Immigration's Economic Impact

▪ 2007

Introduction

Richard B. Freeman  At the turn of the 21st century, the U.S. was the major immigrant-receiving country in the world, as it had been a century earlier. In 2005 the U.S. population included some 35 million immigrants, who constituted 12.1% of the population, up from 4.7% in 1970. The immigrant proportion of residents aged 25–39 was even higher, at 19.4%. Immigrants made up approximately half of the 1990s job growth and added 2.3 million new workers during the slower job-growth period in the early 2000s, when native-born employment was roughly constant. This dramatic increase in immigration (both legal and illegal)—as well as the escalating demands from illegal immigrants for legal status—left many Americans questioning the economic impact of this growing segment of the population.

High- and Low-Skilled Immigrants.

      Immigrants to the U.S. come disproportionately from the top and bottom of the distribution of skills. A substantial number of immigrants are less-educated persons from nearby lower-income countries, notably Mexico, and they can earn far more in the U.S. than they could at home. In 2000 a Mexican with five to eight years of schooling earned approximately $11.20 per hour in the U.S., compared with about $1.82 per hour in those areas of Mexico that have high rates of migration to the U.S. This sixfold difference in earnings gives a huge pecuniary incentive for low-skilled Mexicans, including illegal or undocumented immigrants, to cross the border. According to a 2006 report by the Pew Hispanic Center, in 2005 there were about 11 million undocumented persons in the U.S. and about 7 million undocumented employees, most with regular jobs and many owning their own homes.

      In the past, highly skilled immigrants, including scientists, engineers, nurses, and entrepreneurs, came mainly from higher-income regions such as Canada or Western Europe. In the 1990s and early 2000s, however, increasing numbers came from lower-income countries. In 2000 most immigrants from India had college degrees, many in engineering and computer science. Because of the difference in income between the U.S. and India, however, the 0.1% of India's population living in the U.S. earned roughly the equivalent of 10% of India's national income. In the 1990s, when the dot-com boom increased demand for high-tech professionals, nearly 60% of the growth in the number of Ph.D. scientists and engineers in the U.S. was from those who were foreign born.

Impact on the Native-Born.

      The impact of this inflow of people is complex. Residents who compete with similarly skilled immigrants for jobs are likely to suffer losses in earnings and employment opportunities, while native Americans with complementary skills gain from having more immigrants in the workforce. In addition, employers who hire immigrants at lower wages than Americans would accept may enjoy higher profits and often pass on the savings in the form of lower prices for goods and services. A large influx of medical doctors, for example, will reduce the economic opportunities for existing doctors but will increase demand for nurses, expand the availability of medical services, and cut the cost of those services to patients. At the other end of the economic spectrum, the use of low-wage immigrant farm workers will result in lower food prices.

      Studies of the effect of immigrants on natives, based on comparisons between high-immigrant and low-immigrant areas, find at most small adverse effects on native earnings. A 1995 study by Rachel Friedberg and Jennifer Hunt reported that a 10% increase in the fraction of immigrants in the population reduces native wages by at most 1%. David Card's analysis in 1990 of the 1980 Mariel boat lift, which took large numbers of low-skilled immigrants from Cuba to Miami, found that the influx of immigrants had essentially no effect on the earnings of Miami residents.

      The overall effects of immigration also tend to be spread across the entire country rather than localized in major immigrant-receiving areas, such as major cities. If many low-skilled immigrants go to California, for example, low-skilled persons from other states might be less likely to move to the state, while businesses will invest more capital in California's low-wage sectors. In addition, many low-skilled immigrants work in different occupations and industries from those of similarly low-skilled Americans. In 2000 about 6.5% of Mexican immigrants worked in farming, fishing, and forestry occupations, compared with 0.5% of the native workforce. The job markets for the highly skilled, who have greater geographic mobility, are broadly national in scope.

Trade and Fiscal Policies.

      During the 1990s debate over the North American Free Trade Agreement (NAFTA), proponents of the treaty argued that it would spur the Mexican economy to create more jobs and higher wages and thus reduce the flow of illegal immigrants to the U.S. A positive analysis predicted that increased opportunities for trade would reduce the economic incentive to migrate and, conversely, that greater immigration would reduce the incentive to trade. Greater American capital investments in Mexico were also expected to lower immigrant flows. In the event, NAFTA increased trade and capital flows between the U.S. and Mexico, but it did not spark a great Mexican economic boom or stem the flow of illegal immigrants.

      Some immigrant flows complement trade. When export industries expand, they require additional inputs, some of which may come from immigrant workers. When U.S.-based high-technology industries grew in the 1990s, they created job opportunities for highly skilled immigrants. Many firms successfully lobbied for increased worker visas, and international students found it relatively easy to obtain jobs. The result was that high-tech exports were positively related to the immigration of scientists and engineers.

      The fiscal impact of immigration in the U.S. varies by the level of the government and the skill or earnings status of immigrants. Most immigrants pay taxes and use public services, but if the taxes they pay exceed the value of the public services they use, immigration reduces fiscal deficits. Conversely, when immigrants pay little in taxes but consume many public resources—such as health services and schools for their children—they are a fiscal burden on the society. The federal income tax garners a large proportion of the taxes paid, while state and local governments provide most of the services, so immigration tends to have a more-positive/less-negative effect on the federal budget than on the budgets of state and local authorities. Meanwhile, higher-paid immigrants pay more in taxes but consume similar amounts of many government-provided services. When the U.S. ran budget surpluses in the late 1990s, immigrants as a whole paid more in taxes than the government spent on them. When the U.S. ran budget deficits in the early 2000s, immigration contributed to the deficit because immigrants, like other workers, paid less in taxes than the government spent. Therefore, the most important determinant of the fiscal impact of immigration is not the economic activity of immigrants but rather the budgetary policies of the government.

Controlling Immigration.

      Although in many cases the economic gains may exceed the economic losses from immigration, few U.S. citizens favour unlimited immigration, and the public debate has often become heated. Surveys show that most citizens would like to reduce the flow of illegal immigrants into the country, though they also oppose imposing great penalties or deporting the existing stock of illegal immigrants. In 1986 Congress enacted the Immigration Reform and Control Act, which penalized employers for hiring illegal immigrants, with the aim of discouraging undocumented immigration, but this bill had little effect. At various times the federal government has also increased the size of the border patrol without greatly affecting the flow of illegal immigrants.

      By working in the U.S., immigrants from low-income countries massively improve their economic lives, while their employers make higher profits than by seeking alternative ways to produce some goods and services, and consumers benefit from lower prices. The economic signals that drive immigration thus conflict with the laws designed to regulate it. In a market economy like that of the U.S., fighting market forces is an uphill battle, and, barring some dramatic change in the U.S. or world economy, the country is likely to continue to be an economic magnet for both low-skilled and high-skilled immigrants.

Richard B. Freeman is Ascherman Professor of Economics at Harvard University; he is the author of What Workers Want.

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