Illegal Immigration Here is a short summary of the lecture. The main goals of this lecture were to introduce the economic aspects of immigration including the basic stylized facts on US immigration; the simple economic theory of illegal immigration, a discussion of how illegal immigration is being dealt with using government policies; and the empirical research results concerning how immigrants are faring and how the US economy is impacted by immigration. When a Mexican worker leaves Mexico and moves to the US he is emigrating from Mexico and immigrating to the US. I. What are the Stylized Facts of US Immigration? There have been several large surges in immigration to the US. A time series plot over the last 150 years shows four or five surges before 1930 and a steady rise beginning in the 1950s. In 1990 there was a stupendous increase in US immigration. Illegal immigration also increased during this time. The extremely large increase after 1990 is a response to a change in US immigration policy. If we restrict the sample from 1870 onwards and we consider using the H-P filter (we discussed this in the previous lecture) to both the growth rate of immigration and the growth rate of real GNP we find the following correlation between the two smoothed
trends (not cyclical components). Correlation Coefficients, using the observations 1870-2005 5% critical value (two-tailed) = 0.1684 for n = 136 hpt_gi hpt_gy 1.0000 0.4846 hpt_gi 1.0000 hpt_gy A time series plot shows a remarkable tracking of the two smoothed trends Both the graph and the correlation above show a close positive association between the underlying economic growth rate and the underlying growth in immigration. It does not establish any direction of causality. It is possible that growth in immigration caused the movements in output growth; or it could be that output growth influenced the growth in immigration. Still yet, it may be that there is some other common factor which is determining both. This is why we typically use multivariate regression to study problems which possibly have multiple variables involved.
You should next read the testimony of Steven Camarota at the following link http://www.cis.org/node/1582 entitled Immigration s Impact on U.S. Workers from his November 2009 Testimony Prepared for the House Judiciary Committee Subcommittee on Immigration, Citizenship, Refugees, Border Security, and International Law. The Center for Immigration Studies (CIS) is a conservative research think tank in the US. During the late 19 th -early 20 th century immigration was more skilled, whereas recent immigration involved low education, low skilled labor. II. Major Immigration Issues According to George Borjas (1994) of Harvard University, there are three major immigration questions which interest economists. These are: (1) How do immigrants do after they immigrate to the host country? (2) How does immigration affect the employment opportunities and wages of native workers? (3) What immigration policies are best for the host countries? The first issue is a complicated question which considers whether or not the wages of immigrants tend to converge to native wages over time. That is, a new immigrant will typically be paid lower than a native born citizen. However, as time goes by, these workers improve their situation and their wages tend to rise. The question is whether the wages of these immigrant workers really do converge to those of the legal workers. Borjas notes that many studies show that worker wages not only converge to the native workers but also surpass the native workers. Immigrant wages rise above native born citizens after a number of years. The usual explanation is that immigrants work harder and long hours and therefore they are rewarded for this with higher wages. Immigrants are thought to be more dedicated to their work, since it was largely for economic reasons that they immigrated in the first place. However, Borjas reasons that these cross sectional studies may be biased because the works immigrating now may be very different than before. A cross section consisting of workers from 1970, 1980, and 1990 may show those from 1970 now have high wages
and those (young) immigrants from 1990 now have low wages. This gives the appearance that ALL immigrants have rapidly rising wages over time. In fact, the wage rise is due to a gradual worsening of the quality of workers immigrating today. He feels it is not at all clear that immigrant worker wages are in fact rising so quickly. There are other problems with studies of immigrant wages. The most difficult issue is to explain how skills are related to wages. For example, language skills appear to greatly affect the rise in wages. Borjas finds it is surprising therefore that many recent immigrant workers do not try to improve their English. Yet another facet of immigration is that immigrants from different regions perform differently. Asians tend to achieve higher wages than natives while Latin American immigrants receive lower wages. Much of this may be due to differences in educational skills The second issue is more controversial. Do immigrants take jobs from native workers? Do immigrants lower the wages of native workers? Most empirical studies look at the effect of the concentration of immigrants in a region on the wage or wage growth in that region. Typically, inflows of immigrants have a very weak effect on native wages. Borjas also notes the very small effect. However, Borjas, Freeman, and Katz (1992) provide evidence that 1/3 of the 10% decline in low educated labor is due to increased immigrant flows. In contrast to this, an important study mentioned by Borjas was the Card (1990) study which showed that a large Cuban inflow to Miami had virtually no impact on local wages. Using our US immigration data and overtime hours in US manufacturing, we find that there is a very weak negative correlation for the growth in immigration and the growth in overtime hours after 1980. The correlation is positive and statistically near zero for the entire period 1957-2005. Here is the near zero correlation 1957-1980 Correlation Coefficients, using the observations 1957-2005 5% critical value (two-tailed) = 0.2787 for n = 50 growth in immg growth in overtime 1.0000 0.0297 growth in immg
1.0000 growth in overtime Here is the slightly negative correlation 1980-2005 Correlation Coefficients, using the observations 1980-2005 5% critical value (two-tailed) = 0.3882 for n = 26 growth in immg growth in overtime 1.0000-0.1862 growth in immg 1.0000 growth in overtime Neither correlation above is statistically significant, assuming they are jointly distributed as a bi-variate normal distribution and we use a two tailed test. Remember that correlation only shows association not causation. If we use instead the Spearman's rank correlation for the period 1980-2005, we get an estimated coefficient (rho) = -0.234872 Under the null hypothesis of no correlation, rho follows N(0, 0.200000) And the estimated z-score = -1.174359, with one-tailed p-value 0.120126 This means that again the correlation is negatively signed but not statistically significant. If immigrants were taking work from legal labor employed in manufacturing, we would expect to see less overtime hours being available for labor in manufacturing. These results, although very simple, tend to confirm Borjas assertion that simple correlation and regression do not show a strong negative effect of immigration on wages or employment. We must however recognize that some states and localities may have this problem while the national economy does not. It is also possible that some ethnic groups, like African-Americans, may be negatively impacted by illegal immigration.
The final issue is what type of immigration policy is best. Do national economic policies affect the flow of immigration? And, do immigrants use government provided social services too much?
What this means is that immigrants are now a larger percentage of the total number of households using welfare. Immigrants are becoming dependent on the government. Once again it is possible that these immigrants are using welfare to supplement their S. Camarota in his interview on Washington Journal pointed out that his research has shown that illegal immigrants pay about $17 billion in taxes while using about $24 billion in social services. If this is true, then illegal immigrants are a net drain on the publicly provided social services. Borjas provides some insight into this question in his JEL survey paper The Economics of Immigration published in 1994. Different immigrant groups use social services differently. Below is a summary from Borjas (see the Table on the previous page). The table should be read in the following way: For Austria in 1990, among all immigrants from Austria, 4.3% were on government provided welfare and for Austrian immigrants arriving before 1980, 4.5% were on welfare. The table shows that except for Russia, few Europeans were on social services. It is interesting to note how that over 16% of Russian immigrants were on welfare. Note that this does not mean that they were not working. It is possible that these people had jobs in the underground economy and were receiving welfare as well. Cambodia, Laos, Vietnam and the Dominican Republic had the highest rates of usage of US welfare. Note that nearly half of all Laotian immigrants were on welfare. Nearly 1/4 of Vietnamese were on welfare. Clearly these numbers do not reflect employment since most of these immigrants have work. This shows a clear abuse of the welfare system. As Borjas notes, there has been a big change in the use of welfare services between 1970 and 1990
It is very difficult to estimate an (expenditure revenue) figure for immigrants alone. As we pointed out earlier, Camarota has estimated that illegal immigrants pay about 16 billion in taxes and use about 26 billion in social services. However, this estimate is for illegal immigrants only. To make such calculations requires many assumptions which cannot be verified and which tend to change the results greatly. It is therefore not very clear whether all immigrants pay more into the system than they take out in social services. III. Policies to Deal with Illegal Immigration We next looked at three policies to deal with illegal immigration. We consider W. Ethier s theoretical model of illegal immigration and simplified it somewhat. Suppose that w * = Mexican wage for unskilled workers. Now let w L and wi be the wages of legal and illegal workers, respectively. Letαbe the probability that an illegal will become a legal citizen of the US. The expected wage in the US is just αwl + (1-α)wI = w This is the wage the immigrant can expect if he is able to STAY in the US. However, it is possible that he will be caught at the border. Let g = probability of being caught at the border and suppose if he is caught he must pay a fine equal to k dollars. Therefore, the marginal immigrant (risk neutral) who is trying to decide whether to illegally immigrate or to stay in Mexico will equate w * to the expected return from immigrating illegally. This is just w * = g(w * - k) + (1-g)(αwL + (1-α)wI )
That is, if the immigrant is caught (probability = g) he will pay the fine = k and be deported back to Mexico earning only w *. On the other hand, if he is successful and enters the US undetected (probability = 1-g) he will get the expected wageαwl + (1- α)wi = w, which is the wage for unskilled workers. Solving the above for the expected wage in the US, we get αwl + (1-α)wI = w * + kg/(1-g) Ethier next assumes that an amount of money is spent on border control which is equal to E. This means that if E increases, the probability of catching an illegal will increase as well. Thus, g = g(e) and g (E) > 0. The wage w =αwl + (1-α)wI will rise to maintain the equality. Next, suppose that a firm hires both unskilled (U = I + L) and skilled, S, laborers. Here, I stands for illegal aliens and L stands for legal workers. S is the number of skilled workers. Output Y is produced using only U and S, and the production technology can be written as Y = F(U, S) which we assume is linear homogenous. This means we can write Y = SF(U/S, 1). Or, another way to write this is Y=Sf(u) where u = U/S and f(u) = F(u, 1). Y The marginal productivity of unskilled workers is = f '( u) > 0, with f ''( u) < 0. U In a competitive market, where illegals and legals cannot be easily discerned, the Y marginal product will be equal to the expect wage, or = f '( u) = w. Given an U inelastic supply of skilled labor, So, the wage w will determine the demand for U, which can be written as U d = So ( f ') 1 ( w) Clearly anything which raises w will lower the amount demanded of unskilled labor. It follows that if E rises, then g will rise also. the quantity demanded of unskilled workers. This will raise the wage w and lower
To see the effect of all three policies individually, we adopt this model and use a graphical method to simplify the discussion. The above three diagrams show an exaggerated situation of the unskilled labor market with a very large elastic supply of unskilled illegal workers (SI) and a small supply of legal workers (SL). Adding these supplies horizontally we get the market supply of unskilled workers SU. Adding a market demand DU where legal and illegal workers are perfect substitutes, we get the market equilibrium with equilibrium wage and quantity. Policies: (1) Border Control Consider a rise in k or an increase in E (i.e., and increase in g). This policy will involve a substantial reduction in the supply of illegals and a shift back of the SI curve. We can see the effect of this policy below, assuming it has a very strong effect. The number of illegal workers employed after border control has been strengthened falls from AB to A B. The quantity of legal workers rises from CD to C D. Overall employment of unskilled workers in the economy falls from AD to A D and this fall in unskilled workers reduces the marginal product of skilled workers, thus lowering the skilled wage. Unskilled workers (legal and illegal) that are able to keep their job after the border control is strengthened will experience an increase in their wage and will be better off. In an interesting turn, this analysis indicates that illegal workers who feel safe from apprehension would actually favor a stronger border policy, essentially kicking the ladder away from others once they
have obtained safe employment in the US. They get into the US, but others don t. Border control usually catches about 1 1.5 million illegal aliens each year. However, it is estimated that probably 2000-3000 illegal immigrants cross the border each day. According to the US Border Control, the United States Border Patrol has 11,000 agents on the line to protect our borders. More than 9,500 of these agents are stationed along our 2,000-mile southern border. According to U.S. government sources, nearly 99% of all people arrested entering the US illegally are citizens of Mexico. (2) Employer Sanctions Let s suppose that the border is left completely open, but illegal workers may still be caught once they are employed in the US. When this happens their employers are fined. This is called employer sanctions. Typically, the US government has not made employer sanctions an important part of its illegal immigration policy. Indeed, in 2004 on 3 employers in the whole US were fined for employing illegal foreign labor! Consider a market in which illegal workers and legal workers are imperfect substitutes. The usual profit function for the firm is π = PF( I+L, S) - wll - wii - wss However, if there are employer sanctions for hiring illegal workers (and it is easier to catch illegal workers if more are hired), then we can re-write the profit function as π = PF( I+L, S) - wll ( wi + k(i) )I - wss
This is like a probabilistic tax on illegal workers which must be paid by the employer. We can again use graphical analysis to illustrate what happens Employer sanctions are like an additional payroll tax imposed on the employer probabilistically when illegal workers are employed. We can assume the tax bends the illegal immigrants supply to the left. This raises the wage paid to illegals and reduces the quantity of illegals employed. The higher equilibrium wage causes the demand for legals to rise and this increases both the wage and employments of legals. Imposing this sanction (tax) must lower overall employment of unskilled if illegals and legals are approximately equally productive. This policy helps legal workers, hurts employers and skilled workers, and helps illegal workers who are able to remain undetected. Business would be against this policy and unions and legal labor would definitely support it. (3) Amnesty The last policy is the most extreme and its consequences are the easiest to predict. This policy involves announcing a general amnesty for illegal labor. This policy would result in a dramatic increase in illegal immigration and a large drop in unskilled wages, as well as unskilled, legal employment. Some combination of the above three policies is no doubt the best policy. One important drawback is that we have not modeled the social costs of illegals.