19 May 2008

The Economic Case For Immigration

Elementary economics make clear that immigration drives down the wages of native workers who have skills similar to those of immigrant workers. It is a simple matter of supply and demand. Increasing the supply of workers with a particular skill drives down the price of labor at any given level of demand.

Howard F. Chang, in a preliminary draft of an upcoming article in the Journal of Law, Economics and Policy, goes beyond this analysis to ask about the magnitude of this effect, and to compare restrictive immigration policies to other tools which could be used to protect the incomes of workers.

His conclusion:

[T]ax and transfer policies are more efficient than immigration restrictions as instruments for raising the after-tax incomes of the least skilled native workers. Policies to protect these native workers from immigrant competition in the labor market do no better at promoting distributive justice and are likely to impose a greater economic burden on natives in the country of immigration than the tax alternative. These immigration restrictions are especially costly given the disproportionate burden that they place on households with working women, which discourages female participation in the labor force. This burden runs contrary to the teachings of optimal tax theory and introduces excessive distortions in the labor market because the supply of female labor is more elastic than the supply of male labor. Thus, the best response to concerns about the effect of immigration on the distribution of income among natives is to increase the progressivity of the tax system.

Underlying this analysis is some empirical data on the magnitude of the immigration effect on the compensation received by native laborers:

[S]tudies of the effects of immigration in labor markets in the United States and in other countries have shown little evidence of any significant effects on native wages or employment, even for the least skilled native workers. Given the small effects of immigration on native wages and employment, protectionist policies seem particularly misguided. David Card's influential study of the effect of the Mariel Cubans on the Miami labor market, for example, produces fairly typical results for this literature: he found that the arrival of 125,000 Cubans in 1980, which increased the supply of labor in Miami by 7 percent almost overnight, had virtually no effect on the wages and employment opportunities for workers in Miami, including the least skilled whites and the least skilled blacks.

He cites for this point George J. Borjas, The Economics of Immigration, 32 J. ECON. LIT. 1667, 1697-98 (1994); Rachel M. Friedberg & Jennifer Hunt, The Impact of Immigrants on Host Country Wages, Employment and Growth, J. ECON. PERSP., Spring 1995, at 23, 42; NATIONAL RESEARCH COUNCIL, THE NEW AMERICANS: ECONOMIC, DEMOGRAPHIC, AND FISCAL EFFECTS OF IMMIGRATION 223 (James P. Smith & Barry Edmonston eds., 1997); and David Card, The Impact of the Mariel Boatlift on the Miami Labor Market, 43 INDUS. & LAB. REL. REV. 245, 256 (1990). The citation to Borjas, in particular, is relevant, as Chang describes Borjas as a leading proponent of restrictive immigration among published economists.

He also notes with regard to one of the leading papers of Borjas that:

Recent work by George Borjas, in particular, is widely cited by restrictionists for his large estimates of the effect of immigrants on native wages. In a recent study, for example, he attempts to estimate the effects of all immigration between 1980 and 2000 on native workers in the United States, concluding that the large influx of workers over these two decades reduced the wage of the average native worker by 3.2 percent and the wage of high-school dropouts by 8.9 percent during this period. These results, however, are based on a simulation that make two extreme assumptions. First, he assumes that immigrants are perfect substitutes for natives as long as the workers have the same number of years of education and of experience. Second, he assumes that the capital stock is fixed and does not respond to this immigration by increasing the supply of capital to the economic activities employing immigrant labor. Given these restrictive assumptions, his simulation is inherently biased in favor of finding large adverse effects on natives.

This criticism is supported by Borjas himself:

Borjas and Katz have since reduced their estimate of this adverse effect
on the wages of high-school dropouts down to 3.6 percent, “acknowledging that the original analysis used some statistically flimsy data.” Eduardo Porter, Cost of Illegal Immigration May Be Less Than Meets the Eye, N.Y. TIMES, Apr. 16, 2006, § 3, at 3.

Chang suggests that the low impact is due to the simultaneous impact on demand and supply created by the increased consumption accompanying the influx of immigrants, and the tendency of increased immigrant labor to encourage increased investment and economic expansion in areas where their labor is available. Then, he notes that:

Finally, the empirical evidence indicates that immigrants and natives are not perfect substitutes in the labor market, so they often do not compete for the same jobs. For example, immigrants are likely to have different language skills than natives do, so that employers may find natives to be better suited for some tasks than immigrants are. In fact, labor markets are highly segregated, with immigrant labor concentrated in some occupations while natives are concentrated in others. Immigrants compete with one another far more than they compete with natives. Indeed, some immigrant labor can be a complement rather than a substitute for native labor, so that an increase in the supply of immigrant labor will increase the demand for native labor and thus have positive effects on native wages rather than negative effects.

The last point is most disputed in the literature according to Chang's footnotes.

A study that makes the assumptions that Chang suggests, including the final assupmtion about imperfect substitution of labor between immigrants and native born Americans concludes:

Once they allow the capital stock to adjust fully, they estimate that all immigration into the United States from 1990 to 2004 increased the average wage of native workers by 1.8 percent and decreased the wage of native high-school dropouts by only 1.1 percent. Indeed, they find that all native workers with at least a high-school education enjoy increased wages as a result of this immigration rather than reduced wages. Thus, this influx of immigrants had only a small adverse effect on the shrinking minority of native workers with less than a high-school education.

The study Chang cites is GIANMARCO I.P. OTTAVIANO & GIOVANNI PERI, RETHINKING THE EFFECTS OF IMMIGRATION ON WAGES 3-4 (National Bureau of Econ. Research Working Paper No. 12497, 2006). About 9% of native born Americans are high school dropouts.

Chang finds the impact on native born working women comes mostly through consumption prices and not wage competition (as relatively modest shares of immigrant labor involve unskilled women). The jobs most impacts by immigration according to sources cited by Chang include gardeners, "cooks, kitchen workers, bakers, and others who work in food preparation, housekeepers, maids, and others who clean private households, child-care workers, and waiters, waitresses, and their assistants[.]" Lower wages in these positions, Chang notes, the benefits of cheap service sector immigrant labor accrue most strongly to two income couples, which enhances employment rates for women.

Among the most efficient tax benefits, in Chang's view, might be tax law provisions that set progressive tax rates for earned income person by person, rather than as a household, which imposes high marginal tax rates on someone who views themselves as a "second earner" in their household, or increased generosity in child care tax benefits.

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