Immigration, Excess Aggregate Demand and the Balance of Payments

Abstract

In this article we discuss a method of measuring short-term effects of immigration on excess aggregate demand and on the balance of payments with particular application to a full or over-full employment, economy. It may well be the case that an apparent shortage of labour in the economy as a whole accompanied by a shortage of goods and services -all symptoms of a creeping iiiflation-is attributable in the last resort to inept monetary and fiscal policy. It may further be the case that by some small reduction in the existing level of employment the general labour shortage would disappear and the pressure on prices fall away. Whatever the origins of a general shortage of labour, however, the question remains: does the import of labour, like the import of goods, help to curb an incipient inflation by acting to reduce excess aggregate demand ? If net immigration added to the national product without increasing effective demand, or if it increased effective demand in smaller proportion, then, whatever the other economic effects, it would contribute in the short run to a reduction of the pressure of excess aggregate demand however caused. In the attempt to answer this question we set up, first a general model for estimating the effects of immigration on aggregate net output, on aggregate net expenditure, and on the balance of payments. The model is then applied to the particular case of Jamaican immigrants into the U.K.