Sunday, February 7, 2010

Economics 07/02/2010: Human Capital, Immigrants and Social safety Nets

A very interesting piece of research that tends to support my view that higher minimum wages and more extensive welfare nets / social services nets are acting to reduce overall levels of productivity amongst the immigrants.

One paper, published this week, titled Indian Entrepreneurial Success in the US, Canada and the UK, by Robert W. Fairlie - University of California, Santa Cruz, Harry Krashinsky - University of Toronto, Julie Zissimopoulos – RAND and Krishna B. Kumar – RAND (available here) takes a look at the differences in entrepreneurship (incidence and outcomes) and education amongst one large sub-group of immigrants to the US, UK and Canada. Having a culturally homogenous and relatively large group of immigrants allows the authors to set aside the need for measuring sending country attributes, thus improving substantially the accuracy of their results.

What they found is pretty interesting.

Indian immigrants in the US and other wealthy countries are successful in entrepreneurship. But how successful these entrepreneurs are once they reach different countries and encounter different social systems, and what are the sources of their success?

The study finds that “in the US Indian entrepreneurs have average business income that is substantially higher than the national average and is higher than any other immigrant group. High levels of education among Indian immigrants in the US are responsible for nearly half of the higher level of entrepreneurial earnings while industry differences explain an additional 10 percent. In Canada, Indian entrepreneurs have average earnings slightly below the national average but they are more likely to hire employees, as are their counterparts in the US and UK. The Indian educational advantage is smaller in Canada and the UK contributing less to their entrepreneurial success.”

Hmmm… why so, you might ask?

Immigrants are most likely to enter both the US and UK as ‘family sponsored.’ Since the 1960s U.S. immigration policy has strongly favored family reunification. The UK’s immigration policies over the past four decades have shifted towards emphasizing family reunification and employment. On the other hand, Canada's point-based system which awards immigration admission points based on education, language ability (English or French), years of experience in a managerial, professional or technical occupation, age, arranged employment in Canada, and other factors leads to more skilled immigrants compared to the US.

So far so good – Canada has longer lasting and much more selective immigration policies than the US and UK.

Because of the point-based system, in Canada, roughly half of all immigrants are admitted through employment-based preferences. In contrast, slightly more than 10 percent of immigrants in the US are admitted under this classification.

Again, sounds like Canada should be really the land of entrepreneurial and higher quality immigrants.

The related category of employment creation or investors who face minimum net worth and business experience requirements, and self-employed immigrants who must have relevant experience in occupations. A larger (but still relatively small – just 7%) share of immigrants in Canada are admitted under these policies than in the US (0.1%) and UK (2.4%).

So, ex-ante data analysis, it is pretty clear that “Canada's point-based immigration system results in a higher share of employment-based immigrants compared to the US and UK. On the other hand, the UK admits a much higher share of immigrants under its refugee and asylee programs than the US or Canada. All else equal, we would expect skill levels of immigrants to be the highest in Canada and the lowest in the UK.” (emphasis is mine)

In other words: the authors “find some evidence that the educational advantage of Asian immigrants compared to the national average is lower in the UK than in the US, [consistent with differences in immigration policies]. But, we also find that the educational advantage in the US is higher than it is in Canada, which runs counter to the greater emphasis of Canada's immigration policy on rewarding points for the general skill level of immigrants.”


Why? “A more generous redistribution system, more egalitarian earnings, and other institutional and structural factors, however, may make Canada less attractive to higher skilled immigrants such as Indian immigrants.”

Boy, this is some statement – especially considering the EU policies to achieve ‘Social’ economy – economy based on greater earnings equality, greater rights-based outcomes equalization and maintaining a very generous welfare and redistribution systems. And this is serious, folks. Canada, US and UK are much younger – demographically – societies than EU-core states. This means that in general, the EU has a much more acute need to import younger entrepreneurial talent and skills in order to pay even comparable welfare rates to those in Canada, US and UK. Let alone to afford a more generous system of benefits. The prospects of this happening are not that good, folks.


Let us get back to the study, though:

“We find that Indian entrepreneurs are much more successful than the national average in the US. Indian businesses also perform well in Canada and the UK, but the evidence is not as strong. In the US, Indian entrepreneurs earn 60 percent more than white entrepreneurs and have the highest average business income of any immigrant group.”

No, wait – income inequality is actually favoring ethnic minorities in the US? Without an EU-styled rights legislation that polices allocations of income to specific ethnic groups? Who would have thought that to be possible!

“Estimates from business-level data sources also indicate that Indian firms have higher profits, hire more employees, and have lower failure rates than the average for all U.S. firms.”

Ouch - higher profits = hire more workers + have lower failure rates? And all without help of SIPTU/ICTU/etc to protect the interests of workers and to curb profiteering? Who could have thought?


But what drives such astounding results?

“To explain to relative success of Indian entrepreneurs we focus on the role of human capital. ...We test the hypothesis that a highly-educated Indian entrepreneurial-force is responsible for their superior performance in business. Indian immigrants in all three countries have education levels that are higher than the national average, and in the US the education levels of Indian immigrants are particularly high relative to the entire population. In the US, 68 percent of Indian entrepreneurs have a college education which is twice the rate for whites or the national average. Some of the variation in the education of Indian immigrants across the US, Canada and UK is likely due to immigration policy. Another possibility is that the higher returns to education in the US result in a more selective immigrant pool in the US compared to Canada and the UK.”

Bu wait – ‘higher returns to education’ = greater income inequality between educated and non-educated. Again, who could have thought that this might be a good thing, especially for a ‘knowledge economy’?

“When we examine business income, we find large, positive effects of education in the US and Canada. We also find large positive effects of education on employment in Canada, but smaller positive effects in the UK. The findings for education imply that the relatively high levels of education among Indian entrepreneurs have a large effect on business performance at least in the US and Canada. Decomposition estimates provide exact estimates of the contribution of higher levels of education among Indian entrepreneurs to their higher business incomes and employment levels.

  • In the US, higher levels of education among Indian entrepreneurs result in a business income advantage of 21 log points, which represents 43.9 percent of the gap.
  • High levels of education also contribute substantially to why Indian entrepreneurs earn more in Canada (12.5 log points), but the difference is not as large as in the US.
  • “The combination of the larger education advantage held by Indian entrepreneurs and the larger return to education is responsible for the increased importance of education as an explanatory factor in the US compared to Canada.
  • “In contrast to these results, the smaller educational advantage and lower returns to education in the UK result in less explanatory power in the UK.”
But sectoral and cultural decompositions also matter: “Lower concentrations of Indian entrepreneurs in agriculture and construction, lower female share*, higher marriage rates, and favorable regional distributions also generally contribute to why Indian businesses perform better than white businesses or the national average.”

Again, give it a thought, folks. The above says that Indian entrepreneurs are so spectacularly successful in all three countries because they avoid investing in ‘losing’ sectors and regions. So where does it put state-led efforts to pump money into such ‘losing’ sectors as, for example, agriculture? And where does this leave Ireland’s ‘National Spatial Development Plans’ that reallocate cash to ‘losing’ regions/areas? In the category of ‘luxury goods’ – an affordable (in certain times) cost of keeping at bay social discontent amongst those who are falling behind?

And it also says that higher marriage rates are positively associated with higher returns to entrepreneurship. Who could have thought?


Some food for thought for our immigration policy bureaucrats and our national development authorities, then…



*[Aside - the issue of lower female share of entrepreneurship is, in my view, a simple statistical legacy. Women entrepreneurs tend to run businesses that are on average younger than those for men, hence, some increased risk in statistical measures. Over time, I would expect as female entrepreneurship gains fully similar footing in types of business, sources of financing etc as male entrepreneurship, this difference will disappear completely.]
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