June 6, 2017

Can Immigrants Save America's Struggling Cities?

Adam Millsap

Senior Fellow, Charles Koch Institute and Stand Together

More immigration won’t save struggling cities in the short run, but creating an unfettered economic environment that allows immigrants to work, start businesses, and contribute to a city’s economy and culture can pay dividends in the long run.

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A recent New York Times article discusses the effects immigration has had on the small city of Storm Lake, Iowa. Though many neighboring towns are experiencing the hardships associated with population loss, Storm Lake is growing, in part due to successive influxes of immigrants. But while immigrants can help some places grow and prosper, especially smaller cities, it’s unlikely that more immigration alone can save America’s larger cities.

Storm Lake opened itself up to immigrants in the 1970s, when a local church sponsored a group of refugees from Southeast Asia after the Vietnam War. Since then other groups of immigrants have made their way to the city, including Mexican immigrants attracted by the local food processing plants.

Since 1970 the city has grown by over 2,000 people, from just over 8,500 to nearly 11,000. Meanwhile, Buena Vista County’s population—where Storm Lake is located—has been flat.

Immigration provides the most obvious thing a shrinking city needs—people. People who work or start businesses contribute to an area’s economy, as well as public goods and services via taxes. Immigrants also contribute to an area’s culture by providing novel goods and services, such as new foods.

In addition to population, an area’s median income is another measure of prosperity. The median household income in Storm Lake is lower than that of both the surrounding county and Iowa, as shown in the figure below.

However, the percentage of people 16 and over who are employed is higher in Storm Lake, as shown in the next figure. Both of these results could be driven by Storm Lake’s relatively young population: In 2015 the median age in Storm Lake was 29 compared to 36 in Buena Vista and 38 in Iowa. Since younger adults are more likely than older people to be employed and unmarried, and earn less money on average, these age differences help explain Storm Lake’s higher employment rate and lower household median income.

Immigration has helped Storm Lake grow in an area that has otherwise not experienced much population growth. It has also contributed to Storm Lake being a relatively young city in an older region: Immigrants have more children on average than natives and in Iowa the median age of immigrants is lower than the median age of natives.

But while immigration appears to have positively contributed to Storm Lake’s growth, that doesn’t necessarily mean more immigration would have a noticeable impact on larger declining cities such as Buffalo, Dayton or Flint. At least not in the short run.

Many of Storm Lake’s immigrants work in the food processing industry, which is a relatively good job for low-skill workers just starting out in America. But cities like Dayton or Flint no longer have a large, tradeable industry like food processing that can easily absorb a large influx of low-skill immigrants.

In the past many declining northern cities were destinations for low-skill southern migrants and immigrants alike due to the availability of high-paying manufacturing jobs, but today those jobs are largely gone. For example, Dayton’s largest employers are Wright-Patterson Air Force Base and two healthcare companies. Jobs with these employers typically require some post-secondary education.

Some of Storm Lake’s immigrants also start small businesses that serve the local population, such as grocery stores or restaurants. These places expand the consumption options of local residents and typically provide a middle-class income for one family and entry-level jobs for a handful of others.

Cities like Buffalo, Dayton or Flint, however, need new businesses that sell their products all over the world and employ hundreds or thousands of people: Businesses in tradeable industries are what drive urban growth and create the purchasing power needed to sustain local businesses.

This doesn’t mean that immigrants don’t start large, global businesses: Several well-known tech businesses—including Google and Yahoo!—and dozens of others have been started by immigrants throughout America’s history.

But today these businesses are rarely started in America’s declining cities. The tech businesses are on the coasts in Silicon Valley or Boston while the finance businesses are in New York or Charlotte due to the agglomeration benefits provided by such places. Foreign-born entrepreneurs, just like native entrepreneurs, want to be where the action is.

That being said, attracting immigrants, even low-skill ones, may help declining cities in the long run. There is evidence that U.S.-born workers in more diverse cities have higher wages, all else equal, and that cities that become more diverse also become more attractive as measured by the rental price of housing.

Also, even if today’s low-skill immigrants don’t start the next Fortune 500 Company, their children might . And the children of immigrants who grow up in Flint or Dayton may be more apt to stay there or return after attaining success somewhere else.

This strategy has a long time-horizon, a generation or two, but it’s worth considering. Plus there are short-term benefits, such as an infusion of new culture, which can lay the foundation for further immigration.

In a paper in the American Economic Review that analyzed the Great Black Migration in America (1915-1960), the authors argue that similar migrants—and immigrants—cluster together since the costs of moving decline as the stock of similar people in a destination area increases, which fosters further migration.

Why do moving costs decline? First, information about job opportunities is often spread word of mouth to relatives and friends back home. For example, the New York Times article reports that Abel Saengchanpheng, whose family was originally from Laos, moved to Storm Lake from Northern California after relatives told him about the jobs available in food processing.

Second, early immigrants can help later immigrants find housing or provide temporary housing. Early immigrants can also be a source of credit and provide a valuable reference to employers.

Finally, there are benefits to moving to areas where social networks have already been established since this eases the process of adjusting to a new environment, culture or language. If a city wants to be a destination for immigrants it helps to attract them early.

More immigration won’t save Dayton, Flint, Buffalo or similar cities in the short run. But creating an unfettered economic environment that allows immigrants to work, start businesses and contribute to a city’s economy and culture can pay dividends in the long run.