Immigration: A Free Lunch for America's Economy
Capital, the new controversial input in the global production function, thanks to the surprising popular success of Thomas Piketty’s Capital in the 21st Century, can be divided into two basic categories: physical and human. Human capital, largely passed over by Piketty, deserves a closer look when it comes to the benefits of increased high-skill
immigration.
An economy needs more than physical resources—it needs the “know-how” to be able to produce goods and services. Human capital, a term popularized by the late Nobel Prize-winning economist Gary Becker, refers to the knowledge and skills possessed by workers. If you were to add up all of the knowledge and skills “owned” by every worker in an economy, the total amount would be the stock of human capital, and increasing this stock leads to higher output. This is more abstract, but as important as factories, land, and oil.
In another sense, human capital is different from physical capital since it creates “spillover effects.” Human capital is rapidly spread from worker to worker just by its use in the production process. This transfer of knowledge is made easier the shorter the distance between workers and firms. Spillovers abound in places like Silicon Valley for tech companies, and Massachusetts for research universities, where the cross-pollination of ideas is an everyday occurrence. All else being equal, one would expect that an economy with more human capital would be more productive than one with less.
The United States, in addition to most countries in the developed world, primarily attempts to increase the amount of human capital by subsidizing education. In 2012, average per-student expenditures in the United States were $12,743 for elementary and secondary education. After high school, states spent an average amount of $9,092 per student on subsidies for public universities. Additionally, the federal government directly subsidizes higher education through grants and loans. Average federal grant dollars per undergraduate student was $7,190, and $7,800 for graduate students. These costs do not include the subsidization of federal student loan interest.
Ignoring the possible inefficiencies caused by federal higher education student aid, and assuming that each student spends a total of 12 years in primary and secondary school, 4 years each in undergraduate and graduate institutions, producing a Ph.D educated worker in the public school system costs the United States government an average amount of $312,000. That number does not include other products that could have been made, had the person been working instead of sitting in class. Additionally, when education is provided by the public sector, it often takes the place of privately provided education rather than simply adding to the total supply.
Encouraging high-skill immigration is an alternate, more affordable way to promote the accumulation of human capital. Would-be immigrants with PhDs pay the government for visas and the cost of processing the paperwork. The gains in human capital from immigration comes at virtually no added cost, making increased immigration for advanced degree holders a “free lunch” left on the table by U.S. policy makers. Assuming that a worker’s marginal product can be quantified in terms of wages, the median worker with a Ph.D contributes $84,396 per year to GDP. Under the subsidy method, it would take 3.7 years for U.S.-born workers to make up for the costs they incurred.
The spillovers from human capital, while an abstract idea, are quantifiable. Economists have noted that more human capital leads to higher total factor productivity among firms in OECD countries, increased wages for workers, and contributes to macroeconomic growth. While there is much debate over the size of spillovers, a free lunch is a free lunch. The next “Steve Jobs” or “Thomas Piketty” might be waiting, right now, for a visa.