Immigration Economics

by Russ Roberts on April 5, 2006

in Immigration

What is the effect of immigration on wages and the standard of living of American who are already here? One commenter on a recent post here at Cafe Hayek wrote it’s simple supply and demand—let in more people and wages have to fall. George Borjas makes the same argument—more immigrants means lower wages. But that can’t be the whole story. It certainly isn’t the whole story for Americans overall, inclusive of the full economic effects of immigration.

Imagine the same arguments made about imports of foreign products. It’s a mistake to let in foreign products. Imports lower prices which means Americans selling goods will make less money and be worse off. So imports make America poorer. Imports mean fewer jobs in America, this argument would go, because obviously, there are going to be jobs lost to imports.

There are people who believe these arguments. But it’s hard for these arguments to stand up to logic or the facts. The logical problem with the argument is that it only looks at part of the story. It only looks at what is seen. It misses what is unseen. The unseen effect of trade is that it spurs innovation because domestic firms have to compete with foreign firms. It creates wealth because America can now produce some products the roundabout way—rather than producing our own clothes, for example, we make something else and swap it for clothes—the power of comparative advantage and specialization. And trade doesn’t reduce the number of jobs in the United States. It reduces certain types of jobs but others increase as capital and resources are now available to create new products now that we don’t have to make everything ourselves.

On the facts side, the number of jobs in the United States has risen steadily for 50 years as our population has grown absorbing immigrants, and a tripling of women in the workplace.

The same logic and facts apply to immigration.

Lower wages and fewer jobs can’t be the whole effect. That misses the unseen benefits of new people and new ideas coming into our economy from beyond our borders. Some wages may fall as native-born Americans compete with new arrivals. (And of course, virtually all of these native-borns are descendants of immigrants). But that can’t be the whole impact. That can’t be the end of the story. If America can produce some products more cheaply because of immigrants, that frees up resources to produce more of something else. Those benefits are unseen. But the net impact on America has to be positive. We have more resources. (I am ignoring the problem of immigrants who come here to enjoy the welfare state. I am focusing on the narrower question of whether foreing workers coming here is good or bad for those of us who are already here. The critics of immigration think even foreign workers are bad for America.)

You can’t use supply and demand (or at least the simplistic version of shifting supply and holding demand constant) because everything is endogenous.

That’s the logic. Now what about the facts? Borjas estimates that American wages are depressed 4% by immigration. He estimates that the impact on high school dropouts is a reduction in wages of 8%. He argues that immigration is a redistribution from workers to employers, implying no net effect. Are these numbers right? Maybe. A lot of assumptions have to be made to tease out the effects. But my intuition based on the above logic is that he’s missing something—the hidden connections are too difficult to tease out.

That’s an easy criticism to make of course, so here are some questions to think about if you worry that immigration drives down wages and standard of living of the people already here.

If immigration lowers the wages and standard of living of people already here, do increases in labor force participation and population lower them, too? Yet labor’s share in national income is rock-steady at 70% for the last 50 years. Our standard of living is many times higher.

Would Native Americans (not native-born Americans, but American Indians) be wealthier if they had the American continent to themselves?

Would New York City (or any other city) be richer today if it had held its population to what it was in 1850? 1900? 1950? 1980? Does the inflow of people into New York lower the wages of the people already there? Does it make them poorer? Does it matter whether rich or poor people, high-skilled or low-skilled people are the ones moving into New York?

Has rural America gotten richer as fewer people have chosen to live there? Does the smaller supply of workers increase the wages and standard of living of those people still living there?

Do population increases lower America’s standard of living? Would our wages be higher if we had had zero population growth over the last century? Has the population growth of the last century reduced wages or the standard of living in America? Does population growth lower our standard of living if poor people have a disproportionate share of the new births?

Has the tripling of women in the workforce over the last 50 years reduced wages or the standard of living in the United States? Would our wages or standard of living be even higher if women weren’t crowding into the work force and allegedly lowering wages?

If there were a plague that killed half of the American people, would those who were left find their standard of living rise or fall? Would it depend on whether the people who lived or died were rich or poor or high-skilled or low-skilled?

My answer to all of these questions is "no." More people means more resources for the people already here. It means more trade. More specialization. More economies of scale. It doesn’t matter whether they are native born or imported. (I also recognize it means potentially more congestion and more pollution depending on our public policy choices. But those aren’t necessary consequences of the increase in population. The direct impact on our wages and productivity and standard of living is positive.)

Immigration makes most Americans better off. Are some Americans made worse off because their skills are closest to new immigrants? Here, at least in the short run, one’s usual intuition about supply and demand might hold, though my questions above make me wonder if it’s even right in this case. But let’s help poor Americans by giving them better schools instead of keeping out immigrants. And immigration is really good for immigrants. I care about them, too. If they want to work, let them come.

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save_the_rustbelt April 5, 2006 at 12:06 pm

"Immigration makes most Americans better off. "

In the long run probably.

Last estimate I saw, illegal aliens were costing every resident of Arizona $700 a year. So where do they go the be reimbursed?

Americans who are being driven out of the construction industry may never catch up, but then they are just blue collar workers so why should economists care?

Structured legal immigration is desirable. The current mad scramble is not. Just how many immigrants are we supposed to absorb?

John Dewey April 5, 2006 at 12:26 pm

"Has the tripling of women in the workforce over the last 50 years reduced wages or the standard of living in the United States?"

Would so many women have remained in the workforce without immigration? Low cost immigrant labor enabled talented women to escape such mundane tasks as housecleaning and food preparation. We all benefitted as their talents were put to more productive uses.

Some might argue that automation would accomplish the same thing. Personally, I think those robot vacuums are spooky.

Neal Phenes April 5, 2006 at 12:38 pm

As Russell points out the resolution of the issue or even understaning whether the illegal immigration issue is really a crisis at all, requires looking at the whole picture. The strain on the welfare system from the illegel immigrants, by their supposed refusal to work and collection of government largesse, maybe warrants elimination of all or part of that welfare system so newcomers work or live off their friends, relatives and charities.

I recommend Linda Chavez' essay at Townhall.com (http://www.townhall.com/opinion/columns/lindachavez/2006/04/05/192544.html) for an important overview of the laws of immigration. Before even tackling this issue we should educate ourselves about immigration laws. I learned that :

"The chief actuary of the Social Security Administration estimates that three-fourths of all illegal aliens have Social Security (and Medicare) taxes deducted from their wages. How? It's simple.

Since it is illegal to hire someone who does not present a Social Security number (and show other documentation of legal residence), many illegal aliens use phony numbers or cards to get jobs. In 2002 alone, the Social Security Administration reported it had collected $7 billion in payroll taxes and $1.5 billion in Medicare taxes from workers who could not be matched with valid Social Security numbers. "

Half Sigma April 5, 2006 at 1:23 pm

"Has the tripling of women in the workforce over the last 50 years reduced wages or the standard of living in the United States?"

The answer is YES, because just today I blogged about how median income for men aged 25-44 has DECLINED since the 1970s.

http://www.halfsigma.com/2006/04/median_income_f.html

John Pertz April 5, 2006 at 1:38 pm

Thank you half sigma

Half sigma is part of a growing group of econ commentators who throw out some gigantic macro statistic and then say that this large stat proves something. Todays macro stat du jour is median income data for middle aged men, they are now all supposedly worse off because the macro stat says so. If only we could be wisked away to the 1970's our lives would become so much better. This is a new breed of economic analysis which actualy tries to imply that it is better to go backwards. I say that rising or falling median income data, in a non static economy, does not say much of anything about anyone's standard of living.

Mickey Klein April 5, 2006 at 1:59 pm

Ricardo described how wages can decline and wealth increase.

Say that one week you are paid 10 dollars from the wigit factory that buys you 10 wigits. Say the next week the boss puts in some more capital, highers more workers and lowers wages to 8 dollars, but now you can buy 12 wigits.

Your wages are certainly depressed, but you are certainly wealthier.

Think of it now, if an American family reverted to its material standard of living in the 70's in terms of televisions, cars, telephones, computers and so forth wouldn't that be a drastic reduction in material wealth?

Half Sigma April 5, 2006 at 2:01 pm

It's a stat that's been ignored, because I read a lot of blogs and always read economic related article in the NY Times, yet I was completely surprised to discover that the typical man aged 25-44 is worse off today than in the 1970s, which was supposedly a decade of economic malaise.

It's telling us something important.

Noah Yetter April 5, 2006 at 2:02 pm

If immigration lowers wages then so does reproduction. If you want to control immigration-sourced population growth based on this argument you'd better be ready to control reproduction-sourced population growth as well.

Of course that's all nonsense, based in a worldview that sees a fixed pie to be sliced up among various groups (not even individuals). Labor is a resource, and more resources make the pie bigger.

And speaking of labor as a resource, any and all fears that some segments of the American population will one day be unable to find work because we've exported all the menial tasks are also nonsense. In the same way that we don't let valuable natural resources lay idle and unused, the market economy would not simply let thousands of people languish in permanent unemployment. Assuming the state didn't interfere (a big "if", actually), the market would find jobs for those people.

Scott April 5, 2006 at 2:29 pm

Half Sigma, is the typical man aged 25-44 worse off after taking into account income taxes, non-salary benefits, and other things that aren't measured in the gross income?

Scott April 5, 2006 at 2:43 pm

""Has the tripling of women in the workforce over the last 50 years reduced wages or the standard of living in the United States?"

[Half Sigma]
The answer is YES, because just today I blogged about how median income for men aged 25-44 has DECLINED since the 1970s."

Funny, I always thought the U.S. was comprised of more than just men aged 25-44. If you look at median income for all ages and both sexes the real income from 1974 has increased from $17,876 to $23,186. So IF you're going to use median income to answer the question of "reduced wages or the standard of living in the United States?", that would be no, it hasn't affected them.

spencer April 5, 2006 at 2:53 pm

You need to go to:
http://www.econ.ucdavis.edu/faculty/gperi/Papers/perott_aggregate_6.pdf

where Giovanni Periof of the
University of California, Davis

has done a quanatitative study of exactly what you are talking about.

He found that over the 1980-2000 period the inflow of immigrants lead to about a 2%
increase in the average wages of native born americans.

Actually, you should read the numbers guy at the WSJ and you will see that our numbers on immigrants are so "fuzzy" that we probably can not reach a firm conclusion on the impact of immigrants on the economy.

One study I would like to see is to see if lower costs labor from immigrants leads to using more labor rather then capital and thus dampens capital spending and consequently lowers our standard of living.

To me the logical conclusion of having more "cheap" labor is that the production process becomes more labor intensive. But that is exactly the opposite result of what we want because the only way to raise our standards to is move to more capital intensive processes.

This is the first round difference between importing cheap labor rather then importing cheap goods and why the impact of immigrigration is not necessarily the same as importing cheap goods under free trade.

kebko April 5, 2006 at 3:06 pm

Geez, it seems to me like Half Sigma has a point very specific to the topic here. Total income may have risen, but the young men who have new competition in the labor market have seen income drop. This seems like a point that needs to be taken head on, and not shouted down or ignored.

I would also argue on the point of current immigration that the market for labor is made in a certain cultural & economic context, and in many ways it is the expectations & conditions of that context that inform the supply & demand in that market. So, having millions of low wage workers coming from another context, which universally contains lower expectations for a low wage worker, and joining the American labor market, is certainly going to affect the American low wage labor market in a way that is specifically negative for the American laborers in that market.

One way I envision this is that American labor markets meet an equilibrium where no current laborers see their other options as preferable to being a laborer. Now, I might be very squarely in the position of a laborer, and would remain so even under significantly worse conditions. But, at the margin, there is someone who is willing to leave the labor market to start a business, mooch off of family, etc. if their condition worsens even slightly. I benefit from that person on the margin because their presence helps establish the current labor market which treats me better than I would otherwise insist on being treated. Now, enter millions of new entrants, who, like me, will stay in the labor market under poor conditions. They will drive out those laborers on the margin and reduce the level of benefits in the market in general. The labor market is still my best option, but I'm much worse off because the margin has been driven down by the new level of expectations of other laborers.

Comments?

Scott April 5, 2006 at 3:25 pm

kebko, so we shouldn't allow anything that might affect one segment of a population even if it's a benefit to the larger group?

Suppose, I run a small mom and pop shop. A much larger retailer wants to open up a store nearby which will less expensive goods. Is it right that I petition the government to not allow the store to open because, in all likelihood, my customers will now shop at the new store and I'll go out of business? After all, if I face this new competition my standard of living will decrease.

So, why is it any different if we replace goods with services (i.e., labour)?

Half Sigma April 5, 2006 at 3:52 pm

"so we shouldn't allow anything that might affect one segment of a population even if it's a benefit to the larger group"

Most progress has negatively affected certain parts of the population. For example, mechanization of farming negatively affected farm laborers, but we are much better off today on account of mechanization. So yes, we don't want to stop progress because not everyone benefits.

But it's not clear that immigration provides a net benefit to current U.S. citizens, either in the short run or the long run. The only clear beneficiary of of immigration are the immigrants themselves; they obviously see a benefit or they wouldn't be coming here.

John Dewey April 5, 2006 at 4:00 pm

Spencer,

I understand your point that low wage immigrants allow some processes to remain labor intensive . But I'm not ready for everything to be automated. As I noted above, I don't trust robot vacuums. I'm also a little concerned about out-of-control robot lawnmowers. As for health care workers, I hope that never gets automated. I'll probably be lying in a hospital bed with Alzheimer's in 20 years. Please don't send a robot down the hall to remove my soiled bedclothes. The Mexican orderlies will do just fine even if they can't speak English.

kebko April 5, 2006 at 4:07 pm

Scott,

If the new store was legal, then it would be just fine, because it would be operating under the rules & expectations of the citizenry. If it opened in violation of zoning rules, with black market labor, dumping chemicals onto the ground, or any number of other behaviors we consider unacceptable, then maybe I'd be for mom & pop.

John Pertz April 5, 2006 at 4:12 pm

Half Sigma said:
"It's a stat that's been ignored, because I read a lot of blogs and always read economic related article in the NY Times, yet I was completely surprised to discover that the typical man aged 25-44 is worse off today than in the 1970s, which was supposedly a decade of economic malaise.

It's telling us something important."

How exactly does median income data taken at two different time points in a non static environment definetively prove the large generalization that male workers between 25 or 44 have a worse or better standard of living just because the median income data is going up or down? If you are not going to bother to control for anything then what is the use in citing the stat? At the very best you are being half baked in your analysis and at the very worst you are being disingenuous. Here is a thought expirement, what would happen to median income data if all of the world's wealthiest one percent moved to the U.S. The data would go up, and would any of us be immediately any better off? However, if you were to believe Half-Sigma we would be much much better off.

save_the_rustbelt April 5, 2006 at 4:33 pm

Since it is illegal to hire someone who does not present a Social Security number (and show other documentation of legal residence), many illegal aliens use phony numbers or cards to get jobs. In 2002 alone, the Social Security Administration reported it had collected $7 billion in payroll taxes and $1.5 billion in Medicare taxes from workers who could not be matched with valid Social Security numbers. "

The SSA is supposed to cross reference the W-2s with the IRS 1040 files, and there should be inquiries is whenever these do not match.

Since employers are generally not getting those inquiries it seems reasonable to assume both SSA and IRS are ignoring the law, just as the INS is ignoring the laws about employers.

Isn't this just special?

Scott April 5, 2006 at 4:47 pm

kebko,

Great, so we've established a starting point and now we just need to determine was is and isn't acceptable and that it's not simply a matter of immigrants negatively affecting such and such a segment of "native" population.

I don't think anyone who advocates removing immigration quotas is saying people should be allowed in without question. Obviously it's important to know who is a real criminal (not simply those that have just broken immigration laws) and who is a national security threat. I'm not even entirely opposed to a large fence being erected either, because if you allow open immigration with registration and background checks, then you can be assured that those who still try to sneak in really do have something to hide. I'm sure that many illegals (particularly from Mexico) would have gladly gone through legal channels if they knew they would be allowed in.

If there is concern over immigrants abusing social services then either reform those social services or exclude immigrants from being eligible to receive them.

John Dewey April 5, 2006 at 4:58 pm

Scott,

I'm in general agreement that immigrants should pay their fair share for social services, just as I believe all citizens should. Of course, if illegals become legal immigrants, we can be assured they will pay, right?

I'm not sure we can legally exclude immigrants' children from being educated, nor should we want to do so. I think courts have already ruled on this in some states.

spencer April 5, 2006 at 5:08 pm

Jobhn Dewey — the robot you fear is much more likely to speak Japanese as they are already making great progress on robots to do exactly what you are talking about.

So if you want your bedpan changed you better hope the Japanese continue to lend us the money to purchase their products.

this is exactly the point I'm making, the Japanese are dealing with their labor shortage shortage problems by investing and doing things to improve productivity and standards of living. But we import cheap labor so we have extentive rather then intensive growth.

The interesting thing about this while over the last several years the US has experienced strong labor productivity growth the productivity of US capital has actually been falling. Maybe that is why the real average hourly earnings data shows no growth.

Kebko April 5, 2006 at 5:09 pm

"Great, so we've established a starting point and now we just need to determine was is and isn't acceptable and that it's not simply a matter of immigrants negatively affecting such and such a segment of "native" population."

OK. So, we agree that illegal immigration negatively affects a segment of native population. I think the fact that the immigration is illegal is a good starting point as to whether it is acceptable or not.

Tom Kelly April 5, 2006 at 5:34 pm

Bravo to Russell for this great post.

Some anecdotal evidence that males age 25-44 are way better off now than they were in 1970:

My father was in that age group during the 70's. My brother is in that age group now.

Dad was a college graduate with an engineering job, my brother is a high school graduate who delivers pizza for a living. My dad had four children, my brother has 3.

1970- We had two five year old cars that were handed down from grandparents.
Now- My brother leases a new vehicle, his wife has an older vehicle.

1970- We owned a 45 year old house of 2000 square feet in suburban Denver, it had no ac, no garage, only 2 bathrooms and decrepit plumbing and wiring. We did not have a dishwasher, garbage disposal, or microwave.
Now- My brother owns a 40 year old, 2200 square foot house in suburban Dallas, it has ac and has a swimming pool in need of repair. It has a 2 car garage and the major appliances are all there and up to date.

1970- We entertained ourselves with 3 networks plus PBS on our lone TV, we had to get off the couch to change channels.
Now- My brother's family entertains themselves with a 52" home theater system with DirecTV, TIVO and lots of premium channels when they are not using one of their two computers with high speed access or listening to their iPods.

1970- We went to schools with an average of 30-35 students in each elementary class. Some of our sports equipment was left over from when the school was built in the 1950's.
Now- My nephews go to some of the best schools in the state. The average elementary class has less than 20 students. The sports facilities are beyond belief.

1970- My mother worked part time to help support the family
Now- My brother's wife is a stay at home mom

1970- We never took a family vacation anywhere
Now- My brother's family has been on a cruise, skiing in Colorado, and several circle the nation trips in the summer to see national parks

So in short, due to the expanded economy and technology now, my service worker high school educated brother is able to provide for his family way beyond what my college educated professional father was able to provide in 1970.

What my father did not provide materially, he did provide spiritually- he taught us to treat every man as your brother, no matter where they're from or what their station in life. As a child I saw him speak to people we met like Ronald Reagan and he was just as attentive when he was talking to the garbage collector.

It may be his memory that causes me so much anguish to see this labor/trade war devolving into actual hostilities, as racial tensions have caused at least one high school to ban flags, Mexican and American.

Open immigration would grow the world economy and eventually eliminate many foreign policy problems. Let freedom ring.

John Dewey April 5, 2006 at 5:36 pm

Spencer,

The Japanese desired their society remain homogenous, and resisted immigration as long as they could. They have illegal and legal immigrants today. Illegals are but a fraction of those in the U.S. for an obvious reason: Japan shares no borders.

I'm bored of this silly debate about automation, so you can follow with the last word. Manual labor in food preparation, landscaping, personal grooming, and health care is not going away any time soon, and I'm glad for that. I'm also glad we won't need to depend on the dopeheads and drunks to provide it.

Half Sigma April 5, 2006 at 5:41 pm

John Pertz: "How exactly does median income data taken at two different time points in a non static environment definetively prove the large generalization that male workers between 25 or 44 have a worse or better standard of living just because the median income data is going up or down?"

According to the CPI-U-RS, their standard of living is going down. So your argument is basically that the CPI-U-RS is wrong and is overestimating inflation.

Furthermore the cost of housing is increasing even faster than inflation as measured by the CPI-U-RS. Thus your argument is that even though a young man today has to live with his parents when a generation ago he could have afforded his own place, he is better off because he has high speed internet, a computer, DVD player, Xbox, iPod, and cell phone.

It's my opinion that all those gadgets are BS, it's much better to be able to afford your own place to live, and for that reason the CPI-U-RS is understimating inflation.

JohnJ April 5, 2006 at 5:48 pm

The Linda Chavez article was actually very enlightening. Being able to use some real figures instead of the hypothetical figures most people want to discuss helps. Working to greater legal immigration rates sounds very reasonable, as well as doing more to discourage illegal immigration. As a side note, Mexico rigorously defends its southern border against illegal immigrants.

Scott April 5, 2006 at 5:58 pm

Kebko,

Sure, immigration, wether illegal or not negatively affects some people in the short run, but then again many things do.

If we stopped educating children today yours, mine and probably every other commenter on this board's wages would increase over time as supply becomes restricted, does that mean we should do it? Of course not because in the long run it's detrimental to society's well being.

Something that negatively affects one segment of population while benefitting society as a whole shouldn't be illegal. Technological advances replace some jobs negatively affecting a segment of population, but it also creates new jobs and improves society overall. Should we ban technological changes?

Simply stating that because something is illegal means it's not acceptable does nothing to further the discussion on immigration. We need to discuss WHY it's illegal and wether or not the law should be changed. Or are you saying that there is no such thing as a bad or unjust law?

Timothy April 5, 2006 at 6:02 pm

So your argument is basically that the CPI-U-RS is wrong and is overestimating inflation.

This is a known problem with the CPI. It is also impossible to account for changes in quality using the CPI.

Glen Raphael April 5, 2006 at 6:32 pm

Half Sigma wrote: "the typical man aged 25-44 is worse off today than in the 1970s…It's telling us something important."

Maybe it's telling us more men are going to college now than before so they get established in their careers later.

Or perhaps it's telling us that in today's fabulous economic times young men feel like they can afford the luxury of slacking off for a bit early on, supported by their rich parents.

Or perhaps it's telling us that more young men are responsibly funding their IRAs and thereby reducing their taxable income.

Or perhaps it's telling us a big group of low-skill poor people immigrated here and their salaries are driving down the average despite the fact that every individual person in the sample is better off for their presence.

In other words: how do you know it's telling us something important?

Glen Raphael April 5, 2006 at 6:46 pm

To elaborate on that last point: suppose in 1974 there were only three workers in the economy and they had these salaries {$10, $15, $20}. Average 1974 salary (both mean and median) is $15. Now let's add a low-skill immigrant to the mix. Assume the new immigrant makes only $5, but his low-skill labor make everyone /else/ $1 more productive because they can focus on their core competency and spend less time mowing the lawn or whatever. Assume everything else stays the same. So now in 2006 the salaries in the economy are: {$5, $11, $16, $21}. Wow! Everybody in our sample is better off than before! Everybody except the immigrant is $1 richer than before, and the immigrant is richer too, because in the country he came from he was only earning $1 – that's why he came here, to quintuple his income.

But wait! what's the average income now? $13.25. What's the median? $13.5. So adding the new immigrant brought down the mean and the median income by over $1, despite the fact that EVERYBODY in the economy is at least $1 richer than before.

Looks like just comparing the median salary between two undifferentiated groups over time isn't all it's cracked up to be.

kebko April 5, 2006 at 7:15 pm

"Or are you saying that there is no such thing as a bad or unjust law?"

I agree that the immigration laws are frequently baffling & should be reviewed. I also think the level of legal immigration they currently allow might actually have a little something to do with the amount of immigration our country thinks it can handle without creating too many dislocations.

I'm 100% with you on free flow of capital, labor, etc. & free markets & I think they all should be relied on more than they are in most situations. However, on the ground, the problem with capitalism & markets is that human beings tend to bristle at dislocations, even when those dislocations are for everyone's long term good. If we can stipulate that lower income Americans are being negatively impacted by a huge inflow of illegal immigration, then I think our reaction has to be something more than, "Hey, that's the way the chips fall."

At this very site, the topic of leftists & the media using the "rich getting richer & the poor getting poorer" cliche has been frequently visited. I'd say that's partially a result of the downward pressures from illegal immigrant laborers. And what's it doing? It's leading a lot of voters in this country to support statist policies to benefit poor people at the expense of capitalism within our very borders.

I'm just suggesting that it's hard enough to get the voting population to trust capitalist markets, even under stable civil expectations. It only gets harder if we're asking the most vulnerable members of our economy to adjust to an influx of 3rd world economic expectations.

Kebko

Glen Raphael April 5, 2006 at 8:36 pm

Kebko:
In my example, EVERYONE got richer but if you do the equivalent of quintile analysis it appears that "the rich got richer and the poor got poorer". Just introducing some new low salaries into the mix drags the average values down and drags the low averages down the most even if the impact of the new immigrants is BENEFICIAL to every poor person in the group.

So you can't say from the fact that some demographic that includes new immigrants has a lower average income, that the people in that demographic are made worse off from immigration. They could have experienced POSITIVE dislocations – gotten better jobs – and the numbers would still be lower. You must /exclude/ the new immigrants from the average caluclation in order for it to be less than entirely bogus as a well-being measurement.

kebko April 5, 2006 at 9:08 pm

Glen, I think you make a great statistical point. I agree with you completely.

I think, though, it seems to be generally accepted that illegal immigrants account for about 4% of the population. So, in your example, there would need to be 25 other workers with $1 of new income for each new worker at $5. I suspect that 4% of the population added at low wage levels, even if properly accounted for, probably wouldn't explain the entire recent trend of income stagnation among the lowest quintile.

I would also add that even without immigration, low income workers would still be seeing competition from foreign workers simply working on exports in their own countries, so there would still be downward wage pressure on unskilled American workers.

I think the problem comes from labor not being a very flexible market. If I am an investor in the widget market, and foreign competition starts pressuring me, I can lower my profit expectations, reinvest in other markets where I might attain my target profits, or look for other ways to be more productive. But, unskilled laborers don't necessarily have that many options for redeploying their capital (labor) in new ways, and they aren't generally willing to accept reduced profits (lower wages). For a business, this would just be an adjustment that would have to be made, your stock price would go down, and it would suck, but you'd adjust to the market. Whether it's fair or not, laborers don't like to adjust to the market. Once they get used to making $10/hr., if you tell them that now they can only get $8/hr., the response will be that they have a moral right to $10/hr. They don't, but I don't see how anyone would be able to convince them of that (witness France right now re: reducing labor expectations even in obviously realistic situations).

donny April 5, 2006 at 9:17 pm

re: To me the logical conclusion of having more "cheap" labor is that the production process becomes more labor intensive. But that is exactly the opposite result of what we want because the only way to raise our standards to is move to more capital intensive processes.

Capital intensive processes increase our wealth because they save us a valuable resource which can be then put to other productive purposes. The resource saved is labour itself.

Tom Kelly April 5, 2006 at 9:45 pm

donny:

So the logical extension and fallacy of your argument is that in an ideal world all processes are done totally by machines so people can then be productive doing what?

Capital and labor are substitutes, to maximize productivity you must use them based on their respective costs.

To have more expensive machines cranking out products and services while less expensive labor is idle is inefficient and we all suffer from that inefficient use of resources.

Labor is a resource that can't be "saved". The productivity of those unemployed today has been lost forever.

olivier blanchard April 5, 2006 at 9:52 pm

I'm an immigrant, but I made two American babies who'll join the workforce someday. Does that complicate the equation?

Henri Hein April 5, 2006 at 10:37 pm

Tom made some important observations in the last thread that's worth repeating here:

"The only asset that appreciates in absolute value over time is the human mind- therefore it is the most important asset that must be free to move to it's highest and best use."

"Freedom works, have faith in it."

"I don't understand commenters here, at what in my mind is the best free market blog in the world, who don't seem to understand that the free in free markets has to apply to all markets, without special exception for labor markets based on accident of birth location."

Henri Hein April 5, 2006 at 10:41 pm

Another quote, this one from Cato's immigration page:

"Immigration

America was founded and shaped by immigrants seeking freedom and opportunity. Since records were first kept in 1820, our nation has absorbed more than 60 million immigrants. Those new Americans have almost universally embraced American culture and values, serving bravely in our armed forces, founding some of our most successful companies, and pioneering advances in science, technology and industry. Immigrants have been crucial to America's dominance and dynamism in the global economy.

The overriding impact of immigrants is to strengthen and enrich American culture, increase the total output of the economy, and raise the standard of living of American citizens. Immigrants are advantageous to the United States for several reasons: (1) Since they are willing to take a chance in a new land, they are self-selected on the basis on motivation, risk taking, work ethic, and other attributes beneficial to a nation. (2) They tend to come to the United States during their prime working years (the average age is 28), and they contribute to the workforce and make huge net contributions to old-age entitlement programs, primarily Social Security. (3) Immigrants tend to fill niches in the labor market where demand is highest relative to supply, complementing rather than directly competing with American workers. (4) Many immigrants arrive with extremely high skill levels, and virtually all, regardless of skill level, bring a strong desire to work. (5) Their children tend to reach high levels of achievement in American schools and in society at large."

http://www.freetrade.org/issues/immigration.html

Henri Hein April 5, 2006 at 10:46 pm

"Just how many immigrants are we supposed to absorb?"

As many as wish to come.

John Pertz April 6, 2006 at 12:42 am

"According to the CPI-U-RS, their standard of living is going down. So your argument is basically that the CPI-U-RS is wrong and is overestimating inflation.

Furthermore the cost of housing is increasing even faster than inflation as measured by the CPI-U-RS. Thus your argument is that even though a young man today has to live with his parents when a generation ago he could have afforded his own place, he is better off because he has high speed internet, a computer, DVD player, Xbox, iPod, and cell phone.

It's my opinion that all those gadgets are BS, it's much better to be able to afford your own place to live, and for that reason the CPI-U-RS is understimating inflation."

This sort of analysis is so wrong it is criminal. Again, median income data for 25-47 year olds in the 70's and then compared to median income data for 25-47 year old's now is not going to be able to say much of anything definitively. Until you control for something the analysis is of little worth. The people who comprise the two groups of the two different snapshots are different so what value is the comparison? The kind of relevant statistical analysis that will be able to defintively prove anything is very difficult to do for standard of living comparisons. You would be better off trying to follow the path of a 25 year old man in the seventies and then see how his life turned out when you look at his current situation. The point that I am trying to articulate here is that the composition of the 25-47 year old groups in the two snapshots are so different that trying prove anything through the comparison is going to be very tricky; even with controling for something, which you have no desire to do.

John Pertz April 6, 2006 at 12:48 am

Tom Kelly, I like your line of reasoning.

I would simply argue that when it comes to the relationship of capital to labor the capitalist must ulimately chose. Whatever combination of labor and capital will lead to the most profits will ultimately be what is chosen. If labor is really really cheap it does not mean that capitalists will look away from capital. If that were the case then nobody in China would have any desire to use capital. Capitalists must ultimately take into account the productivity of labor to capital and their relative costs and then make the best possible decision. Their is no exact formula for it.

Russell Nelson April 6, 2006 at 2:28 am

Half Sigma: if immigration makes us worse-off, so does reproduction. So does allowing women to work. So does trade with people who don't immigrate. Since it's obvious that none of those three things make us worse-off, neither can immigration. Use logic, not intuition.

Erin April 6, 2006 at 3:04 am

It's not about immigration- it's about ILLEGAL immigration. There is a difference.

It seems that a lot of people toss the word "immigrant" around in reference to these recent debates. It's important to remember that "immigrants" are those who come here legally, assimilating to the country, taking the citizenship test, and actively pursing citizenship. "Illegal immigrants" however are those that are best describe by the first word of the phrase that defines them: illegal.

Immigrants = Good
Illegal Immigrants = Breaking the law

Tom Kelly April 6, 2006 at 4:33 am

Erin:

If immigrants are good, how can a law prohibiting them be good?

Laws that turn a good action like immigrating to a region of the globe where opportuinity abounds into a crime are themselves the crime.

The criminals in such cases are the law makers, not the law breakers.

From the perspective of WWII era German law, every executioner at Auschwitz was obeying the law, while each of the executed was a criminal.

The people of Israel experimented with strictly following a law that they believed was given by God himself- and this lead to a history of calamities.

Beyond law, there are the higher principles of grace and mercy. Since laws have unintended consequences, it is prudent to temper judgment with grace and mercy as our understanding of the law develops over time.

The supporters of abominable laws that prevent our brothers and sisters who were born into oppressive regions of the globe from improving our lives and their lives by bringing their wonderful energy and talents here must be accorded the same grace and mercy as we work diligently to illuminate the better way of freedom.

Since we are all law breakers, let us strive to have less law and more grace among us.

Grzegorz April 6, 2006 at 5:55 am

Russell,

What was the point of NAFTA?

"If immigrants are good, how can a law prohibiting them be good?

Laws that turn a good action like immigrating to a region of the globe where opportuinity abounds into a crime are themselves the crime."

Because there is a process in place that allows immigrants to become citizens. If this process is broken, why don't you show the same zeal in hectoring your legislature to change the immigration laws that you do when the question of taking action to excessive illegal immigration is raised?

RWP April 6, 2006 at 6:15 am

Why does everyone talk about the problems or non-problems associated with immigration? When the real question we should be answering is why are they coming here and how can we slow the flood?

As long as it is better to live and work in the US than Mexico no wall will stop the flood. It seems that the US has an excess demand for labor and Mexico an excess supply. This is perpetuated by the border. We all know how well artificial barriers work. Take for example drug prohibition. It doesn't solve the problem it just distorts it.

Keep arguing, while policy makers make the wrong choices in Washington and set up another unwinnable war against immigration. Someday both economies will find equilibrium through the price of labor; let's hope it's sooner rather than later and by a rise in Mexican wages and not a reduction of US ones.

Tom Kelly April 6, 2006 at 6:50 am

Why should there be a process to become a citizen? If you live, work, and consume here you are a taxpayer. That should be qualification enough to participate in the processes of governance as a citizen.

I don't know the point of NAFTA or any other government sponsored trade agreement. Individuals should be free to trade among themselves without the government being involved.

JohnDewey April 6, 2006 at 7:54 am

"It's important to remember that "immigrants" are those who come here legally, assimilating to the country, taking the citizenship test, and actively pursing citizenship."

Erin, just to be clear, not every Mexican worker in the U.S. wishes to assimilate and become a citizen. Some just want to work here for a few years and then return to Mexico. Would you describe those guest workers as good also, even if they do not wish to assimilate? What does assimilate mean to you?

We need more immigrants than the government currently allows. Fortunately, our nation didn't enforce the laws vigorously. Had we done so, our economy would not have grown nearly as much as it has. We've all gained from the efforts of those 12 million illegal immigrants. They fill a vital role in our economy.

So what do we now do with those people we've come to depend on? If we treat them as criminals and deport them, our economy suffers – badly.

Is it possible in your black-white, legal-illegal world to craft a solution that doesn't harm the nation's economy?

Bob White April 6, 2006 at 8:01 am

Half-sigma mistakenly mangled the statistic. The article actually notes that median income has fallen for males 25-34, not 25-44, an age span of 10, not 20 years. And can we infer from the lack of notice about other age/gender groups that wages in those segments was flat or rising over the decades?

Think about highway traffic. Recall how it slows down at points where other cars are getting on the highway. Further down the road, the median speed picks up again, even though the same number of cars are on the road as at the point of entry.

This seems analogous to the way that the income of males seems to have dropped slightly, perhaps at the point of entry of a heavier flow of immigrants and native-born females into the job market. But the effect is temporary, since it seems not to persist as those workers age. This presumes that the measured decline in median wage was gradual over the years.

This implies that wages rise as workers age, perhaps because they become skilled, form bonds of loyalty with employers and fellow workers, switch to more lucrative employment as they learn how to better make money. Returning to the highway analogy, workers leave the crowded highways and opportunistically seek the those with fewer cars competing for space and fewer points of entry. Then speed, analogous to wages, picks up. I think these are effects we have witnessed and personally experienced over the years.

Bob White April 6, 2006 at 8:13 am

Erin makes a good point, namely that it is important to remember that the issue of the day is primarily illegal immigration, not immigration in general. We've proven that we can assimilate larger numbers of people into our economy than we legally permit. Let's adjust the flow of legal immigrants and allow those from other countries, not just those with adjoining borders. And let's shut off the flow of illegal workers over those adjoining borders, doing so in the most cost-effective (but truly effective) way. If you have dealt in any way with US immigration services, you know that they do nothing in a cost-effective way and are grossly ineffective. But assuming they can be properly organized and funded, let us as a nation bring in more workers of our own choosing. Let us control the flow and open the gates a little wider.

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