Immigration as International Trade: Optimal Tariffs and Quotas
USC Law Center Working Paper 96-3
Posted: 1 Sep 1996
Date Written: May 1996
This paper takes economic principles commonly applied to international trade and applies them to trade in labor services. This analysis derives the optimal immigration policy for a variety of welfare objectives, including both economic efficiency and distributive justice. The analysis suggests that the maximization of any measure of economic welfare would probably require levels of immigration higher than those allowed by current U.S. policies. First, this paper describes the immigration policy that would maximize the welfare of natives. Trade principles indicate that the United States should eliminate its immigration quotas and other nontariff protectionist barriers and use immigration tariffs instead. A tariff could take the form of an income tax that discriminates between natives and immigrants. The analysis takes account of external effects from immigration through the public sector, such as congestion costs and effects on the public treasury. The optimal tariff not only includes a Pigouvian component to internalize external costs, but also reflects optimal-tax considerations and market power. The optimal tariff is positive for immigrants with low incomes but is likely to be negative for immigrants with sufficiently high incomes. These results suggest that skilled immigration should be permitted (indeed encouraged) without quantitative or other protectionist restrictions and that unskilled immigration should be permitted without quantitative restrictions but subject to less generous fiscal policies than those applied to natives.Second, the paper extends the analysis to include the welfare of immigrants among our objectives. If our measure of social welfare includes distributive concerns, then it may be optimal to provide poor immigrants with access to transfer programs and to use liberal quotas to regulate their immigration. Finally, the paper considers the policies that would maximize global economic welfare, giving equal weight to all persons.
JEL Classification: F22, J61
Suggested Citation: Suggested Citation