Thursday, July 4, 2013

An Economic Case for Increasing Legal Immigration

Between the push for immigration reform, the recent repeal of DOMA that has engendered changes for LGBT couples with regards to immigration law, and the controversial study from the Heritage Foundation about the costs of allowing more immigrants into the country, there has been a lot of heated discussion on immigration lately. Considering that today is the Fourth of July, it made me think of how America is supposed to be the land of opportunity, as well as think about the extent to which America has and should absorb "your tired, your poor, your huddled masses." Has America already taken in too many immigrants, legal or not? Does this country need more immigrants? Is there an economic basis for allowing more immigrants to enter America?

When I ask myself these questions, I have to return some of the most basic of economic principles, one being that economic liberalization leads to greater prosperity. There is a lot of talk about free trade, i.e., allowing [little to] no obstruction of the allocation of goods and services. If one is to truly advocate for free markets, or at least more liberalized markets, then that needs to not just apply to good, services, and capital, but to all markets, and guess what? That includes labor markets. I can say that we should treat labor markets like any other market due to comparative advantage and leave it at that, but that wouldn't make for fun blogging.

I know that immigration reform is a complex and nuanced subject. I also know that I cannot touch upon every single detail involved. Nevertheless, let's go into as many reasons as possible as to why we should allow for more immigrants to enter this country.

The most amusing one-liner I have heard in the immigration debate is "they took our jobs." The idea behind this sentiment is that immigrants enter the country and are able to take the jobs of American citizens because they are willing to work for lower wages. First, let's address the idea of job loss. This assumes that there are a fixed amount of jobs out there, which is patently false. This country has been able to absorb a huge influx of immigrants in the past. The labor markets have also been able to adjust to the population increase caused by the Baby Boomers, as well as the huge influx of women that have entered the workforce since the Women's Liberation Movement. If immigrants really did take jobs from native workers without new jobs being created, then we'd see a decrease in the civilian labor force or a noticeable increase of unemployment as time passes, but alas, that is hardly the case.

What is better about the "they took our jobs" mantra is my second point, which is that there is no real wage depression that occurs. Why? When the "wage depression" argument is made, the assumption is that only the supply of labor increases, which is to say that an increase of employed workers increases supply, which decreases the wage. I'm not arguing the economics behind that. However, when the argument [with a static economic model] is being made, the second half of the equation is forgotten, mainly that immigrants also increase the demand for labor. Immigrants increase the overall population. An increased population translates into more people that want more goods and services, which increases the demand of goods and services. This, in turn, increases demand for labor. That increase in labor demand causes an increase of wages (see below). There is also the argument that if the wages were higher, native-born citizens would take those jobs. This overlooks the fact that if the wages were higher, the jobs simply wouldn't exist. Why? As can be observed with the minimum wage, outsourcing, or sweatshops, input of labor has huge costs, which means employers will react accordingly.

When referring to "the" supply curve, this makes the assumption that labor markets are homogenous, which they are not. Since labor markets are heterogeneous, one has to wonder the extent to which the skill sets of immigrant labor overlaps with that of native-born citizens. As the Brookings Institution points out, as do the Congressional Budget Office and the Federal Reserve Bank of San Francisco, immigrants and native-born workers are generally not competing for the same jobs, which is especially true for low-skilled labor. The reason for this is because most of immigrant labor is primarily either very high-skilled or very low-skilled, whereas a vast majority of Americans do not fall on either end of the spectrum. Even when there is some overlap, native labor and immigrant labor are imperfect substitutes and do not have a great competitive effect, which is to say that immigrants do not adversely affect the wages of native-born citizens. As a matter of fact, immigration could very well increase wages slightly. The OECD published a study in 2010 showing that in OECD countries, immigrants bring new skills to receiving countries and contribute both to entrepreneurial activity and job creation. It does not matter whether the immigration is low-skilled or high-skilled: not only does it improve the life of the immigrant (McCarthy and Vernez, 2006), but immigrants bring something new and positive to the table. Not only that, but immigrants actually increase worker productivity.

The immigrants are not the only actors one should take into account. First, there is the American consumer. As already mentioned, labor is a huge cost to a producer. If labor is cheaper, that means the price of goods decreases, which improves consumer welfare because the consumer's purchasing power increases. Goods can be used in a way that were previously uneconomical, which leads to more economic progress. The producer also benefits because s/he can make more profits, which means investing in more capital to expand production. Relatives of the immigrants who live in the home country benefit, too, because immigrants remit money to their relatives. Remittance is a solid and direct form of foreign direct investment that improves the wellbeing of these relatives. There is another actor who benefits from immigration, and we don't automatically think of it because the actor is the worker who was displaced by immigrant labor. Going back to the outrage of "they took our jobs," it is clear as day when an immigrant replaces a native worker. However, this is a case of the broken window fallacy. Job creation and destruction occurs all the time, which is important because in this context, we see the layoff, but we don't necessarily see the subsequent job creation. When we allow more immigrants, that means more workers in the labor force. More workers mean that more accurate specialization takes place. With that specialization, people land jobs in which they are more suited, or to put it in economic parlance, yea comparative advantage! This ultimately leads to increased productivity, economic efficiency, and net economic welfare for the native-born citizen (see subsequent paragraphs).

There is also the demographic factor of the fertility rate to consider. This country's fertility rate is below replacement rate. Since immigrants have a higher fertility rate, removing immigrants would make our fertility rate comparable to that of European nations, which I can tell you is a demographic disaster because an economy cannot survive in the long-run when the worker to retiree ratio is 2:1, and that ratio is only projected to decrease. A higher influx of immigrants would reverse some of the harm done by the decreasing fertility rate.

An additional issue I have with keeping the borders so tight is that it creates an underground market in labor. Whether it is something like the War on Drugs, human organs, cigarettes, or immigrants, a black market creates unintended consequences. Undocumented workers, who compromise of 3.7% of the overall American population, tend to stay in lower-skilled jobs because it is less probable that their legal status would be discovered. They cannot receive the same market return on their markets skills compared to their legal counterparts because they cannot acquire education or a job that fully actualizes their potential. Bringing those workers out of the black market would create better efficiencies in the labor market (Center for American Progress, p. 6). Not only does illegal immigration condemn undocumented workers to perpetuate their state of poverty, but there are also issues of human trafficking, exposing undocumented workers to subpar working conditions and labor rights abuses, as well as deadly risks they take by crossing the border illegally.

Another argument against immigration is that [illegal] immigrants are leeches that are mooching off the welfare state without making any positive economic contributions. Using the welfare argument is a red herring because the real issue here is that a welfare state exists in the first place. What's more is that contrary to "popular belief," immigrants are not disproportionately using welfare and immigrants are not causing an economic loss that naysayers like to postulate. As an example, between 2002 and 2009, immigrants contributed $115B more into Medicare than they took out. In net terms, immigrants are not a net drain on the federal government budget. Even if an immigrant is undocumented, they're still paying taxes, whether it is through property taxes or when they pay sales tax on goods and services they purchase. Rather than increase the federal deficit, what the Congressional Budget Office (CBO) found recently is that allowing for more immigrants would actually decrease the federal deficit. More to the point, the CBO also projected that allowing for more immigrants to enter the country would increase the GDP 3.3% relative to current law by 2023. A Bush-era White House Council of Economic Advisors concluded that native-born citizens receive a net benefit of approximately $37B per annum through the participation of immigrants in the American economy. Think of how much larger that net benefit and that growth in GDP would be if the United States government allowed for more immigrants! Even the anti-illegal immigration scholar George Borjas admits there is a $22B per annum benefit (in 2003 dollars). Furthermore, although immigrants are about 12% of the overall population (Census historical data here), they are about 16.4% of the overall workforce, which is to say that their overrepresentation in the workforce is a sign that they are hardly mooching.

In summation, immigration is good for the economy (Ottaviano et al., 2010; Kerr and Kerr, 2011). Approval for immigration is something that has a virtual consensus amongst economists, not to mention that sixty percent of Americans are on board. As such, we should work on liberalizing labor markets so that more immigrants can enter this country. To be sure, providing a streamlined way to enter the country without the red tape and long waiting times is not the same as amnesty since conditions and requirements would have to be met. As the Council of Foreign Relations illustrates, we need to create immigration reform and allow for more immigrants to enter the country to create more net benefits because our current system is woefully deficient. Ignoring the net benefits of immigration is like cutting off one's nose to spite one's face, which is why I hope that Congress passes the immigration reform bill as soon as possible.

12-2-2014 Addendum: The Manhattan Institute just published an issue brief entitled "Does Immigration Increase Economic Growth?" The short answer: Yes.

3-12-2017 Addendum: The Urban Institute summarizes research on why immigration is good for society.


  1. While greater legal immigration would increase the mobility of labor, it would also mean that a lot of people would suddenly be affected by minimum wage laws. They'd also be better able to draw services from the government, though they'd also pay more taxes, so I won't make a claim in either direction.

    1. Andrew, thank you for your comments!

      Since your first sentence is a contrasting statement, is that an admission that minimum wage laws cause adverse effects? Personally, I'd either lower or eliminate minimum wage if I could, but I know that would tick off most Americans, so I don't see much political feasibility in that. Alternatively, there's the EITC, which I'd prefer over minimum wage since the costs are more diffuse, but again, good policy versus good politics.

      With regards to government services, three responses: 1) If memory serves me correctly, the CBO accounted for that in their recent CBA; 2) As you pointed out, they'd pay more in taxes. If you drive the undocumented workers to the underground market, there goes tax revenue the government could have had in its coffers. Instead, this money stays in the white market, and thus increases economic productivity. 3) If we are to be this concerned with the immigrant impact on government services, we can either a: put restrictions on the access immigrants have to government services, or b: start paring government services so they don't increase the debt-to-GDP ratio.

  2. Israel is now a leader in start-ups because they absorbed a huge number of highly skilled Russian immigrants. These members of the FSU at first were driving buses and washing floors but quickly founded their own small (and large) businesses which drove the economic engine of the country.