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Sunday, June 25, 2006

Econoblog: The Costs and Benefits of Immigration

A Wall Street Journal Online Econoblog on the costs and benefits of immigration:

Immigration's Costs -- And Benefits, Econonblog, WSJ: ...The Wall Street Journal Online asked economists Gordon Hanson of the University of California, San Diego, and Philip Martin, of the University of California, Davis, to discuss the underlying causes of immigration (both legal and illegal), its historical roots and the nature of the current political uproar over the issue.

Gordon Hanson writes: For all the heat that the debate about immigration has generated, the net economic impact of immigration on the U.S. economy appears to be remarkably small. First, some thoughts on legal immigration, before we address illegal immigrants.

By bringing new workers into the economy, immigration allows existing U.S. capital, land, and technology to be used more efficiently. Also on the plus side, immigrants pay property taxes, sales taxes, Social Security taxes, and income taxes.

In the negative column, immigrants use public services in the form of public education, fire and police protection, government assistance, etc. Add the positive and negative elements together and you get what looks like a very small number.

We can calculate the gain to U.S. GDP due to immigration, known in econ parlance as the immigration surplus, using a simple formula that is a function of three things:

• The importance of labor to the U.S. economy
• The size of the immigrant labor inflow
• The change in U.S. wages due to immigration

Whether legal or illegal, immigration generates a gain in national income by making U.S. business more productive. George Borjas and Larry Katz have examined the specific consequences of immigration from Mexico for U.S. wages.

But illegal immigration differs from legal immigration in several important respects. First, illegal immigrants tend to have low skill levels, which means they end up in jobs in agriculture, construction, household services, landscaping, low-end manufacturing, or restaurants and lodging. Employers in these industries (and consumers of the goods these industries produce) are primarily the ones who benefit from illegal immigration. In a recent study, Patricia Cortes, a graduate student at MIT, finds that U.S. cities that have higher larger immigrant inflows have lower prices for housekeeping, gardening, and other labor intensive services. Ten percent more immigration lowers prices for these services by about 1.3%.

Second, illegal immigrants, by virtue of their low income levels and their tenuous attachment to the legal economy, don't pay all that much in taxes. Yet their kids still attend school and their U.S.-born kids still get access to Medicare. What does this mean for the net fiscal consequences of illegal immigration? The Center for Immigration Studies, an anti-immigration think tank, estimates that the short-run net fiscal impact of illegal immigration is negative, on the order of $10 billion in 2002, or 0.09% of U.S. GDP in that year. This is not a big number.

As with immigration overall, what upsets people is not the aggregate impact of illegal immigration, which, as with legal immigration, seems to be more or less a wash. It is that the benefits of illegal immigration are enjoyed by one group -- the employers who hire them (and the consumers of their services) -- while the costs are incurred by other groups -- low-skilled workers and taxpayers in states where illegal immigrants reside.

Philip Martin writes: Gordon is right: Immigration, whether legal or illegal, adds workers, most of whom get jobs, which makes the U.S. economy larger. If there are economies of scale, as when producing more lowers the cost of production, the prices of some goods fall, benefiting those who buy those goods at home and abroad.

Most of the benefits of immigration go to the immigrants who earn higher wages in the U.S. than they would at home. In the standard triangle analysis, there are no net economic benefits to the U.S. economy (the triangle in the Hanson and Borjas papers above, as well as in my book "Promise Unfulfilled: Unions, Immigration, and Farm Workers") if wages do not fall with the addition of immigrant workers.

It has been very hard to agree on how much wages declined because of immigration, but the 3% estimate of Borjas is reasonable.

With migrants getting most of the gain from immigration in their wages, and owners of capital and land getting most of the rest in higher profits and rents, the surplus triangle is 1/10 of 1% of GDP. Pro-immigration people stress that immigration is positive, a net economic benefit, and in a $13 trillion economy, 1% is $13 billion. Anti-immigrant people stress that immigration adds $13 billion, or about two weeks' growth in an economy growing 2.5% a year.

Economists agree that the immigration generates a small net economic benefit for the U.S. and in doing so redistributes income from workers to owners of capital and land. Perhaps this is why immigration is such a political hot potato; it's mostly a distribution issue and, for governments that are in the business of redistributing income via taxes and subsidies, regulating immigration is another redistribution tool.

How many, from where and in what status are the core questions of immigration policy. Could the U.S. get a larger economic benefit if changed the mix of immigrants arriving?

The National Research Council data suggest the answer is yes. Making often heroic assumptions about how well immigrants and their children will fare in the U.S., the NRC calculated the present value of a typical immigrant arriving in the U.S. in the mid-1990s to be $89,000, that is, taking into account the taxes paid of immigrants and assuming that their children and grandchildren are like their U.S.-born counterparts, the NRC estimated that the present value of the taxes paid will exceed tax-supported benefits consumed by $89,000 over the next 50+ years.

However, the same study emphasized that the key to the benefits of immigration for the U.S. are their level of education. Those with more than a high-school education had a net present value of almost $200,000, while those with less than a high-school education had a net present value of negative $13,000. ... [... continue reading - free link ... covers the history of immigration including the Bracero program as well as the challenges ahead].

    Posted by on Sunday, June 25, 2006 at 09:04 PM in Economics, Immigration, Policy, Politics, Unemployment | Permalink  TrackBack (1)  Comments (10)


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    Yesterday's Wall Street Journal has an Econoblog on Immigration's Costs -- And Benefits between Gordon Hanson of the University of California, San Diego, and Philip Martin, of the University of California, Davis. A good read, with plenty of links. (Hat... [Read More]

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