Eavesdropping on The Street: An Immigration Discussion

The Wall Street Journal’s Econoblog presents a civil discussion about the economics of immigration, showing mostly that there is no huge case to be made either for or against migrants when it comes to the numbers used by economists and business planners.

Migrants do tend to enrich capitalists. I get emails reminding me of that about once a week. OK. But these days, who doesn’t enrich capitalists? Now I’m all for a national discussion about capitalism, but scapegoating is what happens when some unlucky guy gets to take the blame for everyone else.

As the WSJ discussion makes clear, any effect of migrants on the overall economy – and certainly this includes the migrants’ value to corporations – has to be cast in pretty small percentages. The discussion is worth archiving below:(gm) ECONOBLOG

Immigration’s Costs — And Benefits
June 26, 2006

Illegal immigration has been painted as a costly problem, an economic necessity and a political football as the debate surrounding it has gathered steam.

The Wall Street Journal Online asked economists Gordon Hanson of the University of California, San Diego, and Philip Martin, of the University of California, Davis, to discuss the underlying causes of immigration (both legal and illegal), its historical roots and the nature of the current political uproar over the issue.

Gordon Hanson writes: For all the heat that the debate about immigration has generated, the net economic impact of immigration on the U.S. economy appears to be remarkably small. First, some thoughts on legal immigration, before we address illegal immigrants.

By bringing new workers into the economy, immigration allows existing U.S. capital, land, and technology to be used more efficiently. Also on the plus side, immigrants pay property taxes, sales taxes, Social Security taxes, and income taxes.


Gordon Hanson obtained his bachelor’s in economics from Occidental College in 1986 and his doctorate from the Massachusetts Institute of Technology in 1992. Before joining UCSD in 2001, he was on the economics faculty at the University of Michigan and at the University of Texas. He has written more than 50 publications in academic journals and other academic volumes. His current research focuses on causes and consequences of Mexican migration to the U.S., how and why multinational firms globalize their production activities and the factors that shape countries’ export capabilities. His most recent book is “Why Does Immigration Divide America? Public Finance and Political Opposition to Open Borders.”

Philip Martin is a professor of agriculture and resource economics at the University of California, Davis. He also chairs the University of California’s Comparative Immigration & Integration Program and edits the monthly immigration newsletter, Migration News. He studied labor economics and agricultural economics at the University of Wisconsin, Madison, where he earned a Ph.D. in 1975. His research focuses on farm labor, labor migration, economic development, and immigration issues, and has testified before Congress and state and local agencies numerous times on these issues. His most recent book is “Managing Labor Migration in the Twenty-First Century.”

In the negative column, immigrants use public services in the form of public education, fire and police protection, government assistance, etc. Add the positive and negative elements together and you get what looks like a very small number.

We can calculate the gain to U.S. GDP due to immigration, known in econ parlance as the immigration surplus, using a simple formula that is a function of three things:

• The importance of labor to the U.S. economy

• The size of the immigrant labor inflow

• The change in U.S. wages due to immigration

Whether legal or illegal, immigration generates a gain in national income by making U.S. business more productive. George Borjas and Larry Katz have examined the specific consequences of immigration from Mexico for U.S. wages.

But illegal immigration differs from legal immigration in several important respects. First, illegal immigrants tend to have low skill levels, which means they end up in jobs in agriculture, construction, household services, landscaping, low-end manufacturing, or restaurants and lodging. Employers in these industries (and consumers of the goods these industries produce) are primarily the ones who benefit from illegal immigration. In a recent study, Patricia Cortes, a graduate student at MIT, finds that U.S. cities that have higher larger immigrant inflows have lower prices for housekeeping, gardening, and other labor intensive services. Ten percent more immigration lowers prices for these services by about 1.3%.

Second, illegal immigrants, by virtue of their low income levels and their tenuous attachment to the legal economy, don’t pay all that much in taxes. Yet their kids still attend school and their U.S.-born kids still get access to Medicare. What does this mean for the net fiscal consequences of illegal immigration? The Center for Immigration Studies, an anti-immigration think tank, estimates that the short-run net fiscal impact of illegal immigration is negative, on the order of $10 billion in 2002, or 0.09% of U.S. GDP in that year. This is not a big number.

As with immigration overall, what upsets people is not the aggregate impact of illegal immigration, which, as with legal immigration, seems to be more or less a wash. It is that the benefits of illegal immigration are enjoyed by one group — the employers who hire them (and the consumers of their services) — while the costs are incurred by other groups — low-skilled workers and taxpayers in states where illegal immigrants reside.

Philip Martin writes: Gordon is right: Immigration, whether legal or illegal, adds workers, most of whom get jobs, which makes the U.S. economy larger. If there are economies of scale, as when producing more lowers the cost of production, the prices of some goods fall, benefiting those who buy those goods at home and abroad.

Most of the benefits of immigration go to the immigrants who earn higher wages in the U.S. than they would at home. In the standard triangle analysis, there are no net economic benefits to the U.S. economy (the triangle in the Hanson and Borjas papers above, as well as in my book “Promise Unfulfilled: Unions, Immigration, and Farm Workers”) if wages do not fall with the addition of immigrant workers.

It has been very hard to agree on how much wages declined because of immigration, but the 3% estimate of Borjas is reasonable.

With migrants getting most of the gain from immigration in their wages, and owners of capital and land getting most of the rest in higher profits and rents, the surplus triangle is 1/10 of 1% of GDP. Pro-immigration people stress that immigration is positive, a net economic benefit, and in a $13 trillion economy, 1% is $13 billion. Anti-immigrant people stress that immigration adds $13 billion, or about two weeks’ growth in an economy growing 2.5% a year.

Economists agree that the immigration generates a small net economic benefit for the U.S. and in doing so redistributes income from workers to owners of capital and land. Perhaps this is why immigration is such a political hot potato; it’s mostly a distribution issue and, for governments that are in the business of redistributing income via taxes and subsidies, regulating immigration is another redistribution tool.

How many, from where and in what status are the core questions of immigration policy. Could the U.S. get a larger economic benefit if changed the mix of immigrants arriving?

The National Research Council data suggest the answer is yes. Making often heroic assumptions about how well immigrants and their child
will fare in the U.S., the NRC calculated the present value of a typical immigrant arriving in the U.S. in the mid-1990s to be $89,000, that is, taking into account the taxes paid of immigrants and assuming that their children and grandchildren are like their U.S.-born counterparts, the NRC estimated that the present value of the taxes paid will exceed tax-supported benefits consumed by $89,000 over the next 50+ years.

However, the same study emphasized that the key to the benefits of immigration for the U.S. are their level of education. Those with more than a high-school education had a net present value of almost $200,000, while those with less than a high-school education had a net present value of negative $13,000.

Gordon writes: I think few would argue that we are living through an unprecedented moment of immigration from Mexico and Latin America. Where disagreements might arise is over what brought this moment about and how long it might last.

If you go back to the middle of the 20th century, immigration from Mexico just wasn’t a big deal. The share of Mexican immigrants in the U.S. labor force actually fell from the 1920s to the 1960s. Now, these numbers don’t include temporary immigrants that entered the U.S. under the Bracero program from 1942 to 1964, but I think the importance of that program is easy to exaggerate. Since braceros had to return home at the end of each year, the program represented a one-time increase in the U.S. labor force of just a few hundred thousand workers. Even at its height in the late 1950s, when over 400,000 Braceros entered the U.S., these workers represented less than half a percent of the U.S. labor force.

Today, however, the scale is entirely different. Mexican immigrants now account for about 5% of the U.S. labor force (and 35% of the immigrant labor force), up from less than 1% in 1970. What happened?

I would cite two events. Since 1982, Mexico has had several major economic contractions and has been unable to string together more than a few years of solid growth. As a result, per capita income in Mexico has steadily fallen relative to per capita income in the U.S. Why stay in Mexico when incomes are rising faster in the U.S.?

Compounding migration pressures has been the entry of Mexico’s baby boom into the labor force. While fertility rates in Mexico have dropped sharply in the last three decades (from five kids per woman in 1970 to three kids per woman in 2000), it wasn’t that long ago that the typical Mexican woman had nearly a half dozen children. Mexico’s high fertility years produced a demographic bulge, the members of which in the last 20 years have come of age and started to look for work. As luck would have it, Mexico’s baby boom entered the labor force during Mexico’s two decades of dismal economic performance and decidedly lackluster growth in labor demand. The result has been the surge in Mexican immigration that we have been witnessing.

What makes the current surge in Mexico-to-U.S. migration hard to slow is that today’s generation of Mexican young people do not have a memory of good economic times in Mexico. Many may have lost faith in Mexico’s ability to provide them with a decent future. Such a change in expectations is a powerful force because it implies that Mexico would have to produce unexpectedly strong economic growth for a sustained period to get Mexican workers to believe in the Mexican economy, again. In the meantime, Mexican labor will keep heading north.

Philip writes: Gordon has nicely laid out the failure of Mexico to create jobs for its baby-boom generation and the challenge of generating stay-at-home development after repeated disappointments in Mexican economic development. I think that the Bracero experience has relevance for today’s policy debate, in which both the House and Senate agree on more border and interior enforcement, and both seem to favor guest workers, but only the Senate offers a path to legal status.

The Bracero (“strong arm”) program was very important in setting Mexico-U.S. migration in motion. There were actually two periods of programs, between 1917 and 1921 and again between 1942 and 1964. The second period was important for several reasons: It gave Mexicans experience migrating legally and illegally to the U.S., made farmers familiar with Mexican workers, and introduced the nemeses of guest-worker programs everywhere: distortion and dependence.

Opening legal channels for guest workers doesn’t necessarily curb illegal immigration. Between 1942 and 1964, some 4.6 million Mexicans were admitted to do farm work; many Mexicans returned year after year, but between one million and two million gained legal U.S. work experience.

The Bracero program is another example of the maxim that there is nothing more permanent than temporary workers. The economic decisions of U.S. farmers became distorted as they made investment decisions that assumed Braceros would continue to be available. There was no need to raise the piece-rate wages that most Braceros earned, so it became profitable to plant orange and apple trees in remote areas. If the Bracero program were ended, these plantings would be unprofitable, explaining why farmers argued that they would go out of business without migrants. The program was nonetheless ended at the behest of President Kennedy, who believed that Braceros were “adversely affecting the wages, working conditions, and employment opportunities of our own agricultural workers.”

Today, 75% of U.S. hired workers on crop farms were born in Mexico, and more than half are unauthorized. If we substitute “unauthorized Mexican farm worker” for “Bracero,” we get the same debate as we had in the early 1960s and the early 1980s, before IRCA was enacted.

Perhaps the best way to minimize the distortion inherent in guest-worker programs is to charge employers for the privilege of employing legal migrants, and to use the taxes or levies collected to help them to mechanize and restructure jobs. In agriculture and many other U.S. industries that hire Mexican workers, it can be hard for an individual employer to mechanize, since, e.g., the crop must be packed or processed in a facility that is set up to handle machine-picked or hand-picked produce, but not both.

The other issue is the dependence of some areas of Mexico on the U.S. labor market. Economic theory suggests that areas sending and receiving migrants should see convergence in wages, but this anticipates higher wages in areas losing workers. Wages have risen in Mexico, but many of the rural areas from which most migrants come have been described as filled with nurseries and nursing homes, reflecting the fact that working-age adults are in the U.S. Remittances can lead to better housing and spending that generates multipliers and helps nonmigrants, too, but may not lead to the economic development that would keep young Mexicans seeking a brighter future at home.

The Bracero program sowed the seeds for subsequent Mexico-U.S. migration, which makes me cautious about beginning another large-scale guest-worker program. Second, if a new guest-worker program does not deal with the distortion that invariably creeps into the decision making of guest-worker dependent employers, there will be future “I will go out of business without migrant” protests. Third, if Mexico cannot absorb its labor force entrants in good or formal sector jobs, there will continue to be strong incentives to cross the border.

Gordon writes: Where do we go from here? Congress is battling over how to manage illegal immigration, with a plan to expand a guest-worker program being the most popular current policy option. In a nutshell, the idea would be to convert illegal immigrants into guest workers, which the U.S. government could regulate.

A guest-worker program, at least how it is envisioned by Congress, would be a disaster. For as maligned as illegal immigration is, it has some attractive fea

tures in terms of economic efficiency. Illegal immigration delivers U.S. business the types of workers they need (low-skilled labor, which is increasingly in short supply), when they need them (during times when the U.S. economy is expanding), and where they need them (in regions where job growth is strong).

A guest-worker program would have none of these properties. Given the snail’s pace at which the Department of Homeland Security operates, U.S. employers would likely have to apply for guest workers long in advance of when they actually need them. The flexibility and adaptability of current illegal inflows would be lost. In response, many employers would probably go back to what they are doing now, which is hiring illegal workers.

Successful policy reform would require rethinking both illegal and legal immigration in the U.S. Why not convert most family-sponsored immigration visas into visas awarded on the basis of skill? Why not make the number of immigrants awarded visas conditional on U.S. economic conditions? Why not have the price of a U.S. immigration visa be determined by market conditions? These are questions that in the current debate should be asked but sadly are not.

Philip writes: I hate to think that illegal migration, with migrants dying in the desert and sometimes subject to unscrupulous employers, is the best we can do. I think the first priority is to agree that hiring unauthorized workers is a serious offense and devote the resources needed to change the behavior of employers and migrants. We can do this; we have done it for child labor, and we can make hiring unauthorized migrants just as unacceptable, as is true in northern Europe and Germany.

After 1986, both U.S. employers and Mexican migrants thought for a short time that the U.S. government was taking unauthorized migrants as seriously as child labor. But they soon realized that it wasn’t, and they went back to hiring the unauthorized workers who showed up seeking jobs. There was also a layering in the labor market, with many employers turning to labor contractors to hire crews of workers on separate payrolls, cutting the link that allowed for some earlier Horatio Alger stories of ambitious workers climbing the ladder within a corporation when discovered by the right manager.

Labor migration is a process to be managed, not a problem to be solved. An effective migration-management process is one that uses economic incentives and disincentives to encourage employers and migrants to obey government-set rules, since we will never have enough enforcers to get compliance that goes against economic interests. In guest-worker programs, these economic incentives and disincentives involve payroll taxes; in general legal immigration, we have to answer the question whose interest migration is to solve.

If migration is to benefit natives, the key is to select immigrants most likely to be successful: young, healthy, well-educated English speakers. If migration is to allow the world’s “huddled masses” to breathe free, there will be different selection criteria. The inability of policy makers to answer these questions may reflect American ambivalence about immigration.

By mopress

Writer, Editor, Educator, Lifelong Student

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