless of skill level, is necessarily more innovative. This is contradicted by the fact that TFP growth in the U.S. has remained fairly consistent even as the U.S. population has increased.

Robert Shackleton of the CBO released a paper on U.S. TFP growth in historical perspective in March of this year. Here is one passage that relates to population size:

Although forecasters generally project relatively strong continued growth in TFP over the next decade or so, some researchers express concern about several trends that could constrain productivity improvements over the longer term. They worry that it will become increasingly difficult to increase the educational attainment of a labor force when the great majority of workers already have at least a high-school degree and a large portion have attended college.

They also worry that the recent concentration of TFP growth in information and communication technology indicatesthat widespread improvement in many different areas of technology, as in the past century, may have been a one-time event that cannot be replicated. They are concerned that manufacturing’s contribution to overall TFP growth will decline as the sector’s nominal share of output continues to shrink, while rising demand for services with little measured TFP growth, such as health care, will exert an additional drag on aggregate TFP. Some observers express further concern that resource constraints (such as rising costs of fossil fuel extraction and changes in climate resulting from the burning of fossil fuels) will require continual innovations and continual increases in expenditures simply to maintain current productivity levels.

Other researchers note factors that could work in the opposite direction, helping to maintain or even increase TFP growth rates. They suggest that, much as the key innovations of the late 19th century were not fully exploited until the big wave of TFP growth occurred several decades later, recent innovations in information technology, communications, medicine, and elsewhere may yield substantial growth well into the future. They also note that, over the long term, TFP growth is limited only by the ability of innovators to develop new technologies, and that a larger population—especially a larger global population—makes possible a larger pool of talent to be devoted to research, and thus opens up more potential for innovation. [Emphasis added]

Shackleton’s assessment of future TFP growth is appropriately tentative, and it only includes one brief reference to immigration, in a footnote to the following passage:

After averaging somewhat more than 1 percent annually from 1900 to 1920, measured TFP growth accelerated to nearly 2 percent on average during the 1920s and around 3 percent during the 1930s. Researchers attribute that “big wave” primarily to four clusters of critical innovations—electricity generation, internal-combustion engines, chemicals, and telecommunications—with nearly all of the important innovations in those clusters already in place well before World War II. Although the capital equipment associated with those innovations was produced in the manufacturing sector, much of the productivity growth occurred elsewhere, particularly during the 1930s.

The footnote reads as follows:

A complementary hypothesis proposes that the dramatic reduction in immigration from the 1920s through the 1970s tended to raise domestic real wages and encourage greater investment and more labor-saving innovation than would have been the case otherwise.

Let’s think about this for a moment. The Senate immigration bill greatly increases temporary less-skilled immigration through W visas, many of which are expected to be used in labor-intensive agriculture. Is it at least possible that reliance on a continuing influx of less-skilled immigration will tend to discourage investment in labor-saving innovation in sector like agriculture and tourism, and might this have wider implications for TFP?

Eric Rasmusen offers a number of intriguing questions and thoughts — for example, what might the CBO analysis look like without the boost to TFP? 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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