I need a lot of links because I am including a lot of studies. I will be labeling the links by number since the number of links I have is limited. I will link a pastebin with all of the links below.
In Democracy 4 (and 3), if immigration is increased, it results in an increase in unemployment, a decrease in wages, and an increase in healthcare demand. I understand the logic behind these effects: your reasoning is most likely that as immigrants enter the country, they compete with natives for jobs, thereby decreasing wages since the supply of labor is increased, and since these immigrants will take some of those jobs available in the country, unemployment as a whole goes up. Further, immigrants will demand more from the healthcare system of the country, thereby increasing healthcare demand.
The above reasoning exhibits a well-known economic fallacy called the lump fallacy. This economic fallacy ignores either the supply or the demand effect of a population. In other words, the given population is a lump of demand (e.g. for healthcare) or a lump of supply (e.g. of labor), not supplying or demanding respectively. Here, you ignore that while immigrants compete with natives for jobs, in strict economic terms, they increase the supply of labor, they also increase the demand for labor, since they demand the goods and services provided by the economy. By increasing the demand for labor, they offset wage effects from the increase in supply.
Many make the argument that if an immigrant enters the country, they will accept a lower wage rate than native-born workers. In neoclassical economics, this translates to the question of whether immigrants are substitutes for native workers.
The above argument is a simplification based on classical economics and only looks at first order effects. That is, it ignores factors such as savings rates, cultural differences in native vs immigration populations, and how attitudes shift among natives when an increase in immigration occurs. This and many other factors all necessitate an empirical look at effects of immigration on the economy.
Here is a 12 year old meta-analysis of labor market effects (wages, employment, that kind of thing) of immigration: (link 1)
Here is a noteworthy bit from the paper:
“In Longhi et al. (2005a) we analysed 18 papers that provided 348 estimates of the effect of immigration on wages of the native-born population. We found that a one percentage point increase in the share of immigrants in the population would lower wages of the native-born population by about 0.1 percent on average across studies. When migrants are about one tenth of the population this translates into a very small elasticity of a 0.01 percent decline in the average wage for a 1 percent increase in the number of immigrants. In Longhi et al. (2005b) we compared nine recent studies that yielded 165 estimates of the impact of immigration on job displacement among native workers and found, similarly, that on average a one percent increase in the immigration population would leave the native born virtually unaffected: their employment would decline by a mere 0.02 percent.”
The finding that immigrant effects on employment and wages are negligible is not unique to this study. That study is actually an outlier in the literature when I did my research for this post, in that it does actually estimate that immigrants even effect employment and wages. The meta-analysis I linked above most likely predicts that immigrants affect labor markets because it includes studies which use a homogeneous labor market model. Here is a piece from another study, this time from 2016:
“Twenty years ago, economists typically framed their analysis of immigration as an increase in the supply of labor within a model of homogeneous workers and a downward-sloping labor demand, which was determined by the complementarity between labor and physical capital. This approach tended to focus the attention of the researcher on how immigrants competed with other homogeneous workers in the labor force while keeping everything else fixed, in a ‘partial’ view of the labor market. More recent analyses offer greater flexibility”
Source: (link 2)
The study goes on to discuss the larger set of factors that weren’t taken into account in economic research on the topic of labor market effects in immigration, such as the differences between native and immigrant population skills that allows economies to specialize and improve efficiency, rather than taking away from native jobs and wages.
Now, Democracy 4 specifies that the immigration statistic is more about sudden influxes of immigrants, but, from the same study I linked above,
“Between May and September 1980, about 120,000 Cubans left from the port of Mariel to reach the United States, as consequence of a sudden and temporary lift of the travel ban by the Castro regime in Cuba. About half of them arrived in Miami. The event was sudden, very limited in time, and not accompanied by economic crises in Cuba. Hence the Miami economy was receiving many refugees because of its pre-existing Cuban community but was unaffected by the other forces related to the Cuban outflow. This episode was first analyzed by Card (1990), who compared Miami to four control cities chosen as roughly similar to Miami in terms of black and Hispanic employment percentages and pre-1979 labor market trends. He found negligible effects on average wages and on wage dispersion in Miami relative to the control cities after 1980.”
Negligible means it shouldn’t even show up in the game. If I were playing Democracy 4 and that event happened, it should spike the immigration level, and if the results of this study are accounted for, the labor markets effects wouldn’t even register. Racial tension? Sure. Employment and wage changes? No.
What I think should happen in Democracy 4 is that an increase in immigration should simply not affect wages or employment. The reasoning is that, meta-analyses cover economic studies finding immigrants lowering wages and raising wages, and this is because in economics this is a debated issue, although I believe the overall consensus currently is that whatever the case, immigrants have negligible effects on those. Here is something from the Federal Reserve that finds entirely contradictory results on the effects of immigration influxes on unemployment and wages: (link 3)
The point is: it’s kind of unknown. You have said your game is not really about any particular political message. It’s just, “here are the effects of this policy.” Well, that’s what I think is so great about the Democracy series. That’s why I have so much enthusiasm for the game! But this one particular point is driving me crazy, since every bit of economic literature I can get my hands on suggests the way the game deals with immigrants stems from xenophobic stereotypes about them rather than the empirical work that’s been done on the issue.
Just for reference, here are some other studies I found on immigration with respect to labor market effects:
This one looks at immigrant influx in Houston and compares it to Dallas. It’s findings are, “the relative average quarterly wages in Houston decreased by 0.7 percent compared to the same group of industries in Dallas following the abrupt in-migration to Houston.” But notes that this is only from assuming the lump of labor fallacy. That is, ignoring economic demand effects of immigration. It notes in the conclusion, “Lastly and importantly, the same DDD becomes statistically insignificant if we fail to include a proxy for demand-side effects.” (link 4)
This paper discusses how, specifically low-skill immigration, actually causes the kind of specialization in the labor force I mentioned earlier, and explains how this can account for the “modest wage consequences of immigration for less educated native-born workers.” (link 5)
Here is a study looking at effects in Canada of immigration, particularly in the long run, “This paper examines the relationship between unemployment and immigration in Canada. The bidirectional causality test finds no evidence of a significant effect of Canadian immigration on unemployment. Cointegration tests indicate that there is no observed increase in aggregate unemployment due to immigration in the long run. The results from the causality test based on the vector error correction model confirm that, in the short run, past unemployment does cause (less) immigration but not vice versa. There is also a long-run positive relationship among per-capita GDP, immigration rate and real wages.” (link 6)
Pastebin with links: https://pastebin.com/50L9VT8A