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Tuesday, April 04, 2006

Martin Wolf: Unskilled Immigration

Martin Wolf has a pretty good summary of the economic and equity issues involved with the immigration of unskilled workers. A thought that strikes me is that this debate is partly about how one values costs and benefits to non U.S. citizens. Suppose you can make people better off with a particular policy, but a subset will be worse off worse off, but the subset does not contain any U.S. citizens. It is a Pareto improvement to enact the policy?

Some people will value the costs and benefits to non U.S. citizens highly - those that care deeply about the positive impact of immigration on the lives of the immigrants fall into this category. Some will place very little weight on those outside the country - policymakers such as the Fed do not recognize costs and benefits except as they relate to the U.S. economy and the welfare of its citizens. The Fed has made it clear it is not its job to worry about the unemployment rate in Mexico in the conduct of policy unless it somehow affects the U.S. In making welfare assessments, how those costs and benefits are evaluated can have a big affect on the recommended course of action. And I don't think there's a right answer as to what someone should consider in making such evaluations. A person isn't more or less liberal or progrssive (or conservative) for considering their family or community first and placing domestic low skill wage earners at the forefront, or for caring deeply about immigrants.

If I thought politicians would actually follow through on the proposal, my own view is that those who benefit most from both legal and illegal immigration, those at the higher end of the income scale, would have part of those benefits taxed away to compensate those who are hurt by the policy, low-skilled wage earners in particular. In such a case, a liberal immigration policy would be my preference.

But when immigration places costs on some citizens while others reap most of the benefits and there is no compensation or any political hope of compensation being enacted, the proper position to take on proposals to increase immigration is less clear cut, at least for me, except as an advocate for polices to reduce the costs to unskilled workers as much as possible:

Disputed fruit of unskilled immigration, by Martin Wolf, Financial Times: What should be the response of high-income countries to the pressure for immigration of unskilled workers from poor countries? ... That there should be pressure for immigration of unskilled people into high-income countries is hardly surprising, given the huge wage gaps. The number of illegal immigrants in the US, predominantly from Mexico, is estimated at 11m, up from 4m in 1992. Illegal immigrants make up about 5 per cent of the labour force, but 24 per cent of people working in farming, fishery and forestry, 17 per cent of cleaners, 14 per cent of construction workers and 12 per cent of workers in food preparation.

With public concern rising, Congress is debating two distinct responses to the rise in illegal immigration. The Senate version would toughen sanctions on employers of illegal immigrants. It would in addition establish the guest-worker programme ... The House response focuses on building a huge fence to halt the flow of illegal immigrants.

That Congress, in general, and Republicans, in particular, should be divided is unsurprising. Business and the wealthy favour immigration, while nationalists and the less well off oppose it. It is also unsurprising that neither set of proposals is likely to work: where interests in favour of inaction are strong, the appearance of action will almost always be preferred to the reality. It will prove practically and politically impossible to repatriate hundreds of thousands of guest workers and their families. ...

Yet it would not be impossible to halt the inflow: if penalties imposed on the individuals, or chief executives, who employed, or allowed their companies to employ, workers without a valid permit were truly draconian, demand would dry up. Such people are not stupid. In the absence of tough sanctions on employers, the chances of stemming the inflow are negligible. 

The question is whether such sanctions could be justified. They might be, for two reasons: the first is that uncontrolled immigration of unskilled labour is damaging to already ... disadvantaged fellow citizens; the second is that routine violation of such laws undermines the rule of law itself.

The economist who has argued for the first of these propositions most cogently is George Borjas of Harvard University. According to a simulation exercise by Prof Borjas and Lawrence Katz ..., the real wages of US high-school dropouts would have ended up 8 per cent higher if Mexican immigration between 1980 and 2000 had been thwarted, but higher skilled immigration from elsewhere had still been permitted.

Similarly, Steven Camarota of the Center for Immigration Studies, a think-tank in favour of tighter controls, argues that the influx of low-skilled immigrants has already harmed native-born competitors. As the proportion of immigrants (both legal and illegal) in the labour force has risen, the proportion of relatively unskilled natives in work has fallen (see charts). Moreover, many unskilled natives have left the labour force: they are discouraged workers.

A standard counter-argument ... is that immigrants are taking jobs that natives are unwilling to do. This is doubly wrong. First, the supply of labour is dependent on its price. ... Without the illegal immigrants, people would have to spend more on nannies, cleaners, farm workers and so forth. Second, most of the workers doing the jobs done also by immigrants are native-born. The obstacle is not the absence of native-born workers, but that they would have to be paid higher wages...

Equally invalid is the argument that inflationary pressures would build up without the illegal immigrants, forcing the Federal Reserve to restrict growth. This confuses changes in relative wages with an overall inflationary process. With fewer immigrants, the economy would simply grow more slowly. But the question for existing citizens is not whether immigration raises the size of the economy, but whether it increases their own incomes per head.

This it may do, but it also may not. Low-skilled immigration also has adverse distributional effects. If a dominant concern were with the welfare of the more disadvantaged of the native-born, the case for control over the current influx of illegal immigrants would be strong. If a desire to offer opportunity to poor foreigners tempered that concern, a case would exist for formal relaxation of controls, combined with wage-subsidies for native-born, low-skilled workers. What cannot be justified is restrictions on immigration no one intends to enforce.

In making the case for either controlling immigration or compensating the native-born for its impact, the wider context must be remembered. The opening of world trade is eliminating opportunities for production of labour-intensive tradeable goods and services in high-income countries. Employment of the native-born unskilled must increasingly be in non-tradeable activities. If unskilled immigrants drive down wages for such jobs, too, a hapless underclass will inevitably emerge. ... Yet migration, while significant, is not the main factor in rising US inequality. The real cause is a topic I plan to address next week.

    Posted by on Tuesday, April 4, 2006 at 03:02 PM in Economics, Immigration, Income Distribution, International Trade, Unemployment | Permalink  TrackBack (0)  Comments (4)

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