Human Capital

Nick Schulz has an interesting introduction to recent work on immigration and human capital that includes this figure:

The human capital stock is probably over-estimated since it imputes the value of non-market time at market wages but even counting non-market time at zero (not correct either) would give a human capital stock of $212 trillion, about 5 times the physical capital stock. Thinking about human capital reminds us that debates about immigration and education are debates about investment.


Both links seem gated or broken.

"It was hard for Americans to imagine great outcomes from the hordes of impoverished, unskilled immigrants who began arriving in very large numbers during the 19th century. For example, Chinese contract laborers performed difficult, often dangerous work that other people weren’t willing to do on railroads, on farms and in mines. Chinese immigrants learned to get along in a society that used a language utterly unlike their own. There was harsh discrimination against these people. But their strong work ethic, their frugality and their culture that emphasized the importance of education enabled them to become more prosperous than most other ethnic groups. Today Chinese Americans play a crucial role in mathematics, science, technology and medicine. Where would we be without them?

Eastern European Jewish refugees, fleeing from persecution during the last two decades of the 19th century, didn’t seem much more promising than the Chinese. Unlike the sophisticated German Jews who had arrived earlier, Eastern European Jews reportedly arrived with less money than any other immigrant group. Only about half were literate. Many worked as day laborers. The influx of Eastern European Jews packed more people into New York City’s Lower East Side than were in the densest slums of Bombay. The strange language (Yiddish), the strange dress and religious practices of Eastern European Jews embarrassed the Germans who had embraced Reform Judaism. But bedrock values of Jewish culture — cleanliness, learning and charity — prevailed. Jews built schools, libraries, bath houses, hospitals and other community institutions. Jews minimized their exposure to diseases arising from filth. There was little alcoholism. Upward mobility was dramatic as increasing numbers of Jews entered professions. From their impoverished beginnings, Jews emerged as the most prosperous group in America.

Although it isn’t possible to predict which people will do the most to help achieve a prosperous society, there are sure to be plenty of improvements if millions and millions of people have incentives to do better. This is consistent with nature’s way of assuring the survival of species."

from "The Most Important Secret Of A Prosperous Economy," by Jim Powell, Forbes, January 16, 2012

Just like evolution. Who could have known?

The AEI paper argues for more immigration of STEM graduates who attend US colleges. I can understand why US colleges would like this, because they would be selling a degree and citizenship as a package. In the graduate school marketing department in which I sometimes teach, about half are foreign graduate students. This is a large state university, and I sometimes wonder if the state is getting a good deal with this, or whether it is the faculty and administration who are.

Human capital is a big issue, and I think the investment should be in citizens first.

Outside of the marketing department, if you look at STEM-like graduate programs at the University I am at, more than half are usually international graduate students. The vast majority of these graduate students are looking to enter the US job market in STEM jobs. My question is this: why citizens first? If the same benefits are accrued to the state whether the investment is with citizen students or international students, why should they care? Of course, if there are meritorious citizen students who are passed over to admit less meritorious international students, there should be an issue; that is the prerogative of the state who has a responsibility to the citizens. After 10 or so years in a University, I see that STEM departments are struggling to find enough meritorious citizen students to fill their ranks. The alternative for these departments is to scale back, but even I don't see that as the best solution.

Why citizens first?

For two reasons.

States subsidize education.

Second, these departments have grown beyond the demand of its citizens. States are in effect supporting faculty and administrators to have bigger empires, and would sell a path to citizenship to get there using state resources. Maybe faculty and administrators should move to developing countries on their own nickel.

People subsidize universities, via government.

"After 10 or so years in a University, I see that STEM departments are struggling to find enough meritorious citizen students to fill their ranks."

This is so funny to me. How 'bout train them? You are after all the same guys teaching undergrads. So, not only is it your job, it's also a little your responsibility.


Which side of the fence are you in the "nature-versus-nurture" debate?

The top side.

Generally international students pay higher tuition (without access to US student loans), so they're not really subsidized.

That is a proposition I would like to see someone prove who is arguing for money to expand a graduate program or add another life time tenured faculty to supervise grad student theses. Yet to see that expansion without an argument for more resources.

A typical STEM graduate student is a net source of money for the university rather than a sink. Bill's argument might have more weight were this not so. Forget the long term asset to the local economy etc. which are more complex considerations.

If you consider a foreign undergraduate, it is a weaker argument, yet he pays higher tuition than the in-state student and does not get access to any of the federal aid at all. In a sense it's somewhat of a cross-subsidy.

If education is education, then people aren't going to like all of it going to immigrants, and probably rightly so. If education is...ummm...not what people think it is then economists are more right. But we need economists to admit that (graduate( education (at least) isn't really education.

Graduate education is an apprenticeship. Is apprenticeship education?

It's not even really apprenticeship, which is not really education.

Rahul, my graduate education in economics had components that I would consider "apprenticeship," in particular co-authoring papers with faculty members. And I disagree with Andrew' apprenticeships can be a helpful input to an education. Certainly not a stand alone component, but valuable.

Mine is certainly not apprenticeship. So, to say it IS apprenticeship is false in a general sense. It is also only really apprenticeship in any meaningful sense of the word if you end up doing that job, of which what percentage end up doing it? Not many and nearly none from anything but the top departments.

Should say "if you end up NOT doing that job."

That's one difference between education and apprenticeship. Apprenticeship is by design specific while education is general, so to say it is one is to say it's not really the other, while of course there is some overlap as you do learn stuff as an apprentice, it's just not education in what people mean by those concepts.

If a STEM graduate student is a net source of money for the university, does this mean that a foreign STEM graduate candidate would be a *greater* source of money than a resident candidate? I don't get the logic.

I assume that a foreign graduate candidate would replace a resident graduate candidate because of the limited number of slots. I also assume that each is equally capable. If this is so, would not the parents of the resident candidate likely have partially financed, previously or currently, through taxes, that graduate slot? Is it reasonable for those parents to expect a greater chance to experience a return on their tax investment than parents who have not made that investment?

The student is not a source of money. The student is a source of labor provided to grants- the source of money.

Take it up with Rahul, please.

I will, but it's germaine to your point. Where do the grants come from? From the people who want to send their kids to universities and graduate schools.

The students don't make money. The help justify tax-payer funding. People will argue that good foreign students do better research but research is not about being efficient. It is horribly inefficient, that is why the pay is so low. 99% of what you do doesn't work. That's why it's not a huge opportunity cost to have students doing it. And pushing for more cheaper research labor is going to eventually undermine support for the system, so long-term, they aren't a source of grant funding, they aren't really better because the point of education is to teach people up, unless you accept the human capital model. If the Americans are a little worse, that is more than offset by the funding provided by them and their parents.

OK, I agree that, in general, grants also come from taxpayer money. That might be germane to my point, but it is certainly not germaine.

The vast majority of these graduate students are looking to enter the US job market in STEM jobs. My question is this: why citizens first?

Unless we want to suffer the same fate as more sclerotic societies, we must encourage immigration to the US. See, e.g., Mancur Olson, The Logic of Collective Action.

And unfortunately, many - although not all - of the arguments against immigration have the same nativist tone of the anti-Chinese laws and debates in the late 1800s and early 1900s. The arguments then were about how the Chinese would undercut wages, how dirty they were, how "foreign" they were, etc., etc., ad nauseum.

And today universities must discriminate against the Chinese and other Asians so they don't take all the top spots at university. Why? As Steve Hsu has pointed out, why should the sons and daughters of the Chinese, who as a the only race to be denied denied citizenship in the US (1882-1943), pay the price of affirmative action as recompense for the United States slave-owning past?

You just can't make this stuff up.

The laws of the United States are supposed to look out for the interest of current citizens, not non citizens. The case must be made that increased immigration will benefit current citizens. I'm not convinced of such a case.

The case must be made that increased immigration will benefit current citizens. I’m not convinced of such a case.

Assuming you are in the US, aren't you glad that argument wasn't made when your immigrant ancestors came to the US?

And unless citizens start having more children or dramatically reform our laws for health care and support for the aged, you might want to share your solutions for how having less immigration will benefit citizens.

Education is not a job. Unless it is just a job. But then stop taking my money for it unless it goes to my kid.

It's almost assuredly a truism that underutilized immigrants can be better utilized here. If we can't export our system (which ironically liberals hate) then we should import their people (which ironically conservatives hate). We should of course put in place assurances that they don't come for goodies and don't change our system to their failed system.

It was made against my ancestors. In fact immigration was largely shut down after WWI, and the golden age of America most people talk about was at a low point for foriegn born citizens as a % of the country.

It was also a different time and different immigrants. My ancestors where white christian europeans, who shared most of the same fundamental religous, moral, and cultural beliefs as the natives. They learned English and assimiliated quickly. Being Irish or Italian might have been a big deal at one time, but now we're all just "white".

By contrast, current immigrants are from dramatically different religious, moral, cultural, and ethnic backgrounds then immigrants in say 1900. They don't assimilate as quickly. I have a feeling that 50 years from now people will still be checking off the box for their various ethnicities rather then considering themselves "American".

There are also economic differences. In 1900 the economy required lots of "strong backs" to build the countries physical infrastructure. A pair of hands off the boat could do that just as well. Today we need human capital, which the vast majority of immigrants don't have. Even supposedly "skilled" immigrants are mainly just used to drive down the wages of mid-level white collar workers. I support all the immigration we can get from +3SD IQ foriegners (heck, I'd pay them to come here), but the rest simply seems like a way for the elite to drive down the wages of the non elite.

There is also an HBD (bell curve) arguement to be made against latino immigration, but I will leave it aside here as not to get bogged down in race stuff.

The issues of fertility, old age benefits, and health reform are all the result of our disfunctional political system. There are solutions to these problems, we just need to implement them. If your making the case that immigration is like a bandaid on those political failures that pushes back the math of insolvency awhile, that's a pretty poor case to be made. Immigration has all sorts of negative externalities, some of which even make constructive political consensus harder. Better to actually fix our political problems then through immigrants at it.

Why don't we just try providing opportunity and liberty and see who shows up?

Why don’t we just try providing opportunity and liberty and see who shows up?

That is the American proposition. Unfortunately, what we are finding out is that while a nation can have a proposition, a proposition cannot be a nation. Also, nobody seems to have given any consideration to the ethnicity that dreamed up the proposition and understands it. Francis Fukuyama, for example, doesn't understand it. The members of the Frankfurt School didn't understand it.

Thanks AG.

The simple question before us is weather America is a proposition nation or not. Some people think it's always been, but this is mostly revised history. The current dynamic, in which citizenship itself is fairly meaningless and we are an idea rather then a people is unprecendented in history, especially in a nation of this size.

But immigrants do undercut native wages. Ask anyone in the construction industry. Or the hospitality industry.

The fact that the negative effects of immigration are felt mostly by people from a different social strata than your own doesn't mean those effects don't exist.

That depends on the immigrants, doesn't it?

felt mostly by people from a different social strata than your own doesn’t mean those effects don’t exist.

I'm not quite sure what your point is here, unless it is to argue that only those who experience something can comment on it. The "chickenhawk" argument, among many others.

So you are arguing that a person can only argue from her own experience? Correct?

And of course a part of the nativist argument, especially against the Chinese, was organized labor. These same anti-Chinese zealots were also the first to staff the US Bureau of Immigration when it got started in the late 1800s.

The point is that no matter how "right" your argument may sound today, we have no clue who will turn out to have brought the skills that we need in the future to this country. More than 150 years after all but a few in the US and in Congress voiced similar anti-Chinese language and reasons, we must now discriminate against the Chinese because they work too hard and are too smart.

Your same arguments were used in the late 1800s by those determined to keep out the Chinese. Fortunately, we changed course.

If you want to argue that we should not extend welfare benefits to immigrants, "illegal" or otherwise, then make that argument.

What's old is new.

My argument is simply that immigration does in fact lower the wages, and indeed the employment prospects, of low-skilled native workers and that that negative effect should be considered when we decide how many and what kind of immigration to permit.

Just screaming "racist" and "nativist" doesn't change the fact that immigration isn't a win for everybody. There are losers as well and their interests count, too. Or should, anyway.

If supply and demand are both increasing, how can you say net wages will definitely decline?

Just screaming “racist” and “nativist” doesn’t

Your characterization of what I wrote is telling, perhaps in ways you did not intend.

1) I was not screaming
2) I did not use the term "racist"

In the future we will all be dead.


How do we know that the net benefit of, say, cheaper bridges is not larger than the downside of reduced wages? Should we also legislate against all other non-immigration developments that would depress specific sector wages?

In any case, the better solution might be an internal transfer to compensate the losers of the bargain.

The problem is that you are not simply getting cheaper bridges. You are also making it much harder for people at the lower end of the spectrum to earn a living through productive work. These effects, those not seen in the cost of the bridge, weigh quite heavily.

No you are not.
Demand for AND Supply of labor both increase with immigration.

How does one prove that? And why is labor different from every other market?

I was under the impression that the Mariel Boatlift (the only natural experiment I can come up with) actually showed no net reduction in wages and only an increase in property values.

See the link:

Frankly, I think not enough work is done on the empirical aspects of immigration. It would appear to me, after scanning the literature, that immigrants of all stripes tend to be more law abiding and productive once you control for socioeconomic brackets.

Seems probable. The evidence also shows that the children of immigrants are less significantly less law-abiding than their parents.

eugenics = investment in human capital. Our current laissez-faire practices = disinvestment in human capital.

We are laissez-faire? Since when?

Looks like a lot of growth opportunities for robots and other capital substitution.

Does physical capital include land and natural resources?

This is Nick Schulz asking the Republican presidential candidates about high skill immigration:

Changing the levels of high-skill immigration is basically a minor technical matter, that if decoupled from the larger issue of mass immigration of uneducated peasants, could be handled quietly by any Congress, who would likely produce a reasonable adjustment.

However, since the Democrats' immigration lobby has tied the issues of enforcement of existing law and family reunification to other immigration issues, and successfully tarred the opponents of increased mass immigration of the uneducated as "racist", it is not possible for a rational discussion to happen in Congress on any immigration issue, and any proposed change to immigration law is either seen as "racist", or as supporting more illegal immigration.

Republicans do not trust immigration advocates of any stripe, because there's a track record of repeatedly rewarding illegal immigration, and because most visible immigration is of poor people who will never move into the middle class, and whose children will be substantially more likely to end up on welfare or in jail than the native population. If people advocating for more immigration of highly-educated people had a track record of also supporting enforcement of existing laws and of limiting immigration of people who are likely to be and remain net burdens on society, then non-elite Republicans might be willing to listen to them.

Wouldn't such a graph (even the one that values free time at zero) argue that technology does not even double (or even come close to doubling) production in a technology free world?

It would seem to me that if technology doubled labor's output (what output would be without any technology), labor and capital would be equally valued on that chart. If it quadrupled output, capital would be worth three times as much as labor.

Clearly without any technology, we'd produce a small fraction of what we actually do produce -- a really, really small fraction, one that would make just feeding us all impossible -- so capital should be worth way more than labor.

On the other hand, I assume I'm missing something really important. Without being angry or unpleasant, can someone explain what that it is that I'm missing.

I see that graph as unrealised potential. The reason we 'beg' for the so called skilled immigrant and not for the unskilled, is the fact that 1) there are now diminishing returns for the unskilled in the developed world and 2) when human capital is defined only in monetary terms, the whole world becomes the market for all that is money related, i.e. other forms of measurement are needed for human capital. With a form of measurement outside money, there would be no such thing as ZMP and no nation would need to fear the immigrant taking jobs from the locals. But until all human capital is considered in the creation of wealth, nations will become reluctant to accept immigrants. More importantly, until all human capital is brought into wealth creation, that huge stack of human capital will remain primarily wasted potential.

This topic brings out the typical spergy response that demand for labor goes up with the supply of labor (see, my exquisitely constructed mathematical models prove this). Therefore if a million immigrants are good, ten million immigrants must be better, and 100 million immigrants, nay, one billion, will be the best of all possible worlds.

Does anybody ever give any thought to why so many Han, Hindu and Meso-Americans are willing to spend thousands of dollars trying to get away from other Han, Hindu and Meso-Americans? When they are the market-dominant majority in the US, where will those groups immigrate to then?

Is the per-capita human capital in the United States actually equal to $642,000? or $2.2 million, in the higher estimate? Really?

General immigration will shift the supply curve for labor to the right, but as immigrants spend their money, it will also cause the demand curve for labor to shift to the right to accommodate these immigrants without a net depression of wages.

However, with occupation specific immigration, the overall supply curve will shift to the right for the targeted occupation while the demand curve will stay put. Increasing the size of an occupation with foreign workers by Qfw% percent will depress the wage by Wd% percent. If this occupation has a demand elasticity of Ed, then the net increase in the size of the occupation will be Qd% = Ed x Wd%. If the supply elasticity is Es then the reduction in the native supply is Qs% = Es x Wd%.

Qfw% = Qd% - Qs%
Qfw% = (Ed - Es) x Wd%
Wd% = (Qfw%)/(Ed - Es) <= wage depression equation

From this you can now derive a native displacement equation.
Qs% = Es x Wd%
Qs% = [Es/(Ed - Es)] x Qfw% <= native displacement equation

What the native displacement equation shows is that an attempt to increase the size of an occupation with foreign workers in isolation of the rest of the labor force by Qfw% will cause the size of the native force to decline by Qs%. The net increase in the size of the occupation will be (Qfw%-Qs%) or Qd%

My equations got compressed in the above post. I'll try one more time.

Qfw% = Qd% – Qs%;

Qfw% = (Ed – Es) x Wd%;

Wd% = (Qfw%)/(Ed – Es); <= wage depression equation;

From this you can now derive a native displacement equation.

Qs% = Es x Wd%;

Qs% = [Es/(Ed - Es)] x Qfw%; <= native displacement equation

Engineers probably have a demand elasticity of about -0.5 or Ed = -0.5 (this is a guesstimate on my part). The long run supply elasticity for engineers appears to be somewhat greater than 2.

Using the native displacement equation, an attempt to increase the size engineering field with foreign workers by 10%, in isolation of the rest of the labor force, will result in a decline in native workers of [2/(-0.5 - 2)] x 10% = -8%. Meaning an attempt to increase the size of the engineering field by 10% with foreign workers will only cause a net increase in size of 2%. Occupation specific immigration has a strong boomerang effect.

Using the wage depression equation, that 10% increase will cause a wage decline of (10%)/(-0.5 - 2) = -4%.

The graph says the value of all physical capital in the United States is $45; I am a buyer, if you're interested, Mr Obama. Europe needs a Hoover Dam or two.

I believe that's relative

Except for a rather unfortunate encounter with bad sushi, I haven't heard the words "free lunch" used so much as I have with skilled immigration reform. Many thousands of the world's best and brightest stand ready to contribute to America's economy. Yet, we make them wait for years in the misguided belief that we live in a zero-sum world where one more working immigrant means one less native-born worker. Just as investing in physical capital can generate income over time, so too can an investment in human capital. Skilled immigration is a net positive for America's economy.

In full disclosure, I work at the organization which helped spearhead this paper. The truth is that there's a lot of original research that's been to done to show the value of skilled immigrants to America's economy. Unfortunately, it's often been scattered or siloed. The great value-add of Nick's paper is in bringing much of the latest research into one concise publication. From there, the facts speak for themselves:

- Immigrants are 30% more likely to start a business than those who are native-born (source: Robert Fairlie)
- One-quarter of STEM-related companies founded between 1995 and 2005 had at least one immigrant founder (source: Vivek Wadhwa)
- Immigrants account for over 50% of STEM-related job growth between 2003 and 2008 (source: Pia Orrenius)
- Over 500,040 employment-based principals currently await legal permanent residence (source: Vivek Wadhwa)
- 100 foreign-born workers with advanced STEM degrees generated 262 jobs for native-born workers (source: Madeleine Zavodny)
- Almost 2% of immigrants have Ph.D.'s (source: Michael Greenstone and Adam Looney)
- Chinese and Indian engineers managed 24% of the Silicon Valley techn businesses started between 1980 and 1998 (source: AnnaLee Saxenian)
- Immigrants are on the founding leadership teams of 24 of the top 50 privately held, venture-backed companies in the U.S. (source: Stuart Anderson)

I could keep going. The point is that skilled immigrants are a net gain for the American economy, as you have pointed out in Launching the Innovation Renaissance. Unfortunately, we have chosen through our current immigration policy to not effectively compete globally for skilled talent.

We can only hope though that immigrants will still want to flock to America even if reform comes. As Vivek Wadwha points out, if you're a highly-educated, foreign-born national faced with the choice of working in a stagnant American economy far from your home or getting to live in a known, economically vibrant community where you will be granted ample pay and perhaps even household staff, the choice seems far too clear. Thus reform still necessitates having an "opportunity economy." It means tackling the raft of other reforms you noted in your book in a way that engenders equal parts innovation and entrepreneurship.

Put another way, immigration reform may be a free lunch, but it's one meal among the many we'll need to thrive.

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