Examining the Economic Impacts of Immigration
Sharply divided public opinions on immigration reflect the basic economic conflicts.
Summary of a presentation by
Gordon Hanson, Professor of Economics, Graduate School of International Relations and Pacific Studies and the Department of Economics, University of California, San Diego, and the National Bureau of Economic Research
“Immigration creates winners and losers, gains and losses.”
Americans’ conflicted opinions about immigration are reflected in the mixed economic effects of immigration: While immigration benefits some players in the economy, it works to the detriment of others.
Divided opinions on immigration are reflected in all levels of society. Within both major political parties, there is a sharp disagreement over U.S. immigration policy.
“The Republican Party is split; and in the Democratic Party there is division as well – although they would not like to admit it,” Hanson said. “The division we see in political parties is mirrored in the nation as a whole.”
According to a 2005 Pew Hispanic Center survey, 53 percent of respondents said illegal immigrants should be required to return to their home countries, while 40 percent of respondents said illegal immigrants should be offered amnesty or another option to stay in the U.S.
(See Prof. Hanson's Power Point presentation, slide 2.)
“Survey after survey shows the country is roughly split down the middle when it comes to immigration: Half of the country wants to see stronger restrictions on immigration; slightly less than half feels a more open immigration policy is the best thing,” Hanson said.
The immigration issue has caused splits in some surprising quarters. Union leaders have embraced immigration, while the union rank and file has been more skeptical. Some environmentalists have adopted strong anti-immigration tendencies. A dissident faction of the Sierra Club has tried to get the organization to take an anti-immigration stand.
Hanson sees these divisions as closely correlated with the economics of the issue. “The political debate about immigration is informative about economic outcomes,” he said.
On a massive scale
For the past 35 years, the United States has experienced an unprecedented influx of immigrants – both legal and illegal. In 1970, the foreign-born population in the U.S. was 9.6 million. Today it is 35.2 million – higher than at any point in U.S. history. (See slide 5. These figures include permanent legal residents, temporary legal immigrants as well as illegal immigrants.)
Although the raw numbers are unprecedented, as a percentage of the overall U.S. population, immigration was more concentrated at the turn of the last century: In 1910, 14.7 percent of the U.S. population was an immigrant. In 2005, the figure was 12.1 percent.
In 1970, only 4.7 percent of the U.S. population was an immigrant. The low figure was the culmination of a 50-year slowdown in immigration. In 1924, Congress enacted sharp restrictions on immigration and imposed quotas based on country of origin. The 1965 Immigration Reform Act abolished quotas, which resulted in the opening of immigration from Asia, Latin America and the Caribbean. The new policy also placed a priority on family reunification, which compounded the increase in numbers from the developing world.
Meanwhile, during the 1950s and 60s, health conditions in Mexico and Central America improved, causing a dramatic decrease in mortality rates and an increase in population. The resulting “baby boom” started to hit the labor market in the early 1980s, which by unfortunate coincidence came at a time when Mexico and Central America were suffering their worst economic and political crises in recent history. This created a huge pressure for immigration.
“The increase in immigration creates pressure on the U.S. economy and the U.S. social fabric,” Hanson said “That pressure felt more in more regions than others.”
Top destination states for immigrants are California, New York, New Jersey, Florida, Nevada and Arizona. California is the number-one destination state, with 10 million immigrants, who constitute 28 percent of state population. New York is second, with 3.9 million immigrants, constituting 21 percent of the state’s population.
(See slide 6.)
“This geographic concentration means the economic consequences of immigration are going to be felt more strongly in those states,” Hanson said.
Immigrants are disproportionately represented at both the low end and the high end of the economic spectrum. Predictably, illegal immigrants tend to be at the low end of the skill spectrum, while legal immigrants are at the high end. The economic incentive for illegal immigration is strongest at the low end.
(See slide 7.)
“If you’re a high-skilled individual, you don’t want to become an illegal immigrant, because you’re not going to get a return on that extra education, extra experience and your occupational expertise,” Hanson said.
A substantial portion of the U.S. immigrant population has low educational attainment: About 33 percent of the immigrant population does not have a high school degree, compared to 12 percent of the U.S.-born who have failed to complete high school.
(See slide 7.)
Predictably, low-skilled, low-wage occupations in the U.S. have a very substantial immigrant presence: 45 percent of agricultural workers are foreign; 34 percent of grounds maintenance workers; 26 percent in construction; and 24 percent in food preparation.
(See slide 8)
Over the past century, improved education and skill training in the U.S. has meant that low-skill and low-wage jobs have gone unfilled by U.S. natives, while immigrant workers are filling in the gap. In 1960, 50 percent of the working-age population hadn’t completed high school. That figure has declined to 12 percent today.
“The U.S. has been educating itself out of low end jobs,” Hanson said.
At the other end of the spectrum, legal immigration draws highly skilled and educated individuals to the United States. Consequently, the share of immigrants with advanced degrees is higher than the native population. The resulting “brain drain” on the exporting countries has been a boom to the United States. Most infamously, in the 1930s when Nazi Germany forced out Jewish professionals and faculty from universities, they came to the United States and contributed to the Allied victory.
Winners and losers
Immigration is a mixed bag in terms of economic plusses and minuses: The winners are employers who hire immigrant labor and the consumers who buy the goods and services produced by immigrants.
(See slide 11.)
The losers are workers who compete with immigrant labor for jobs in the labor market, and taxpayers who pay for the costs of entitlement programs and social services for immigrants and their children.
(See slide 12.)
On the plus side, immigration raises the overall productivity of the U.S. economy and thus increases the total gross domestic product (GDP). Immigration adds productive resources to the economy, allows greater utilization of land and capital, and thus increases the total production and total income.
(See slide 13.)
The biggest beneficiaries of illegal immigration are agricultural producers, farmers, factory owners, food packers, and real estate builders who hire low-wage immigrant labor.
“Immigration increases the supply of labor used in the production process and makes business more productive,” Hanson said.
Other beneficiaries are workers who are complemented by the presence of immigrant labor, such as supervisors, managers and accountants.
At the consumer end, immigration lowers the prices of goods and services produced by immigrant labor such as agricultural products, home construction, cleaning, tourism, restaurants, hotels, home care, and child care.
“If you are a purchaser of those services, and you live in a high-immigrant locale, the increase of the supply of immigrant labor is going to help make those services available at a lower cost. So that increases your real income because each dollar you earn now goes further,” Hanson said.
On the losing side, low-skilled workers who compete for jobs with illegal immigrants feel the pinch. According to George Borjas of the John F. Kennedy School of Government, Harvard University, immigration has lowered the wages of low-skilled native workers by about 9 percent.
Correspondingly, unemployment of low-skilled native workers is higher in areas with a high number of immigrants; and crime and incarceration rates are higher in areas with high immigration.
Some have disputed Borjas’ findings, but other studies support his thesis, Hanson said. Patricia Cortes of MIT has studied the impact of immigration on the prices of goods and services and calculated how much immigration lowers prices.
“How can immigration lower the price of goods and services except by lowering the wages?” Hanson asked “The fact that you see lower prices for goods and services is consistent with immigration having pushed down the wages of those workers. So if you declare Borjas’ evidence as inadmissible, we have other evidence we can put on the table.”
What might prevent immigration from pushing down wages? As the supply of labor goes up, it creates an increased incentive for capital investment, thus increasing the overall size of the pie.
“This happens in long run. In short run, you still see these negative wage impacts. Over time, that will be less,” Hanson said.
“A lot of people get very upset when you talk about immigration lowering wages. But let’s consider the gains to employers and the gains to consumers. How are those gains manifested? If immigration doesn’t lower wages, it will not generate gains.”
Impact on public services
Immigrants make greater use of public assistance such as food stamps, supplemental security income and Medicare. About 24 percent of immigrants use some form of public assistance compared to 15 percent of native U.S. households.
(See slide 10.)
“Because so many immigrants have a low education, they have low-income jobs, and thus they are more likely to be eligible for public assistance,” Hanson said. “This difference in the characteristics of native and immigrant households in terms of age, income, family size means they create stresses on public finance at the local, state and national level; and this creates political conflict,” Hanson said.
(See slide 3 from Hanson's second Power Point presentation.)
The 1996 federal welfare reform legislation excluded immigrants from eligibility for many entitlement programs. The legislation has a notable caveat: Although non-citizens are not eligible for income-based welfare programs, their U.S.-born children are.
Medicaid is the most costly form of federal public assistance. About 23 percent of immigrant households use Medicaid, compared to 14 percent of American households.
With the exception of Medicaid, one result of federal welfare reform has been to displace the financial burden from the federal government to the states and local governments, which have to pick up the tab for services used by immigrants.
Who bears the financial brunt of immigration depends on the policies of different states. California has a progressive tax structure and generous social service programs, so taxpayers in higher tax brackets bear the largest fiscal burden of immigration. Texas, on the other hand, has less generous social services and a sales tax and rather than an income tax. Since income taxes are regressive – those with lower incomes pay a larger percentage of their income on taxes – the tax burden is shifted away from the upper income taxpayers.
(See slide 16.)
“High-income people in high-benefit states bear the brunt of immigration, and politically they tend to be the most opposed,” Hanson said. “The political talk is not about the aggregate gain of immigration; people are talking about their bottom line.”
Impact on education
Immigrants and their children account for a large share of school age children in high-destination states. In California in 2005, 47 percent of school age children had foreign-born mothers. In Arizona, 27 percent of the school-age population was born to immigrant mothers.
(See slides 9 and 24.)
“This creates an important source of political conflict, because public education is expensive,” Hanson said. “The older population whose kids are out of school might not want their tax dollars go to pay for the education of immigrant kids. That creates a cleavage and creates a point of conflict that plays itself out in the political realm.”
Immigrants tend to be young – in their child bearing years – and immigrants tend to have large families. The economic incentive for people to emigrate from poor countries is the greatest on people in their early working life, when they stand to benefit the most from moving from a low-income country to a high-income country, Hanson said.
(See slide 2 from Hanson's second Power Point presentation.)
“Immigration increases the demand for public services on state and local governments. This creates pressure to increase taxes to pay for these goods and services,” Hanson said. “Public education and public health are the biggest cost factors of immigration. Public education creates about half the additional expenditures of immigrant arrivals.”
In the aggregate, the net economic gains and losses of immigration to the U.S. economy appear to be small. The net income gains from immigration are about .2 percent of GDP. This accounts for income gains to business owners and consumers minus income losses to workers who compete with immigrants for jobs.
(See slide 13.)
The net fiscal costs of immigration are about .3 percent of gross domestic product. This accounts for tax payments made by immigrants minus public services that they use.
On balance, immigration lowers the U.S. GDP by about .1 percent per year. Statistically, accounting for margin of error, this is close to zero, Hanson said.
“Immigration, like international trade, is going to increase the total size of the pie, but there will be winners and losers, gains and losses” he said. “If you say you are in favor of immigration, you must say you are in favor of lowering the wages of some workers. But you cannot say net impact of immigration is very big.”
Hanson said the best way to turn the net impact of immigration into a positive is to invest in the education of the children of immigrants.
“It all comes down to what happens in subsequent generations. If you get the children of immigrants out of high school and with a year or two of college, you enter the realm where there might be net fiscal gains to the economy,” Hanson said.
“You cannot have a debate about immigration policy cannot without talking about the maximum educational attainment of the second or third generation. The dynasty begins with one kid. If they are excluded, then we will have negative consequences … It makes sense to get children of immigrants educated. The extra dollars that states spend may reap benefits. This is something national policy needs to consider.”
Reported and written by Bruce Murray.