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ECO 4933 – ST: Economics of Immigration

Homework 5
Due Monday, Nov 13, at noon; Please upload a single PDF of your answers to Canvas

1. There are several ways immigration can affect housing markets.

a) Suppose immigration increases housing demand and supply, but the effect on demand is
larger. What is the predicted effect on housing prices? Include a clearly labeled supply and
demand diagram with your answer.

If immigration raises both supply and demand for housing, with a greater impact on demand, an
increase in housing prices is anticipated. Consider the following diagram.

S1
S2

P2
Price
(Housing)
P1 D2
D1

Q1 Q2 Quantity Q
(Housing)

P1 and Q1 are the initial equilibrium price and quantity. When immigration boosts housing
demand, the demand curve flips from D1 to D2. This is because more people desire to buy
homes, while the supply of housing stays the same. Now P2 and Q2 are the new equilibrium
prices and quantities, where P2 is greater than P1.

The inflow of new immigrants causes a rise in housing demand. Immigrants require housing,
which increases the demand for housing. The increased supply of housing is because immigrants
frequently start businesses and create jobs, attracting additional inhabitants and businesses to the
region. However, because new housing takes time to develop, the rise in supply is often lower
than the increase in demand. As a result, the equilibrium price of housing rises due to the higher
increase in demand. Consequently, immigrants and other purchasers will have to pay more for
homes.

b) Suppose immigration increases housing demand and supply, but the effect on supply is larger.
What is the predicted effect on housing prices? Include a clearly labeled supply and demand
diagram with your answer.
 If immigration increases both housing demand and supply, but the effect on supply is greater,
home prices are expected to fall. Consider the diagram below:

S1
S2

Price
P
(Housing) 1
P2
D2
DD11

Q1 Q2

Quantity
(Housing)

P1 and Q1 are the initial equilibrium price and quantity. When immigration boosts housing
supply, the supply curve flips from S1 to S2. This is due to a rise in the number of people
developing and renting out houses, which increases the supply of housing. P2 and Q2 are the
new equilibrium prices and quantities, where P2 is less than P1.

The increased supply of housing is because immigrants frequently start businesses and create
jobs, attracting additional inhabitants and businesses to the region. This increases housing
demand, encouraging developers to create more houses and landlords to rent out old units. The
equilibrium price of housing falls because of the higher increase in supply. As a result,
purchasers will have to pay less for homes.

c) Suppose two housing markets experience the same magnitude of increase in housing demand
as a result of immigration. Market A has strict building codes, lots of zoning regulations and
limited empty land. Market B has lax construction rules, no zoning regulations and lots of empty
land.

In which market will housing prices rise more:

In which market will housing quantity rise more:

Because of differences in building rules, zoning laws, and land availability, housing costs and
quantities will most likely be influenced differently in Market A and Market B.

Housing Prices: Prices in Market A are projected to grow further. This is due to the difficulty of
swiftly increasing the housing supply in response to growing demand due to tight construction
requirements, zoning laws, and limited vacant land. As a result, rising demand from immigration
will outstrip supply, causing prices to rise.

Housing Quantity: The supply of homes will most likely increase in Market B. With permissive
construction laws, no zoning requirements, and plenty of undeveloped land, it's easy to respond
to growing demand by building more residences. As a result, even while demand is growing due
to immigration, supply may also expand to match this need, resulting in a bigger increase in
housing supply.

These projections are based on supply and demand principles: when demand rises and supply is
constrained (as in Market A), prices rise; when supply may freely respond to demand (as in
Market B), quantities grow. However, numerous additional factors that are not included in this
response can impact real outcomes.

2. An article about immigration and international trade discusses the “immigrant elasticity” of
exports and imports, or the percentage change in exports or imports associated with a 1% change
in the number of immigrants (see https://wol.iza.org/articles/impact-of-migration-on-trade/long if
you want to read the article).

a) The article notes that the U.S. appears to have a higher immigrant elasticity of exports than
most other countries. What is a plausible reason for that?

According to the article, the United States has a larger immigrant elasticity of exports than most
other nations due to the business network impact of immigrants. This is when immigrants utilize
their expertise in their home nation to assist firms in the United States in exporting goods to their
home country.
The United States has a vast and diversified immigrant population, which provides it with a
distinct trading edge. Immigrants have strong links to their home countries, which they might
leverage to assist US firms in exporting goods to those nations. Immigrants, for example, might
supply knowledge about the local market to U.S. enterprises, find new clients, and negotiate
deals.
Immigrants' business network impact is especially relevant in emerging economies where U.S.
corporations may not have a large presence. Immigrants can assist American firms in
overcoming these obstacles and entering new markets.
Aside from the business network impact, immigrants increase commerce through their
purchasing habits. Immigrants tend to purchase items from their native countries, increasing
imports to the United States. This may result in greater US exports as firms strive to fulfil the
demand for these items.

b) The article also notes that, on average, imports respond more to immigration than do exports
(although this is not the case for the U.S.). What is a plausible reason why imports are more
responsive to immigration than exports?
Imports may be more responsive to immigration than exports for several reasons:
Immigration increases the demand for Imported goods:
Immigrants frequently carry their home country's likes and preferences with them, which can
contribute to a rise in demand for imported items. Immigrants from China, for example, may
have a strong liking for Chinese food, which might contribute to a rise in Chinese food imports.
Immigration can make imported goods more affordable:
Immigrants sometimes have strong links to their home countries, which might provide them with
information about lower-cost imported items. Also, because they are more familiar with the
items and do not have to worry about transit expenses, immigrants may be ready to pay less for
imported goods than native-born individuals.
Immigration can reduce the costs of importing goods:
Immigrants can assist in saving import costs by offering knowledge about local markets,
negotiating deals with suppliers, and providing logistical support. This can make importing items
from their native nations easier and less expensive for enterprises.

3. For each scenario below, indicate which person is likely to have a less adverse (more
beneficial) fiscal effect in static estimates and why. Assume all else is equal between the two
people.

a) An immigrant who arrived at age 10 or an immigrant who arrived at age 40, both observed at
age 50.

In static estimations, the immigrant who came at the age of ten is more likely to have a positive
budgetary impact. This is due to the fact that they have had more time to work and contribute to
the tax base, as well as more time to learn English and gain skills that will make them more
productive workers.

b) An unauthorized immigrant who has not completed high school or a U.S. native who has not
completed high school, both of them observed at age 20.

In static estimations, the US native who has not completed high school is projected to have a
higher advantageous fiscal effect. This is due to the fact that they are entitled for more
government benefits, such as Social Security and Medicare, than undocumented immigrants.
Furthermore, even if they do not have a high school education, native-born Americans are more
likely to have access to high-paying professions.

c) An immigrant who has completed high school or an immigrant who has a bachelor’s degree,
both observed at age 30.

In static estimations, the immigrant with a bachelor's degree is more likely to have a positive
budgetary impact. This is because they are more likely to have high-paying occupations and pay
more taxes. Furthermore, immigrants with a bachelor's degree are more likely to get health
insurance, which lowers Medicaid and Medicare costs.
4. For each scenario below, indicate which person is likely to have a less adverse (more
beneficial) fiscal effect in dynamic estimates over a 50-year period and why. Assume all else is
equal between the two people.

a) An immigrant who arrived at age 10 or an immigrant who arrived at age 40.

In dynamic estimates over a 50-year period, an immigrant who came at the age of 10 is projected
to have a less adverse (more beneficial) fiscal effect than an immigrant who arrived at the age of
40.
Reason: Because younger immigrants have more time to work in the United States, pay taxes,
and contribute to the economy. They also have more time to study English and assimilate to
American culture, which can help them become more effective citizens.

b) An unauthorized immigrant who has not completed high school or a U.S. native who has not
completed high school, neither of whom plans to get more education.

In dynamic estimates over a 50-year period, a U.S. citizen who has not completed high school is
expected to have a less adverse (more beneficial) financial effect than an undocumented
immigrant who has not completed high school, both of whom want to further their education.

Reason: Because native-born Americans are entitled to a broader variety of government benefits
and services than undocumented immigrants, such as Social Security and Medicare. As a result,
undocumented immigrants are more likely to rely on government aid, putting a burden on
government resources.

c) An immigrant who has completed high school or an immigrant who has a bachelor’s degree,
neither of whom plans to get more education.

In dynamic estimations over a 50-year period, an immigrant who has completed high school is
anticipated to have a less adverse (more beneficial) fiscal effect than an immigrant who has a
bachelor's degree, both of whom want to further their education.

Reason: Because higher-educated immigrants make greater salaries and pay more taxes than
lower-educated ones. They are also more likely to be working and rely less on assistance from
the state.
5. Explain briefly why assigning immigrants (or U.S. natives, for that matter) the average cost of
public goods instead of the marginal cost has a noticeable effect on estimates of their fiscal
impact.

Assigning the average cost of public goods to immigrants (or natives, for that matter) rather than
the marginal cost has a noticeable effect on estimates of their fiscal impact because it treats all
immigrants as if they have the same impact on public spending, regardless of their age,
education, or employment status. This is a simplification that can lead to erroneous estimations,
particularly when looking at the long-term budgetary impact.

For instance, an immigrant who enters at the age of 10 and goes on to get a bachelor's degree and
a high-paying job is likely to have a far greater positive fiscal effect over the course of their
career than an immigrant who arrives at the age of 40 and has fewer education and work skills.
However, attributing the average cost of public goods to both immigrants ignores this difference
and understates the younger, more educated immigrant's favorable fiscal effect.

6. Which approach do you think makes more sense from an economic perspective, assigning the
average cost of public goods or the marginal cost, and why?

From an economic point of view, attributing the marginal cost of public goods to immigrants (or
native-born Americans) frequently makes more sense. This is due to the marginal cost better
reflecting the incremental cost to society of each additional individual.

Many government services have high fixed costs but low variable costs. For example, once a
road or a school is completed, the cost of adding another user is quite minimal. As a result, the
marginal cost of adding another individual to use these public goods is frequently relatively low.

Assigning the average cost, on the other hand, may result in an overestimation of the fiscal effect
of each new worker. This is due to the fact that the average cost includes both fixed and variable
expenditures and implies that each extra person adds the same cost to the public goods budget as
every existing resident.
7. In a clearly labeled diagram, show the effect of emigration on the labor market in the origin
country if labor supply and labor demand are not perfectly elastic. Clearly label the relevant
areas for social welfare and fill out the table below using the labels in your diagram.

S1
S0
D
W1
B
W0
Wage rate (W) A

L1 L0
Quantity of Labor (L)

Before emigration After emigration Change

Number of workers L0 L1 Decrease

Wage W0 W1 Increase

Worker surplus A A Increase

Other factors of B B Decrease

production surplus