THE GOVERNANCE OF MIGRATION POLICY
Gordon H. Hanson
UCSD and NBER
December 2009

In this paper, I examine high-income country motives for restricting immigration.
Abundant evidence suggests that allowing labor to move from low-income to highincome countries would yield substantial gains in global income. Yet, most high-income
countries impose strict limits on labor inflows and set their admission policies
unilaterally. Making immigration more attractive would require creating mechanismsthat limit the negative impacts of labor inflows on natives. Fiscal distortions create an
incentive for receiving countries to screen immigrants according to their perceived
economic impact. For high skilled immigrants, screening can be based on educational
degrees and professional credentials, which are relatively easy to observe. For low
skilled immigrants, illegal immigration represents an imperfect but increasingly common
screening device. For policy makers in labor-importing nations, the modest benefits freer
immigration brings may simply not be worth the political hassle. To induce high-income
countries to lower border barriers, they need to get more out of the bargain.
Keywords: international migration, labor mobility, political economy, illegal migration

1 INTRODUCTION
When economists discuss the rationale for global trade accords, they generally
appeal to the benefits of free trade for global economic well being. By agreeing to keep
trade barriers against each other low, countries can achieve a higher level of welfare thanthey could by succumbing to the unilateral incentive to improve their terms of tradethrough the application of tariffs. The belief that the world is better off with multilateral
trade liberalization than a state of trade war is in part what sustains the world trading
system in the face of political opposition from special interests.
No such logic guides the policies that govern international migration. Most laborimporting countries set their admission policies unilaterally, with high-income countries
imposing strict limits on labor inflows. Many countries have negotiated bilateralagreements on labor movements – the Philippines through its Overseas Employment
Administration manages agreements on temporary migration flows with a dozen
countries (International Organization for Migration, 2003) and Spain has immigrationagreements with at least seven countries (http://www.migrationpolicy.org/) – butmeaningful migration accords are much more the exception than the rule. 1 The closest
source and destination countries have come to negotiating a multilateral deal on
migration is Mode IV of the General Agreement on Trade in Services (GATS), which
addresses the temporary movement of “natural persons” in the provision of services
across borders. While GATS has been in force since the implementation of the Uruguay
Round in 1995, its importance for international migration is quite limited. Today, the vast

1

While the OECD (2004) identifies the existence of 176 bilateral migration agreements, their practicalaffect appears to be limited. Most agreements establish a framework for future migration flows rather thanmechanisms for governing current flows. The same OECD study recognizes that the vast majority of
migration flows occur outside of negotiated arrangements.

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majority of labor flows between countries remain governed by policies that labor
importing countries design, monitor, and enforce.
Were the outcome of the current system an efficient global allocation of labor,
there would be little to grumble about. Yet, Clemens, Montenegro and Pritchett (2008)
report that for a sample of 42 developing countries the average gain to migrating to theUnited States is an increase in annual earnings of about four times, at purchasing power
parity. These gains, which I describe in more detail in section two, reflect enormous
cross country differences in labor productivity, which three decades of economic
liberalization by developing countries have been unable to erase.
With money seemingly left on the table, it is a puzzle why countries have notfound a way to facilitate greater global labor mobility. One question is why laborimporting countries continue to set immigration policies unilaterally. The simple answer
is that when it comes to migration from poor to rich countries importers have all thebargaining power. A core principle underlying the World Trade Organization isreciprocity in tariff setting: by allowing imports into their markets countries secureaccess to markets for their exports. With international migration between low-income
and high-income countries, labor flows are rarely bidirectional, making reciprocity moot.
Whereas migration from high-income to low-income countries accounts for only 3.5% ofworld flows, migration from low-income to high-income is 33.6% of the total (see Table1). The United States stands out for its importance as a destination. The country is hostto 19.7% of all international migrants from low-income incomes and 49.5% of migrants
from low-income countries that reside in high-income countries. The United States is thesource country for just 1.2% of the world’s migrants. Because cross-country differences3

in income are largely a result of variation in total factor productivity (rather than, say,differences in relative factor supplies), rich countries primarily import labor from poor
countries and poor countries primarily export labor to rich countries (Grogger andHanson, 2008). The reciprocal market access that poor labor exporters can offer is oflittle value to labor rich importers, leaving them under minimal bilateral pressure to open
their borders to poor country workers.
A more fundamental question is why, even without the lure of reciprocal market
access, receiving countries do not choose to make their economies more open to foreignlabor. In this paper, I examine high-income country motives for restricting immigrationand how the institutional framework for policy setting translates these motives into policy
outcomes. One motivation for barriers to labor inflows is political pressure from groups
that are hurt by immigration. If workers opposed to immigration lobby more effectively
than the business groups that tend to support immigration, policy makers may choose to
set foreign labor inflows too low, at least from the perspective of maximizing national
income. Raising immigration would depend on creating a mechanism to transfer income
from those that immigration helps to those that it hurts. In section three, I discusstheoretical and empirical literature on the political economy of immigration policy.
A related reason countries restrict immigration is that labor inflows from abroad
may exacerbate distortions in an economy. In the presence of redistributive tax andtransfer policies, immigration, particularly if it is low skilled, may raise the net tax
burden on native residents. Native voters may support immigration restrictions as asecond best response to a welfare system that is hard to reform. The key to making
immigration more attractive is creating mechanisms that limit the negative fiscal impacts

4

of labor inflows on natives. In section four, I discuss how the fiscal impacts of labor
inflows affect immigration policy.
Fiscal distortions create an incentive for receiving countries to screen immigrants
according to their perceived economic impact. For high skilled immigrants, screening
can be based on educational degrees and professional credentials, which are relatively
easy to observe. But for low skilled immigrants, screening is more problematic. Theireconomic performance is based less on education than on motivation and ability, which
are hard to verify in a visa application or a consular interview. Having low skilledworkers enter as illegal immigrants, as is increasingly the case not only in the UnitedStates but also in Europe, is a mechanism for selecting potential entrants who have astrong desire to work. While illegal entry may help identify good workers, it has otherproperties that are unappealing, including exposing migrants to extreme physical risks,leaving immigrants in a state of prolonged uncertainty regarding their residency rights,
and attracting criminal gangs into the business of migration. In section five, I discuss
why countries create separate policy regimes to govern legal and illegal immigration andidentify mechanisms that could potentially replace illegal entry.
High-income countries maintain barriers to immigration not because of a lack ofinternational cooperation but because they do not perceive significant benefits fromgreater labor inflows. Ironically, the labor movements that make migrants substantiallybetter off appear to have only modest effects on net incomes in receiving countries.
Borjas (1999) estimates that for the United States the net short run impact from
immigration is a change in GDP of a few tenths of a percent, which given theuncertainties involved in making such a calculation is essentially a wash. While one may

5quibble with some of the assumptions underlying his calculations, plausible alternative
assumptions would not yield outcomes more than two or three times larger, which is stillless than one percent of GDP. For policy makers in labor-importing nations, the modest
benefits freer immigration may bring are simply not worth the political hassle. To induce
high-income countries to lower border barriers, they need to get more out of the bargain.
By way of conclusion, in section six I discuss policy reforms that could make receiving
countries amenable to raising immigration from poor countries.

2 INCOME GAINS FROM EMIGRATION
How large are the gains in migrating from a low-income to a high-income
country? As an illustrative example, consider the income gain to migrating from Mexico
to the United States. One way to evaluate the gain would be to compare incomes forindividuals in different countries with similar observable characteristics. Using data from
U.S. and Mexico population censuses, Hanson (2006) reports that in 2000 the averagehourly wage for a 28 to 32 year old male with 9 to 11 years of education was $2.40 in
Mexico and $8.70 for recent Mexican immigrants in the US. 2 At full time labor supply(35 hours per week and 48 weeks per year) this would yield a yearly income gain of$10,600. Combining household data in developing countries with data from the U.S.
Census, Clemens, Montenegro, and Pritchett (2008) estimate that in 2000 the annual
income gain to migration for a 35 year-old urban Mexican male with 9 to 12 years ofeducation was $9,200.
Yet, migrants and non-migrants with similar education and experience may not be
2

Interestingly, for Mexico the relative income gain appears similar (about four times) whether one looks at
per capita GDP or hourly wages for low skilled labor. For other developing countries, per capita GDP
differences overstate the relative gain to migration. See Clemens et al. (2008).

6

the right comparison. They may differ in terms of unobserved cognitive ability, motor
skills, or motivation. If migrants are positively selected on unobserved skill, theestimated $10,000 gain would overstate the benefits from emigration. Clemens,
Montenegro, and Pritchett (2008) attempt to control for self-selection on unobservables inmigration, as well as for the possibility that the gains to migration include compensation
for the cost of moving abroad. They find that observed gains to migration overstate true
gains by 1.25 to 1.5 times. For the Mexico-U.S. case, the gain to migration would fallfrom $10,000 to $6,700 to $8,000.
The income gain from migration captures the gross return from moving to anothercountry. While there has been research on the role of migration networks in migration
decisions, there is little work that estimates the actual cost of migration. These costs
include transport expenses in moving abroad, time lost in switching labor markets,
administrative fees incurred in legal migration, border crossing costs in illegal migration,
the psychic costs of leaving home, and perceived changes in uncertainty associated withliving and working in another country. Given the absence of comprehensive data on
migration costs, we are far from being able to produce reliable estimates of the change innet income resulting from emigration. The change in income from emigration is themonetary gain from moving between countries. Through remittances, this gain is shared
between the migrant and his or her family members at home. Having migrants abroad
also provides insurance to households, helping them smooth consumption in response toincome shocks, be they domestic or foreign (Yang, 2007).
For labor exporting countries, the costs and benefits from emigration tend to behighly unequally distributed (Fajnzylber and Lopez, 2007). Most of the gain is captured

7

by migrants, a portion of which they share with their family members. Non-migrating
workers in sending countries may also gain, as wages rise in response to a reduction inlabor supply (Mishra, 2007). Yet, labor exporting countries are likely to suffer a
reduction in GDP, given the loss of labor resources. If the emigrating labor is highly
skilled, there may also be negative consequences for economic growth (which could beameliorated by emigration’s positive effect on the incentive to acquire skills; Docquierand Rapoport, 2008). The end result of emigration is that, at least in the short run, a
relatively small number of individuals may enjoy a substantial gain while a relatively
large number may experience a moderate loss. For sending countries, emigration tends toincrease GNP (which in theory includes income earned by migrants) but to decrease GDP(Hanson, 2008). Here, then, is an important difference between trade and internationalmigration. While in theory trade raises the GDP of all countries, international migration
only raises the GDP of receiving countries. In theory, migration does raise GNP for all
countries, but if sending countries lack the means to tax emigrants, the value of their lostlabor services may not be offset by the value of the income they remit.

3 POLITICAL ECONOMY OF IMMIGRATION POLICY
Why do countries restrict immigration? Absent distortions, the first-best policy
for a labor-importing country would be to have open borders. Yet, most developed
countries are far from such a policy. Immigration changes the distribution of income
within a country, creating winners and losers. In the United States, winners appear toinclude businesses that hire foreign labor, consumers that buy the goods and services that
immigrants produce (Cortes, 2008), and land owners (Saiz, 2007); losers include low

8skilled native workers that compete with immigrants for jobs (Borjas, 2003) andtaxpayers that absorb the fiscal costs of immigration (Hanson, Scheve, and Slaughter,2008). Evidence for Europe suggests that the labor market and fiscal consequences ofimmigration also contribute to opposition to foreign labor inflows (Mayda, 2006;
Facchini and Mayda, 2008).
By changing the income distribution, immigration has political consequences,which may give politicians an incentive to restrict labor inflows from abroad. In
choosing an immigration policy, a government trades off political support from special
interests against consumer welfare, which tends to be enhanced by economic openness.
Governments may restrict immigration because they weigh the welfare of different
individuals unequally, for whatever reason favoring those opposed to immigration. In the
United States, fiscal conservatives have considerable political weight, given theirprominence in the Republican Party. Their opposition to immigration (in concert with
cultural conservatives who also resist immigration) helped derail attempts to legalize
illegal immigrants and expand visas for guest workers in 2007. For fear of offending theparty’s base, Republican presidential candidate John McCain, who had been a leading
advocate for expanded immigration, gave the issue little attention in his 2008 campaign.
In Australia, Austria, Denmark, France, Greece, Italy, and the Netherlands, right wingparties have also been energized by immigration, allowing a core of anti-immigrant
voters to have outsize influence in political outcomes.
Lobbying by special interests may also influence immigration policy. Facchini,
Mayda and Mishra (2008) examine the allocation of foreign guest workers (in the form of
H1B visas for skilled labor) across US industries and find that industries that spend more9

on lobbying the government on immigration succeed in obtaining a larger number ofvisas. Most H1B immigrants are in engineering, science or other technical fields, whichhave been in scare supply in the United States during the last two decades (Lowell,
2000). Lobbying activities are evidence that skilled immigration benefits employers,
consistent with standard economic theory that inflows of labor raise the marginal productof capital. In theory, skill-intensive industries are the ones that gain most from skilled
immigration, consistent with their aggressive in lobbying for visas.
For politicians to respond to pressure from voters regarding immigration policy,
voters in destination countries must perceive that immigration affects their standard ofliving. In the United States, Scheve and Slaughter (2001) find that opposition to
immigration is stronger among less-educated workers, which appear to be the group mosthurt by labor inflows from abroad (Borjas, 2003). The opposition of the less-educated isgreater in regions where immigrant inflows have been larger. Less-skilled labor’s
skepticism about immigration mirrors its opposition to globalization more generally(Scheve and Slaughter, 2001). Mayda (2006) obtains similar results for a cross-section ofEuropean and Asian countries. In economies where immigrants are less skilled thannatives, opposition to immigration is stronger among less-skilled residents. Still, one
might be skeptical about the ability of low skilled labor to influence immigration policy.
Low income workers tend to have relatively low voter participation rates, giving
politicians an incentive to discount their concerns.

4 FISCAL IMPACTS OF IMMIGRATION POLICY
Tax and transfer policies create another motivation for a labor-importing country10

to restrict immigration, even where the level of immigration is set by a social planner. If
immigrants are primarily individuals with low income relative to natives, increased labor
inflows may exacerbate distortions created by social-insurance programs or means-tested
entitlement programs (Wellisch and Walz, 1998). Such policies may make a departurefrom free immigration the constrained social optimum. In the long run, immigrants may
also affect voting outcomes directly through their participation in the political process,possibly leading to a further transfer of income away from native taxpayers (Razin,
Sadka, and Swagel, 2002; Ortega, 2004).
In the United States, the fiscal consequences of immigration appear to matter for
immigration policy preferences. Low-skilled immigrants – who account for one-third of
the U.S. foreign-born population – tend to earn relatively low wages, pay relatively little
in taxes, and receive subsidized health care with relatively high frequency (Borjas and
Hilton, 1996; Fix and Passel, 2002). Hanson, Scheve, and Slaughter (2007) find that U.S.
natives who are more exposed to immigrant fiscal pressures – those living in states thathave large immigrant populations and that provide immigrants access to generous publicbenefits – are more in favor of reducing immigration. This public-finance cleavage isstrongest among natives with high earnings potential, who tend to be in higher tax
brackets. Facchini and Mayda (2008) obtain similar results for Europe, where
immigrants also appear to be a fiscal drain (Sinn, Flaig, Werding, Munz and Hofmann,
2003). More educated individuals, who are also likely to be high income earners, aremore opposed to immigration in countries where immigrants are less skilled andgovernments are more generous in the benefits they provide.

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There are also regional inequalities in the fiscal impacts of immigration. Theseare particularly noticeable in the United States. States and localities incur much of the
fiscal cost associated with immigration, while the federal government receives much of
the revenues (Hanson, 2006). In the United States, states and localities pay for public
education and public health, with support from the federal government in the form ofblock grants. About half of the value of public services that immigrants absorb is in theform of publication education, with health care occupying the second category. Much of
the tax revenues from immigration, in contrast, go to the federal government. While
sales taxes and property taxes are captured by states and localities, payroll taxes andfederal income taxes would go to Washington, DC. Illegal immigrants often have payroll
taxes withheld because they present Social Security cards to employers (be they real orfake) as proof of employability. By law, U.S. employers are required to ask for
documents proving the eligibility of an individual for employment but they are notrequired to go to great efforts to verify the authenticity of these documents. As part of an
accepted fiction in employing illegal immigrants, employers deduct payroll taxes fromtheir paychecks and pay these to the federal government. Contributions maid on behalfof invalid Social Security accounts go into the Earnings Suspense Fund, which as of 2007
held $600 billion. Many illegal immigrants pay federal income taxes, as well, as thiscreates a paper trail of their earnings which is useful for obtaining home loans and carloans from banks.
How large are the net fiscal consequences of immigration in actuality? The truth
is we do not really know. The vast majority of studies, including the analyses ofimmigration and public pensions discussed below, are calibration exercises based on

12assumptions about future immigration and immigrant behavior. One of the few
comprehensive national level analyses of the fiscal impact of immigration was by the
National Research Council (NRC). For the United States, the NRC estimated that in1996 immigration imposed a short-run fiscal burden on the average U.S. native
household of $200, or 0.2% of U.S. GDP. 3 In that year, the immigration surplus, ascalculated by Borjas (1999), was 0.1% of GDP. A back of the envelope calculation thensuggests that in the short run immigration in the mid-1990s reduced the annual income of
U.S. residents by about 0.1% of GDP. Given the uncertainties involved in making thiscalculation, one should not put great stock in the fact that the resulting estimate is
negative. But the available evidence suggests the total impact is quite small.
What about illegal immigrants? Camarota (2004) applies the NRC methodology
to estimate the fiscal impact of illegal immigration in the United States. He finds that in2002 US illegal immigrants on net received $10 billion more in government benefits thanthey paid in taxes, a value equal to 0.1% of US GDP in that year. With unauthorized
immigrants accounting for 5% of the US labor force, US residents would receive asurplus from illegal immigration of about 0.03% of GDP. Combining these two numbers,
it appears that as of 2002 illegal immigration caused an annual income loss of 0.07% of
US GDP. Again, given the uncertainties surrounding this sort of calculation, one could
not say with much confidence that this impact is different from zero.
Pay as you go pension systems create a further incentive for politicians tomanipulate the timing and level of immigration (Scholten and Thum, 1996; Razin and
Sadka, 1999; Poutvaara, 2005). Governments may choose to permit immigration of3

Going from a short-run to a long-run estimate of the fiscal cost of immigration can change the results
considerably. See Borjas (1999).

13

young workers, in order to smooth adjustment to demographic shocks, such as the agingof the baby boom generation (Auerbach and Oreopoulos, 1999; Storesletten, 2000).
Given its graying population and unfunded pension liabilities, one might expect Europe
to be opening itself more aggressively to foreign labor inflows (Boeri, McCormick, andHanson, 2002). However, concerns over possible increases in expenditure on social
insurance programs may temper the region’s enthusiasm for using immigration to solve
its pension problems (Boeri and Brücker, 2005; De Giorgi and Pellizzari, 2006).
Beyond the economic consequences of labor inflows, some argue that opposition
to immigration is grounded in culture, with individuals preferring homogenous societies
because they foster a stronger sense of national identity and civic purpose (Huntington,2005). Consistent with this claim, the recent anti-immigration-based presidential
campaigns of Pauline Hanson in Australia, Jean Marie Le Pen in France, and Tom
Tancredo and Duncan Hunter in the United States each touted the negative culturaleffects of foreign labor inflows. Because fiscal conservatives and cultural conservatives
are often aligned politically, it is difficult to disentangle how important cultural attitudes
are in promoting resistance to immigration.

5 THE DESIGN OF IMMIGRATION POLICY REGIMES
Because immigration may create tension with the functioning of the welfare state,high income democratic countries – all of which have welfare systems of one kind or
another – may resist the unfettered inflow of foreign labor. One solution to the conflict
would be to deny immigrants access to welfare benefits, which would allow receiving
countries to gain from labor inflows while not exacerbating fiscal distortions too

14

severely. Guest worker programs in part serve this purpose. They grant foreign workers
admission visas, while restricting their residency rights by placing limits on the amountof time they can spend in the country and the public services to which they have access.
Yet, in most countries, guest worker programs remain small. In the United States,
temporary immigrants accounted for only 3% of the total stock of immigrants in the
country in 2005 (Camarota, 2005). In 2006, inflows of legal temporary workers were
213,000 in Australia, 146,000 in Canada, 28,000 in France, 295,000 in Germany, 98,000
in Italy, 164,000 in Japan, 83,000 in the Netherlands, and 266,000 in the United Kingdom(OECD, 2008). Note that given the short term status of guest workers these numbers
represents stocks and not flows of temporary immigrants (i.e., these populations ofworkers turn over completely every one to three years).
Interestingly, it is non-democratic countries, including the Gulf States, Hong
Kong, and Singapore, that appear to channel most of their low-skilled immigrants
through guest worker programs (Rupert, 1999; Winckler, 1999). Table 2 shows the stockof immigrants in 2000 in the six largest Middle Eastern labor importing countries,
Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. 4 In 2000,
immigration in these countries accounted for 6.4% of the world total and 7.5% of world
immigration from low and middle income countries. Two thirds of the immigration in
the six Gulf States comes from just seven sending countries, Bangladesh, Egypt, India,
Indonesia, Pakistan, the Philippines, and Yemen.

4

While immigrants accounts for a large share of the populations of Hong Kong and Singapore, labor
inflows into these countries are a small share of the world total (with the exception of migration from China
to Hong Kong, which totals 2.2 million individuals). In 2000, the number of non-Chinese immigrants inHong Kong and Singapore were just over a half a million individuals in each country (Parsons et al., 2007).

15

Why would Gulf States be willing to admit large numbers of low skilled
immigrants as guest workers whereas the United States and Europe effectively force
similar labor inflows to be illegal? One conjecture is that non-democratic countries are
better able to enforce the departure provisions of guest worker contracts (Massey, 2004).
The Gulf States do appear to be aggressive in deporting illegal immigrants (Shah, 2006).
Enforcing departure requires immigration authorities to be able to monitor the
movements of immigrants. A government cannot deport immigrants that violate theterms of their visas unless it can locate them. Monitoring may be aided by the internalsurveillance that non-democratic countries maintain as part of their national security
infrastructure. Tight internal security may make it difficult for illegal immigrants toevade apprehension. The watchful eye of the government may thus enhance thecapability of the state to run large scale temporary immigration programs.
Relative to non-democratic societies, democratic countries are typically lessvigilant over the movements of individuals. The protection of civil liberties inherent todemocratic societies may complicate the internal enforcement of temporary immigration
visas (Martin, 2001). Concerns over violating civil liberties may impede the state fromacquiring information over where immigrants live and work. If immigrants in democratic
countries choose to overstay their visas and violate the terms of their temporary labor
contracts, they often can (Passel, 2006). One consequence of imperfect vigilance indemocracies may be that voters are skeptical about the ability of governments to force
temporary migrants to return home after their labor contracts are completed. Imperfect
enforcement of guest worker contracts for low skilled immigrants may lead voters to16

view such programs as simply allowing open ended immigration, causing them to haveweak political support (Briggs, 2004).
How do democratic receiving countries resolve the conflict between the welfare
state and the need for immigration? One way is by effectively forcing low skilled foreign
workers to enter their countries as illegal immigrants. Illegal immigration gives receiving
countries access to the labor they desire, while limiting the fiscal consequences of labor
inflows. In the United States, illegal immigrants account for 30% of the foreign born
population in the country (Passel, 2006). Illegal immigration is by no means exclusively
a US phenomenon. For the European Union, Jandl (2003) estimates than the grossannual inflow of illegal immigrants is on the order of 650,000 to 800,000 individuals ayear, which is comparable to gross illegal inflows in the United States. Inflows of thismagnitude do not necessarily translate into large stocks of illegal immigrants in part
because European countries have been aggressive in providing amnesties to illegal
immigrants. Greece, Italy, Portugal, and Spain have each offered multiple amnesties,
which has kept the share of illegals in the region’s foreign born population under 10%(Jandl, 2003).
While the United States and Europe devote resources to enforcing their borders
against illegal immigration, it is evident that these enforcement efforts are not meant to
be too effective. The United States spends about $15 billion a year on borderenforcement efforts and apprehends 0.8 to 1.2 million individuals attempting to enter thecountry illegally (Hanson, 2006). In the European Union, there are no official data on
spending on border enforcement or on the number of illegal immigrants detained but
Jandl (2003) suggests that there are at least 0.3 to 0.4 million apprehensions of illegal

17

immigrants in EU countries each year. The United States and Europe could easily afford
to spend far more on border enforcement but choose not to. High levels of illegal
immigration reflect a decision on the part of receiving country governments to allow
illegal entry to occur. Illegal immigration is a policy choice.
To understand why countries permit both legal and illegal immigration it is
helpful to review the mechanisms that countries use to govern admissions. Countries
regulate legal immigration through a combination of numerical quotas, entry selection
criteria, and restrictions on residency rights. While many countries have admission
categories that allow unrestricted immigration, these are generally limited to immediatefamily members of citizens, as in the United States, or individuals from countries within
an economic bloc, as in the European Union. Other legal immigrants are subject toquotas, whose number varies according to a nation’s ex ante selection criteria. The
United States allocates the majority of permanent residence visas to relatives of U.S.
citizens and legal residents; Australia and Canada favor legal immigrants that meet
designated skill criteria; and many European countries reserve a large share of visas forrefugees and asylees (OECD, 2008). Visas come with limited residency rights.
Temporary visas specify a time limit for residence, the types of jobs a visa holder may
hold, and the set of government benefits to which the holder has access. Permanent visas
provide broader residency rights, such as mobility between employers and access to moregovernment benefits, but do not always offer a clear path to citizenship.
Regarding illegal immigration, while countries do not explicitly set unauthorizedlabor inflows, they do implicitly determine the ease of illegal entry through theirenforcement actions. By choosing the intensity with which they police national borders18and monitor domestic worksites, governments influence the smuggling fee illegal
immigrants pay to enter a country (Ethier, 1986; Gathmann, 2004). Enforcement also
defines an ex post selection criterion for illegal immigrants: individuals who are able toevade capture by avoiding the police earn the right to stay in the country (Cox andPosner, 2006). The United States, for instance, concentrates enforcement on borders
rather than in the interior, allowing most illegal immigrants who do not commit crimes ormaintain a high public profile to remain on U.S. soil (Davila, Pagan, and Grau, 1999).
While illegal immigrants lack official residency rights, they are not devoid of legal
protections. Again in the United States, illegal immigrants may report crimes, attend
public schools, seek emergency medical services, obtain bank loans, or even acquire adriver’s license (in some states), with minimal risk of deportation.
For migrants, there are obvious disadvantages associated with high-income
countries channeling the low skilled through illegal means of entry. Illegal migration isdangerous, subjecting migrants to physical risks associated entry by sea, across deserts,
or hidden in transport vehicles. To reduce physical risks, migrants often seek the servicesof a smuggler, but this entails risks of its own associated with robbery or assault. Once inthe destination country, being illegal leaves migrants in a state of uncertainty andweakens their ability and incentive to make long run investments in their place ofresidence. By virtue of their status, illegal immigrants lack legal recourse and may beapprehensive to seek police or fire protection when the situation calls.
Cross-country differences in policy regimes do not affect the skill mix ofimmigrants as much as one might think. Antecol, Cobb-Clark, and Trejo (2003) find that
excluding immigrants from Latin America – who benefit from close proximity to the19United States – the education, English fluency, and income of immigrants in Australia,
Canada, and the United States are relatively similar. This is true despite Australia’s andCanada’s use of a point system that favors skilled immigrants and the US reliance onfamily reunification, which takes no account of skill, for the majority of its admissions.
Comparing immigrants admitted on employment-based visas in Australia and the UnitedStates, Jasso and Rosenzweig (2007) suggest that it is self-selection, rather than national
screening mechanisms, which accounts for differences in immigrant skills.
Even with similarities between countries in who gets in, there are differences
within countries in how legal and illegal inflows are regulated. As discussed above,
authorized entrants tend to be subject to quantity regulation and ex ante selection criteria
and have either expansive residency rights (for permanent immigrants) or limited
residency rights (for temporary immigrants); and unauthorized entrants tend to be subject
to price regulation and ex post selection criteria and have minimal residency rights.
Why do countries permit both legal and illegal immigration? First, consider legal
inflows. Quantity regulation allows a country to achieve specific goals in admissions, byassigning quotas to particular categories. The allocation of quotas may reflect a desire to
maximize the immigration surplus (by admitting scarce labor types), political economy
constraints on the level and type of immigrant inflows, or other objectives of government(e.g., national security, cultural homogeneity, humanitarian concerns). An ex ante screen
has a cost in that the government foregoes the option to obtain information on an
immigrant beyond observable characteristics, before offering admission (Cox and Posner,2006). However, the cost of foregone information may be small for skilled immigrants
whose abilities are verifiable in the form of educational degrees, professional awards, and20

past employment positions. The effective information cost may also be small wherecountries have strong preferences for specific types of entrants (e.g., family members), in
which case any updating on immigrant quality after residence in the country would be
unlikely to alter the admission decision.
Combining an ex ante screen with broad residency rights gives immigrants astrong incentive to assimilate. However, broad rights have a high fiscal cost, since theygive immigrants access to government benefits. The cost of providing broad rights may
be small for skilled immigrants, whose income-earning ability would make them net
contributors to government coffers. For family-based immigrants, the perceived cost of
broad rights may also be small since, as family members of residents, their well being
may be an implicit component of national welfare. For refugees and asylees, a similar
logic would not apply, perhaps accounting for why they tend to have narrow residencyrights (Åslund, Edin, and Fredriksson, 2001; Hatton and Williamson, 2004).
Quotas do not imply as much inflexibility in immigration levels as it would seem,since countries often admit a mix of permanent and temporary entrants. Opponents toimmigration may be unwilling to allow all entrants be permanent. Temporary
immigration quotas give politicians the power to rescind visas in the future, which may
increase support for immigration. The cost of having immigrants be temporary is a weak
incentive to assimilate. Comparing the costs and benefits, we might expect the share of
temporary immigrants in legal admissions to be higher when an economy is closer to abusiness cycle peak, at which point the option value of being able to expel current
entrants in the future may be relatively high.

21For illegal immigration, entry prices and selection criteria are defined implicitly
through the intensity of border and interior enforcement (Either, 1986). Entry prices
serve as selection device, since an individual must value migration to be willing to incur
the cost of paying a smuggler. Entry fees thus select immigrants with large perceived
income gains (Orrenius and Zavodny, 2001), which would include those for whom
immigration would yield large gains in either pre-tax income (due to a productivity gainfrom immigration) or post-tax income (due to tax and transfer policies in the destination).
While most destination countries would prefer to attract the first type of immigrant overthe second, an entry price does not select between the two.
One way to encourage immigration of more productive illegal immigrants isthrough granting narrow residency rights. For instance, since 1996 non-citizens in the
United States have been ineligible for most types of federally funded public assistance(Fix and Passel, 2002). A second way is through ex post screening. Interior enforcement
helps screen out illegal immigrants who commit crimes, try to obtain government
benefits illicitly, or engage in other behavior deemed objectionable. Governments thatchoose not to monitor employers that hire illegal immigrants can ensure that illegals whocome to work are able remain in the country. In the United States, greater borderenforcement does not appear to have strong deterrent effects on illegal entry (Davila,
Pagan, and Soydemir, 2002) or to affect wages or employment in U.S. border cities(Hanson, Robertson, and Spilimbergo, 2001), suggesting that the primary role ofenforcement is not to disrupt U.S. labor markets.
Combining price regulation, narrow residency rights, and an ex post screen helps
countries attract productive and motivated illegal immigrants. This selection process may

22be particularly important for the low-skilled, whose observable characteristics may be
uninformative about their productivity. In the United States, two-thirds of immigrants
with less than a high school education appear to be in the country illegally (Passel, 2006),
suggesting that the majority of the least skilled immigrants are unauthorized. Relative tosimilarly skilled natives, low-skill immigrants have high employment rates and low rates
of participation in crime (Butcher and Piehl, 1998 and 2006).
The United States and the EU have considered using expanded temporary
immigration to absorb their illegal immigrant populations (Walmsley and Winters, 2005;
Schiff, 2007). Large scale illegal entry in the United States began after the end of theBracero Program (1942-1964), which admitted large numbers of seasonal laborers from
Mexico and the Caribbean to work on U.S. farms (Calavita, 1992). Could new guest
worker programs end illegal inflows? Recent literature suggests that unless interior
enforcement is highly effective at preventing employers from hiring illegals, a guest
worker program that rations entry would not curtail the employment of unauthorizedlabor but simply push these workers deeper into the underground economy (Djajic, 1999;
Epstein, Hillman, and Weiss, 1999; Epstein and Weiss, 2001).

6 DISCUSSION
In a neoclassical economy, the optimal immigration policy would be to allow theunfettered entry of labor from abroad. Yet, labor-importing countries tightly restrict
labor inflows. Barriers to immigration in part reflect domestic political opposition to
open borders, with those most opposed to labor inflows being the workers and taxpayers
who are most exposed to the adverse consequences of immigration on labor markets and23

fiscal accounts. Immigration barriers may also represent a second-best policy thatgovernments adopt in order not to exacerbate distortions associated with domestic socialinsurance programs that they are unwilling to dismantle.
The structure of immigration policy regimes suggests that destination countries
also use barriers to identify individuals who appear likely to be productive workers
and/or have the desire to assimilate. Reserving immigration visas for skilled workers
selects high ability foreigners in a transparent manner. Restricting the residency rights ofimmigrants helps screen out those whose primary interest is in enjoying rich-country
welfare benefits. Less transparently, barriers to illegal immigration also select the moreproductive and more motivated workers among the low-skilled, whose ability is hard toobserve. The existence of informational problems in evaluating immigrants’ abilities andmotivations suggests there may be gains from coordination between labor-exporting andlabor-importing countries. Were labor-importing countries to have access to better
information on the employment histories of low-skilled individuals in developing
countries, they might be willing to accept them in larger numbers and require fewer ofthem to enter their economies as illegal immigrants.
There would appear to be strong efficiency arguments for having high income
countries admit more immigrants. Their unwillingness to do so reflects an estimation thatthe gains from higher immigration are not worth the political and fiscal costs. There
would also appear to be efficiency gains associated with converting illegal immigrants
into legal immigrants. Legality would reduce the uncertainty and physical risk that are
inherent to unauthorized migration, increase the incentive of migrants to makeinvestments in human or physical capital, diminish the scope for criminal gangs to24

capture a portion of the gains to migration, and strengthen the rule of law in receiving
countries. The challenge in converting illegal immigrants into legal immigrants – interms of maintaining domestic political support for such a policy – is avoiding making
fiscal distortions in receiving countries worse.
Given the absence of an incentive for receiving countries to participate inmultilateral negotiations on immigration barriers, efforts to reform immigration policies
will have to come from receiving countries themselves. What measures would encourage
individuals and governments in receiving countries to accept higher levels of legal
immigration from low income countries?
•

Have employers internalize the fiscal cost of hiring immigrant workers.
One source of opposition to immigration is that it results in a net fiscal transferfrom native households to immigrant households, at least in cases where immigrants have
low income levels relative to natives (under the assumption that the receiving country tax
system is progressive). Low skilled immigration thus imposes a negative pecuniary
externality on native taxpayers in the form of a higher net tax burden. Employers inreceiving countries would make efficient choices regarding the employment of immigrant
workers if they had to internalize the fiscal cost.
•

Create an incentive for employers to hire legal immigrants.
To convert current and future illegal immigrants into legal immigrants requires

changing the incentives for employers in receiving countries. For employers, one key
change is ending their ability to hire illegal immigrants under the guise of legal
employment, as currently occurs in the United States. This could be achieved by having
a national identification card, as exists in some European countries, or by imposing a25

mandatory verification system for employment eligibility. The United States hasdeveloped an electronic system known as E-Verify, in which prospective employees havetheir documents checked against a government database. As it stands, verification is
mandatory only for government contractors and a few select types of other firms.
Making electronic verification mandatory for all firms would end the ability of employers
to plausibly deny that they have knowingly hired illegal immigrants. Verification would
make monitoring of employers a much more significant deterrent against violating
employment regulations.
A second key change is making employment visas available in sufficient quantity.
One appeal of hiring illegal immigrants is that they are available immediately, with their
numbers fluctuating over the course of the business cycle. One way to make visas
responsive to market conditions is to auction their supply (Freeman, 2006). Weregovernments to set a target price for visas, they could vary the supply to keep the visa
price relatively constant. The sale of visas would generate revenue for receiving
countries, transferring a portion of the gains from migration from migrants to the hostcountry. Capturing these gains would encourage receiving countries to raise immigrationof low skilled individuals beyond current levels.
While auctioning visas might appear to be a significant change in how receiving
countries govern legal immigration, recall that regimes governing illegal immigration are
already price regulated. Smugglers charge fees to migrants to enter receiving countries
illegally, with the fee reflecting demand for entry (rising during relative boom periods inthe receiving country) and the cost of illegal crossing (rising during periods of more
intense border enforcement by the receiving country). Auctioning visas would allow

26

receiving countries to capture revenues currently enjoyed by smugglers. Migrants would
go from paying smugglers a fee for an uncertain entry outcome to paying a fee for acertain entry outcome, arguably improving their welfare even if the entry price rises.
•

Create an incentive for migrants to work as legal employees.
For migrants, the imposition of a payroll tax and the auctioning of visas could

create an incentive for them to eschew legal employment and seek work in theunderground economy as unauthorized employees. While mandatory verification andmonitoring of employers would dissuade many firms from hiring illegal immigrants, not
all firms would be deterred. Migrants would also need incentives to operate in the legal
economy. One incentive is the promise of permanent residence and citizenship. Supposethat migrants could accumulate points toward obtaining a permanent residence visa byobtaining and completing satisfactorily a series of temporary employment visas.
Migrants would have an incentive to comply with the requirements of a temporary visa ifthey wanted to get their visa renewed at the end of the visa period. These requirements
would include working in the receiving country only with a valid employment visa,
paying all relevant payroll taxes, and not using public services for which temporary
immigrants are ineligible (e.g., in the United States, non-citizens are ineligible forfederally funded income support payments). After a specified number of temporary visa
renewals, an immigrant would be eligible for permanent residence and, after a specified
waiting period, citizenship, brining full residency rights. Such a system of graduatedresidency rights (going from an initial temporary visa to a renewed temporary visa topermanent residence to citizenship) would provide a strong incentive for migrants to playby the rules. Citizenship would be conditional on behavior. Illegal migrants would

27

progress from the current environment of vague promises of permanent residence inreturn for their working hard and staying out of trouble to a system where the rewards tocompliance are well defined and subject to low risk.
•

Create screening mechanisms for low skilled immigrant workers.
One of the appealing features of illegal immigration is that it attracts individuals

with a strong desire to work. By virtue of having to pay an entry fee and not having
access to a safety net, illegal immigrants are highly motivated to stay employed. The
challenge for policy makers is to replicate these features through a system of legal
migration. One way to accomplish this would be by allowing international employment
agencies to matching workers in sending countries with employers in receiving countries.
Employment agencies would serve as intermediaries, obtaining information on the skill
profile and work history of prospective migrants and the occupational requirements of
employers. Employment agencies have come to play a large role in domestic hiring byfirms in high income countries, particularly the United States (Autor, 2008). In thePhilippines, such agencies help place workers in construction jobs in Gulf States anddomestic service jobs in Hong Kong and Singapore.
The active market for illegal labor in the United States and Europe may have
reduced the scope for legal intermediaries. Since legal intermediaries risk fines or
imprisonment by taking illegal immigrants as clients, their incentive to enter the market islimited. Perhaps as a consequence, employers primarily use informal networks to findworkers, relying on their employees to recruit friends and relatives from sending
countries (Massey et al., 1994). Such networks serve a useful purpose but by their nature28

are small in scale. Converting illegal immigrants into legal immigrants would potentially
increase the demand for formal intermediaries to help employers find workers abroad.
Screening mechanisms should not rely on sending countries to be gatekeepers for
emigration. Were sending country governments given the power to select which
individuals would obtain visas to work abroad, the incentive for corruption would begreat. Initially, the Bracero Program had the Mexican government allocating visas tomigrants to work in the United States (Calavita, 1992). Rampant corruption and abuse ofworkers put an end to this. U.S. employers then began to contract directly with Mexican
workers (often using their own recruiters to find field hands).

Allowing more labor to move from low income countries to high income
countries would raise world income, generating gains for migrants, migrant family
members in sending countries, and receiving countries. Receiving countries remainunenthusiastic about immigration because they enjoy, at best, small net gains frominternational labor flows. Migrants capture much of the gains from internationalmigration. Whatever benefits that remain for receiving countries are partially or fully
negated by worsening fiscal distortions. Unless receiving countries perceive greater
benefits from immigration, they will not be inclined to allow more labor in.
Multilateral negotiations hold little hope for expanding labor flows. At least as
far as migration is concerned, receiving countries have all the bargaining power.
Reciprocal market access for migration to poor sending countries is simply not much of
an attraction for the United States or Europe. The WTO itself acknowledges that GATS
Mode IV has been ineffective at increasing global labor flows (IOM/World Bank/WTO,

29

Mamdouh, 2004). Making Mode IV a meaningful vehicle for migration would appear torequire governments to substantially liberalize their commitments on labor movements
associated with trade in services. High-income countries do not appear to have made thisa priority in their approach to negotiations surrounding the Doha Round (Charlton andStiglitz, 2005). Conceivably, low-income countries could demand progress on expanding
Mode IV as grounds for completing Doha. Given the existing conflicts and controversy
surrounding the negotiations, it is difficult to see how such an approach would makecompleting the round more likely.
Fortunately, there are changes that receiving countries could undertakethemselves that would encourage the lowering of immigration barriers. The fiscal costsof immigration could be reduced by subjecting immigrant workers to payroll taxes and by
auctioning visas to temporary immigrant workers. With more visas available and inflexible supply, the incentive for illegal migration would fall. Sensible monitoring of
employers could further reduce the hiring of illegal labor. Migrants could also gain fromsuch reforms, to the extent they obtained a clearly defined path to citizenship and wereable to escape the risk uncertainty of unauthorized migration. New individuals in low
income countries could possibly gain access to emigration opportunities. Simply stated,
unless they perceive larger benefits to immigration, receiving countries are unlikely toopen their borders.

30

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35

Table 1
Stocks of International Migrants by Origin and Destination Region, 2000
Destination Region
Latin Am. &Origin Region
High Income Other Asia
Car.
21,155,815 1,149,869 2,036,010
High Income
Other Asia
15,266,768 18,104,219
174,503
Latin America & Car.
21,453,599
622,774 3,575,082
Eastern Europe
6,913,603
198,836
79,468Former Soviet Union
2,252,041
674,546
69,594
Mid. East & N. Africa
9,161,003
461,41393,889Sub Saharan Africa
3,901,407
302,209
41,135
Total
80,104,236 21,513,866 6,069,681

Eastern Former Soviet Middle East Sub Saharan
EuropeUnion& N. Africa
AfricaTotal
553,633
478,763 1,246,442
772,836 27,393,368
126,806
368,003 9,397,668
411,041 43,849,008
60,829249,683
452,855
237,676 26,652,498
1,689,382
832,362 1,269,960
162,681 11,146,292
1,650,766
24,553,428 1,612,173
411,628 31,224,176
276,559
247,622 7,118,225
531,322 17,890,033
63,436
138,666
798,755 12,307,038 17,552,646
4,421,411
26,868,527 21,896,078 14,834,222 175,708,021

International Migrants by Origin and Destination Region as Share of World Total, 2000
Destination Region
Latin Am. & Eastern Former Soviet Middle East Sub SaharanOrigin Region
High Income Other Asia
Car.
EuropeUnion& N. Africa
AfricaHigh Income
0.120
0.007
0.012
0.003
0.003
0.007
0.004
Other Asia
0.087
0.103
0.001
0.001
0.002
0.053
0.002
Latin America & Car.
0.122
0.004
0.020
0.000
0.001
0.003
0.001
Eastern Europe
0.039
0.001
0.000
0.010
0.005
0.007
0.001
Former Soviet Union
0.013
0.004
0.000
0.009
0.140
0.009
0.002
Mid. East & N. Africa
0.052
0.003
0.001
0.002
0.001
0.041
0.003
Sub Saharan Africa
0.022
0.002
0.000
0.000
0.001
0.005
0.070
0.456
0.122
0.035
0.025
0.153
0.125
0.084

Total
0.156
0.250
0.152
0.063
0.178
0.102
0.100
1.000

High income includes Australia, Japan, New Zealand; Canada, the United States; Andorra, Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, and the United Kingdom. Data are from Parsons et al. (2007).

Table 2: International Migration to Arab Gulf States, 2000

Origin Countries
Other Asia
Indonesia
Philippines
Bangladesh
India
PakistanBahrain
191,059

146,512Middle East, N. Africa
Yemen
Egypt

30,797

High Income
Eastern Europe
Former Soviet Union
Latin America, Caribbean
Sub Saharan Africa

4,469
1,424
18,393
2,884
5,281

Total

254,307

Jordan848,149

UnitedSaudi
Arab
ArabiaEmirates
2,929,055 1,485,422
296,778
13,098383,031
18,551
379,207
24,041
1,045,985 1,299,439
661,383

Total
6,838,721
355,955
486,521614,6113,824,441
881,854

Kuwait395,614

Oman
580,034

Qatar
409,388362,591

219,184

111,968
341,342409,388516,591

87,011

72,5380

1,967,811
360,438
1,015,124

214,235

2,888,983
424,900
1,248,258

134,300
120,194
177,372
74,71373,897

147,698
58,854
179,148
152,289
87,06012,308
756
2,329
182
13,5740000053,643
1,266
1,865
785
300,387

51,441
46,03967,941
28,61928,304

403,859
228,533
447,048
259,472508,503

1,945,216

1,107,674

681,721409,3885,254,812

1,922,001

11,575,119

127,018

This table shows the stock of immigrants in Gulf States by sending region and for the largest sending countries. Data are from
Parsons et al. (2007).

37