Sunday, June 17, 2007

Migration and Economic Growth in the US

One of our themes here at Demography Matters is the idea that inward migrant flows can help ease the pressure put on health and pension systems which results from excessively rapid population change. As I argue here, in the case of Ireland, this is a win-win situation, where a comparatively young population generates a level of economic growth which attracts an inflow of migrants which helps maintain the population as a comparatively young one. At the other end a rather older society like Italy attracts migrants at a somewhat slower pace and is unable to generate enough economic activity and growth to hold on to its own young educated people.

At the heart of all of this is the transition from an industrial to a services economy, and the central role which housing (through both financial services and construction) seems to play in the whole process.

I this context I found this recent Bloomberg article interesting:

The U.S. housing slump is squeezing Mexican migrant workers from Los Angeles to New York, where permits for new home construction are down 20 percent this year, according to the Census Bureau. That's reducing the pace of money transfers, the second-biggest source of dollars in Mexico after oil exports, and turning the peso into a laggard among Latin American currencies.

I found the article interesting since it seems to suggest that movements in construction sector activity are a pretty good proxy for rates of flow of migrant workers (or, of course, the reverse). This point was in my mind following the post I mentioned on the Irish economy, and the role of migration in reinforcing the recent Irish boom. Talk in the Bloomberg article about the reduction in the rate of increase of remittances lead me to start thinking that remittances flows are probably also a good proxy for the intensity of migrant flows (since the most recent migrants tend to send proportionately more, and then the flow tapers off over the years).

Remittances rose 3.4 percent in the first quarter, the slowest growth in eight years. The peso has strengthened 0.1 percent this year to 10.8137 per dollar, the second-worst performance among the most-traded currencies in the region.

Interestingly the article also mentions that:

The number of people caught trying to enter the U.S. illegally from Mexico dropped almost one-third in the first quarter to 265,000, according to U.S. Border Patrol data.

The article mentions the crackdown on migration as one of the reasons for this reduction in the number of people being "caught in the act", but I am not so sure this is such a good explanation. Clearly increased surveillance can act as a disincentive, but so can the lack of availability of employment, and, ceteribus paribus, you would on the face of it expect increased vigilance to produce more, not less, apprehensions.

Now going back to the role of construction in migrant flows and economic growth, there was also this:

The decline in illegal immigrants mirrors the U.S. housing market. Residential construction in the U.S. fell by 17 percent in the first quarter, according to the Commerce Department. The construction industry is the biggest source of work for Mexicans in the U.S., accounting for about 20 percent of jobs, data from Mexico's central bank shows.

The pace of money transfers has moved in step with the U.S. construction industry since the late 1990s, said Dawn McLaren, a research economist at Arizona State University in Tempe. The correlation between the two has become so strong that she uses border apprehensions as a ``leading indicator'' for the U.S. housing market.

So according to Dawn McLaren border apprehensions could now be considered a "leading indicator" for the US housing sector. If this is so, then on recent evidence we should expect the housing market to continue to remain flat. Also, since one of the points I am trying to argue here is that migrant flows represent a non-linear feedback mechanism which reinforce a construction boom, when they slow or stop this will also have non-linear negative feedback consequences for the economy over the mid to longer term (of course, in the current US case the whole issue is about how and when housing activity really picks up again).

So stimulated by Bloomberg I went over to the University of Arizona site and found that Dawn Mclaren has an interesting podcast: The tangled web of illegal immigration -- what do we really know? where she explains many of her principal arguments. I found the following extract - where she explains the "little bit of a demographic problem" that the US is passing through - particularly interesting.

We are not talking about low wage here, we are not talking about minimum wage, we are certainly not talking about less than minimum wage, we are talking about the labor that is necessary. The reason it's necessary is that we have a little bit of a demographic problem.

If you look at over the last hundred years our population of people between the ages of 44 to 64 has grown and grown and grown in terms of a percentage of our total population. And the percentage of people in the 15 to 24 year old age bracket has been declining and declining and declining -- lower and lower percentages over the last hundred years.

Now why is this important? Well, the 44 to 64 year olds make a lot more money. In their life cycle they are making more money than they will after they retire after 65 and certainly more money then they did in their younger years. And the people who have that income want services. They want someone to clean the house, they want someone to cut the lawn, do the landscaping, they want services provided to them.

Now usually, what happens if you don't have our little demographic problem is the group of 15 to 24 year olds, the kids in high school and the ones putting themselves through college and this kind of thing, they will come out and do this type of work. We are not seeing that. That is partly because we are having this little demographic problem, we have got a lower percentage of that population to serve the much higher percentage of 44 to 64 year olds.

Not only that, but we have put them into jobs when they do work, they are working in things that are related to computers like computer help centers. The more skilled, the more knowledge economy-oriented jobs and would it be a good idea to say to them, "Stop doing those knowledge economy jobs and start doing the manual labor."

That has put a lot of pressure on bringing in unskilled labor into the country. That is starting to go away because we are starting to see that percentage ease off so that there are now becoming more 15 to 24 year olds. The housing boom is over so we don't have that same pressure, that intense pressure to bring in labor to do construction jobs. This is easing off a little bit.

Now going back to the main thread of my argument, I am not saying anything especially new here, since Nobel Economist Simon Kuznets long ago identified in the US data what became known as "Kuznets Cycles" - mini-cycles driven by migrant flows with a 10 to 15 year lag. Obviously with financial markets becoming somewhat more efficient the lead-lag times which regulate all of this have probably reduced considerably.

What Kuznets didn't think about, however, was the impact of these flows on age structures and population pyramids. I am now finding myself rethinking just exactly what it was that happened in the US during the 1990s. As we all know there were massive inward migrant flows - 1 million undocumented workers a year from the late 80s on I think. And I am being lead to ask myself: did the US median age actually drop during the 1990s? If it did that would explain a lot of things.

Now thinking about this - and Dawn Mclaren's idea of the "little bit of a demographic problem" - I went over to Ken Gronbach's Changing Demography Blog to take another look at the chart you will find below, where you will see that there have been important structural shifts in the US population over the last 50 years, and in particular the presence of what Gronbach calls the "silent generation" (click over image for a better view).

Now if my central idea is right - ie that migrant flows represent a strong feedback process (or a strong version of what Keynes would have called the multiplier), and that US median age either actually fell during the 1990s (which is an idea that needs to be checked and calculated) - then we have another potential explanation (aside that is from productivity and the arrival of the internet) for what Alan Greenspan called the raised cruising speed of the US economy. At this point, of course, all of this is largely conjecture, but since the underlying idea seems to fit in so well with what we have been seeing here in Europe - in places like Ireland, the UK, Greece and Spain (and in each of these cases median ages have been going down - at least slightly - and not up in the last few years) - and indeed if any of this has any validity it does seem to add some force to my old idea that what central bankers should actually be doing is targeting median ages.

1 comment:

Rafael H M Pereira said...

very interesting post!