The Economics of Immigration

January 30th, 2013 at 7:23 pm

Dylan Matthews, a major-general in supreme-commander Ezra Klein’s Wonkbook army, has an interesting piece with some nice graphs up on the economics of immigration. It cites research that paints quite a sunny picture of the impacts on our economy and domestic workers.

I agree with much of what’s in Dylan’s piece. I’m particularly interested in the impact of immigrant flows on macroeconomic growth. Economists are well aware that slowing labor force growth is a factor in slower growth predictions in the future, but faster immigrant flows can improve that outlook.

But what about the near term impact of immigrant competition in a job market that’s already too weak? Here I think Dylan’s piece is too sunny. Let me explain.

First, we should be clear that a path to citizenship for immigrants already here will, if anything, put upward pressure of the wages of domestic workers with whom immigrants compete. As long as those folks are stuck in the shadows, they can and will be exploited. A path to citizenship therefore has the potential to take a pretty vicious form of competition out of the market.

Of course, the counterargument there is that anything that can be assailed as amnesty will signal future undocumented workers that the coast is clear. There’s not much evidence to support that, but it’s one reason why conservative supporters of immigration reform want the sequencing of the policy to be first “seal the borders,” then set out the path to citizenship.  There’s surely logic to that but we’re already doing a ton on the borders. Here’s how EPI’s Ross Eisenbrey (a supporter of comprehensive reform) sees it, and I think he’s right:

“We are spending $18 billion a year on immigration enforcement already, and I doubt there are big returns to more border enforcement.  But I’m a believer in the need to deter employers from hiring unauthorized workers.  Until there are effective sanctions — which we’ve never had — they’ll keep doing it and we’ll be back to where we are now before long.
So the new policies should expect less from border actions and more from a reliable verification system.”

One of most interesting and portentous—and most actively commented upon here at OTE—pieces of this is the impact of immigration (i.e., of folks who are not here already) on domestic workers’ wages. Here’s where Dylan may be a bit too optimistic, especially in the near term, and especially when the labor market is already over-supplied relative to labor demand.

The “little impact” camp is certainly right in the long run. Immigration flows are ultimately just too small as a share of the US labor force to have large impacts on wages once the labor market adjusts to the supply increase. The labor force is always growing along with population, and if anything, demographics is pointing toward slower supply growth, as I mentioned above.

In fact, many of the longer-term studies cited by Dylan assume zero impact of overall wages from the supply effect over the long term (which I’d say is 5-10 years). So they’re not really speaking to the question that looms large for many in this debate. I think it’s fair to say that the near term matters more to people, as opposed to economists.

In the near term then, what really matters for domestic workers is whether or not you compete with immigrants. The consensus among folks who’ve looked at this most carefully is that the vast majority of native workers do not, in fact, compete with immigrants. They are, in the parlance, more complements than substitutes. But if you are among those—and we’re generally talking about the least educated native workers, like high-school dropouts (and 12% of native-born black men are in that group)—who are “substitutable” for low-wage immigrant labor, you will feel this competition, significantly, in your job offers and your paycheck.

This is not at all an argument against comprehensive reform. It’s a very strong argument for upgrading the education of the “substitutables.”

A few more related points on this part of the argument, and I’ll get back to this with more info soon. Watch for members of Congress to try to expand guest worker programs throughout this round of reform, particularly in STEM and computer related guest visas, like H-1b’s. There is simply no credible economic argument I’ve seen based on wage or employment trends that would support the notion that there’s a near-term shortage in these fields. The wage trends in particular simply do not reflect excess demand relative to available supply.

More broadly speaking, that picture in STEM occupations is clearly the case economy-wide as well. Such observations have led scholars of comprehensive immigration reform, like Ray Marshall (a strong supporter of CIR, btw) to suggest that flows be tied to the unemployment rate. I think that’s a tall order re implementation, but surely that idea could be applied to guest worker programs. Their parameters in terms of allowable number of entrants could handily be adjusted to conditions in the job market.

Much more to come on this…it’s a good, important debate to be having and the political stars may be uniquely aligned to legislate welcoming reforms in this nation of immigrants.

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12 comments in reply to "The Economics of Immigration"

  1. D. C. Sessions says:

    I grew up with weekly stories of the huge shortage of engineers that the nation faced — and I’m now preparing for retirement. The stories never changed. For a while (until it disintegrated from old age) I had a newspaper page that had two columns on it, one headlining Company X testifying to Congress about the crippling shortage of engineers, the other reporting on the same company laying off hundreds of engineers in the very field it was describing as being short.

    I know firsthand that engineering pay lagged inflation from the mid-70s into the 90s, all while we kept seeing those stories of crippling engineering shortages.

    I’m not really complaining — I love my work, and economically I’ve done pretty well all in all. But the truth is that my employers (and all of the others in my industries) lie through their teeth about demand for skilled workers because it’s patently to their benefit to have lots and lots of us competing for jobs at any pay available, and there are a lot more employers than engineers talking to Congress.

    The same is true for some other fields (not all: lawyers and doctors come to mind) but engineering is the one I know.


  2. Kevin Rica says:

    First for anyone naive enough to consider Ezra Klein’s views on immigration, never forget how he can distort anything on the subject to conform to the WAPO’s position on immigration go here.

    http://www.washingtonpost.com/blogs/wonkblog/post/wonkbook-less-than-two-weeks-for-the-supercommittee/2011/11/11/gIQA1IKtBN_blog.html#excerpt

    Then look all the way down to this piece:

    “Native-born workers aren’t gaining employment after an immigrant exodus in Alabama”

    Contrary to what Klein implies, the article stated that the reason the employers can’t find native-born workers to take the jobs is because 1) They don’t pay enough and 2) Once illegals take certain jobs, the native born become convinced there must be something wrong with the job.

    Klein gets the respect from me that he deserves – none.

    But on the broader them of whether immigrants create additional jobs — there is no evidence besides bumper sticker slogans from 1950s sociologists to suggests that they do.

    In the 12 years since W was sworn in, this country has allowed in over 1 million LEGAL immigrants per year (leaving out illegals), but created 300 thousand net private sector jobs. WHERE ARE THE JOBS?

    The U.S. economy is not being held back by a shortage of HS dropouts. That idea is stupid-beneath-contempt. Had Romney won and self-deportation worked beyond anyone’s wildest dreams and 20 million people left, including 12 million from the unskilled labor force, the only significant impact would have been an increase in wages. The actual reduction of employment (people productively working) would have been maybe 2 million near minimum-wage jobs: marginal physical productivity– maybe $16K x 2 million = $32 billion lost GDP = 0.2% of GDP, but a 6.5% increase in per capital GDP and a large redistribution of income to the working poor.

    Adding low-skilled workers to the labor force defeats the purpose of increasing living standards. Canada and India have economies of roughly equal size – where is there a higher living standard?

    Obama’s immigration proposals are a war on Archie Bunker and the Dems final rejection of the ideals of FDR’s New Deal.


  3. Kevin Rica says:

    Jared,

    I’m glad that you are taking this issue up.

    But even you are being too sunny.

    A few technical issues:

    1. “First, we should be clear that a path to citizenship for immigrants already here will, if anything, put upward pressure of the wages of domestic workers with whom immigrants compete. As long as those folks are stuck in the shadows, they can and will be exploited. A path to citizenship therefore has the potential to take a pretty vicious form of competition out of the market.”

    Letting the current group of illegals compete openly walk into the nearest business and announce that they will legally accept any job for the minimum wage and no benefits will NOT improve the wages of the native born and legal immigrants. It means that the former illegals can openly compete against everyone else. It makes them a closer substitute for the native born and especially previous legal immigrants. That will reduce or eliminate the spread between the wages of the two groups. Wages will converge from both sides – meaning legal workers’ wages will decline.

    2. If you look at item #2 in the Dylan Matthews article, where he says: “that full deportation reduces gross domestic product and the others would add. Deportation reduces GDP by 0.61 percent, legalization with border control increases it by 0.17 percent and legalization without border control increases it by 0.53 percent.” Those numbers imply declining per capita income (living standards) as a result of immigration. Furthermore, the added income would not even cover the income earned by the illegal immigrants. Illegal immigration causes a two-way redistribution of income from the legally-working poor: from the working poor to the new immigrants and from the working poor to employers. Double Whammy for the working poor.

    3. It’s logically inconsistent to say that illegal (and legal) immigration of the unskilled does not reduce wages, but insist that these workers are doing valuable “Jobs that Americans don’t want.” (George W coined that phrase – do we have to believe everything that he said?) Because if wages don’t go down when the illegals come, that the jobs will be filled and can be filled by Americans working for the same wage if the illegals leave.

    4. On STEM — see interesting article in the Columbia Journalism Review:

    http://www.cjr.org/reports/what_scientist_shortage.php?page=all

    or you could just go to the conventions where science post-docs look for work and find out for yourself.

    5. STEM is used for the old bait-and-switch. We will be promised 5 Nobel laureates and get 5 million day laborers.

    Keep up the good work Jared and keep the issue alive. Defend the New Deal!


  4. beowulf says:

    Curious the only person saying that a much higher minimum wage (i.e. $12/hr) should be part of any immigration reform plan is the publisher of The American Conservative, Ron Unz.
    http://www.theamericanconservative.com/articles/immigration-republicans-and-the-end-of-white-america-singlepage/

    I dunno, I figured that was a policy that liberals in Washington would be fans of, apparently not.


  5. Smith says:

    All My Sons (and daughters)

    All of the 1.8 million college graduates entering the workforce each year are affected by the 85,000 (65,000 + 25,000 w/advanced degrees) who work under the threat of deportation if their employer terminates their employment. When 5% (85,000/1.8 million) of a segment (new & college educated) consist of indentured servants in violation of the 13th Amendment, it affects everyone’s wages. Lincoln understood the dynamics. The solution is to change work visas (corporate welfare) into green cards (economic conditions permitting).

    You must start explaining why accountants and teachers should care about higher STEM salaries. Because when some erstwhile teachers and accountants move to STEM, and the supply of teachers and accountants goes down, their wages go, guess what? Any wonder what’s happened to the college education premium? Or share of productivity gains?

    On the other end of the payscale, it seems cruel (aside from incorrect) to say only the poorest and most in need are hurt by increased immigration.

    One theory of how America traditionally absorbs immigrants without hurting other workers is the opposite of sanctioning temp workers.
    1. No employer dependent immigration.
    2. Racist Americans reject job applications of foreigners.
    3. Foreigners with little recourse are forced to start their own businesses.

    Thus complementary immigration.

    Non sequitur: Anyone else notice the irony of using the term ‘domestic worker’



  6. Dave says:

    Interesting.

    My view on this is a bit different, because I don’t view it as a matter of ‘long run’ vs. ‘short run’.

    First, most assumptions about immigration and its cousin, free labor trade, use a properly functioning macro economy as a basis. We don’t have one of those. We can hope we’ll get there someday, but I think it is an incorrect assumption so name that the ‘long run’. It should be referred to as a properly functioning macro economy.

    Second, I don’t agree with discriminatory immigration policies. I think anyone that can line up a job in a properly functioning macro economy (with other restrictions of course, but not related to job title) should be allowed to immigrate. Why discriminate based upon job? The argument is always based upon a shortage of certain types of labor, but that is a subjective measure at best.

    One person’s labor shortage is another persons properly functioning job market. Claiming we should bring in people to solve labor shortages is to pick winners and losers. It is to say that we will not tolerate a buyer’s market in labor, which is to say we are using central planning to oppress workers.


    • Kevin Rica says:

      Dave,

      According to freshman economics textbooks, labor shortages are the mechanism that raises wages.

      According to the the House Democratic Caucus, labor shortages are the justification for immigration.

      Since they can’t serve both purposes, which purpose do you think that they should serve?

      Ken


      • Dave says:

        I strongly believe that the democratic caucus is shilling for the capital kings. Labor shortages are the only mechanism for redistruting workers into different careers, which requires wage increases. We don’t need labor shortages to justify immigration. Immigration is good because it brings a larger, more diverse group into our democratic, market-driven, socially insured system and makes it larger.

        If you destroy the wage mechanism for redistributing labor, you completely foul up the entire system from education to labor to wage levels to demand…

        Immigration should be uniform across job sectors to avoid distorting the markets away from labor towards capital.


        • Dave says:

          I should have said that some of this shilling occurs unwittingly, and some is pretty blatant, but they rationalize it.

          It is surely true that immigration is good. And we also like it because it helps our side demographically, but once a person makes the political calculation that we need to justify immigration any way we can, this lends itself to the use of capital kings. They tell the caucus they have a labor shortage, the caucus likes immigration and this provides an economic justification that can pass the house, so they do it.

          Over time they forget why they were doing it, and because the only people they talk to are the capital kings, they come to believe it is the right thing to do, to fix labor shortages through immigration.

          It is wrong.

          But don’t get me started on the Republicans! They are much worse than that.


  7. purple says:

    There is basically is no immigration coming in from Mexico now, in NET.

    And Asia is booming so that source is going to dry up quickly. Actually, the word is already out about how tough it is here.

    I think the political class is in a time warp and doesn’t even realize how fast the world is catching up economically.

    Bloomberg etc. really thinks there are thousands of foreign born STEM Masters graduates who are forcibly deported from this country every year. Actually, they just want to go home where they can get a good job (at a fraction of the living expense in the U.S.) and be closer to their family. Those that leave usually come to the U.S. for our schools only.


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