President Bush touched off a debate on immigration with his recent proposal for changes in U.S. treatment of illegal immigrants. Just as it was 100 years ago, immigration remains a core policy issue with myriad economic implications.
More than a million immigrants enter the United States each year. This number is a bit higher than the levels common in the decade before World War I, though as a proportion of the total population, a million new residents in 2004 are much less significant than a million in 1904.
One important difference is that a century ago, virtually all immigrants were legal ones. Today, about a third of all new residents each year arrive in violation of U.S. immigration laws. Bush’s recent proposals focus almost entirely on this group rather than the much larger one that arrives with legal blessing.
Examining all economic implications of immigration is a huge task. Let’s focus on the key issue the president raised. In his speech, Bush focused on the issue of “jobs American citizens are not filling.” This lies at the core of his proposals for a guest worker program.
For someone with a Harvard MBA, the president showed remarkable economic naiveté in his assertion that “some of the jobs being generated in America’s growing economy are jobs American citizens are not filling.” It implicitly assumed a crucial missing clause. He should have said, “jobs Americans are not filling at wages employers wish to offer.”
Supply is not a question of physical quantities but rather a price-quantity relationship. Jobs that U.S. citizens shun at a low wage could be highly desired if employers offered higher pay. Do we need guest workers to fill jobs absolutely no American will take — or do we want to keep the wages of unskilled workers low? We should address that question squarely rather than evade it.
Basic economic theory argues that immigration increases output because more labor is available and because a greater labor force increases the productivity of natural resources and of capital goods such as plants and machinery. It also implies that if immigrants generally have lower education or skills than native-born workers, the increase in labor supply will tend to depress wages for most existing low-skill workers.
There not only will be more output, but also more output per resident, including guest workers. The benefits of more production, however, will largely flow to consumers rather than low-skill workers. We well may decide that the benefits to winners from this tradeoff should trump the harm to losers, but let’s be explicit about it.
Economists who study immigration generally find that the implications of economic theory are borne out in practice. Immigrants, legal and illegal, increase U.S. production of goods and services on a per capita and an aggregate basis. They also depress wage rates for existing workers at the lower end of the income scale. African-Americans and other minorities make up a disproportionate fraction of low-wage workers, and thus suffer greater harm from high immigration than other Americans.
Earnings of low-wage workers have been stagnant or declining since the 1970s. Some economists estimate that higher immigration accounts for about one-fourth to one-third of the gap between actual low-skill wages and what they would be if they had increased at the same rate as overall per capita income in the last 30 years.
Keep in mind that the increasing importance of technology over that period is an even more significant factor in depressing earnings of low-skilled workers. Increased imports also play a role along with a widening education gap between lower- and higher-skilled workers.
Citizens who feel indignation at this outcome need to keep in mind that it is consumers — rather than employers — who reap the bulk of benefits that stagnant wages for low-skilled workers bring. The U.S. market is highly competitive, and in such competitive markets, savings on input costs are inherently incorporated in lower product and service prices. It is the broad mass of middle- and upper-class Americans that benefits from increased immigration — not a small cadre of exploitive employers as many liberals fantasize.
Indeed, employers frequently are caught in a bind. If there are no penalties for employing illegal immigrants, some competitor inevitably will do so. Once a few businesses employ illegal immigrants, they gain a cost advantage over those that do not. It is competitive pressures, rather than avarice, that drives widespread hiring of illegal immigrants.
Regardless of whether Bush’s proposal is adopted, the reality is that workers from other countries will continue to find the United States economically attractive. A supply of potential immigrants will always be there, and recent history shows the limitations of border patrols. If this nation wants to reduce illegal immigration, it has to reduce demand. It would not be difficult to do so if we had the political will to impose stiff fines on businesses that hire illegal residents.
Employers whine about the difficulty of distinguishing job applicants who are legally entitled to work from those who are not. With recent technology, implementing a national worker I.D. card that is hard to counterfeit need not be difficult. If Americans find that unacceptable on civil liberties grounds, we need to accept the inevitable economic consequences.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.