Ryne Belliston and Kerk Phillips, Economics
Introduction
Immigration issues create tough political problems for policy makers. Whether or not to allow workers from low wage countries to migrate to high wage countries is a source of constant domestic and international political debate. Japan is a country facing an aging population and low birthrates, and thus is forced to consider changes to their immigration policies. Immigration would likely help Japanese firms and capital owners but would likely hurt Japanese workers. Additionally, as incomes have risen, the lure of higher wages has made Japan a more attractive place for non-Japanese laborers to work.
However, Japan has strictly limited immigration. Japanese immigration law favors skilled workers and those with Japanese ancestry. This is at least partly because of concerns of possible links between non-assimilation of low wage workers and crime. There is no consensus at the current time on whether immigration restrictions should be eased or not. Advocates of the status quo argue that available jobs can largely be filled by Japanese workers. Advocates of increased immigration argue that Japan’s demographics demand an increase in immigration to fill job openings and support an increasingly older population. Regardless of one’s stance, it is clear that this is an issue that needs to be addressed.
Methodology
In an effort to aid policy makers in their discussions on immigration policy, we developed a computable economic model, and we used it to analyze the effects of various immigration policies. We were not the first to use computable models to examine this issue, but our project differed from the existing literature in important ways.
Goto (1998) provided valuable insight in his paper on Japanese immigration. He found that sufficiently large amounts of labor migration are welfare improving. However, he used a model that is not explicitly dynamic. This required him to make assumptions that limited the scope of his analysis. Choi (2004) also made an important contribution to the literature with his analysis of South Korean immigration. In it he examined the effect of easing immigration restrictions. However, his focus was only on short run behavior. It did not take into account any long term effects.
Our model incorporates both of these elements lacking in existing literature. It is explicitly dynamic, meaning we are able to analyze changes over time. This allowed us to see more clearly what and how changes would take place. Furthermore, our methods of computation allowed us to analyze the long run transition to a new steady state. That means we were able to look at not only where the economy will end up (the new steady state) but also the path the economy will take getting there (the long run transition). This is an essential element of immigration policy analysis. For example, if policy makers were to learn that the transition path to the new steady state will be very long and painful for parts of the population, they may decide against certain policies—even if everyone is better off eventually. .
Our analysis considered four different immigration policies, relating to the mix of skilled and unskilled immigration allowed: unskilled immigrants only, proportional increases in both types of labor, equal increases, and skilled immigrants only. We then looked at the results of these policies by examining their effects on output, consumption, factor prices and utility. As mentioned above, this was done for both the new steady state and for the time-path leading to that steady state. Additionally, we examined confidence bands for these paths after imposing a series of unrelated macroeconomic shocks to the model.
Results & Conclusion
From these policy experiments, we learned that domestic Japanese households will almost always gain in the long-run from increases in immigration regardless of the skill bias of immigration policy. Domestic households with only skilled labor will prefer unskilled only immigration and will generally prefer a policy that allows more unskilled immigration to one that allows less. Domestic households with only unskilled labor will prefer an immigration policy that allows equal numbers of skilled and unskilled immigrants, but would prefer skilled only immigration to either proportional immigration or unskilled only. Immigrant households, or, more generally, households with no capital income will prefer a policy that makes the type of labor they possess relatively less abundant. These findings are in agreement with common economic intuition.
Our simulations show that the utility gains to households are relatively small relative to the fluctuations in utility that occur over the course of the business cycle. Put more precisely, with the exception of skilled immigrant labor, the time paths of utility for all types of household subunits lie within the 95% confidence bands for our stochastic simulations. This is despite the fact that immigration levels in our simulations are quite high at over 9 percent of the current Japanese population. This is because in all cases we consider the same amount of immigration. Large levels of immigration do generate utility gains that are distinguishable from business cycle movements, but the levels are unrealistically high. In addition, the utility gains that accrue due to technological progress dwarf the effects of immigration policy, even for the cases of skilled workers facing large numbers of skilled immigrants.