A review of the academic literature on immigration and the American worker
Posted on 08-Dec-2013. Updated on 09-Dec-2013.
Topics: Effects of Immigration on American Workers
From Center for Immigration Studies:
George J. Borjas has been described by both Business Week and the Wall Street Journal as “America’s leading immigration economist”. He is the Robert W. Scrivner Professor of Economics and Social Policy at the Harvard Kennedy School. He is the recipient of the 2011 IZA Prize in Labor Economics. Professor Borjas is also a Research Associate at the National Bureau of Economic Research and a Research Fellow at IZA. Professor Borjas is the author of several books, including Heaven’s Door: Immigration Policy and the American Economy (Princeton University Press, 1999), and the widely used textbook Labor Economics (McGraw-Hill, 2012), now in its sixth edition. He has published over125 articles in books and scholarly journals. He received his Ph.D. in economics from Columbia University in 1975.
At current levels of around one million immigrants per year, immigration makes the U.S. economy (GDP) significantly larger, with almost all of this increase in GDP accruing to the immigrants themselves as a payment for their labor services.
For American workers, immigration is primarily a redistributive policy. Economic theory predicts that immigration will redistribute income by lowering the wages of competing American workers and increasing the wages of complementary American workers as well as profits for business owners and other “users” of immigrant labor. Although the overall net impact on the native-born is small, the loss or gain for particular groups of the population can be substantial.
The best empirical research that tries to examine what has actually happened in the U.S. labor market aligns well with economy theory: An increase in the number of workers leads to lower wages. This report focuses on the labor market impact of immigration.
Immigration also has a fiscal impact — taxes paid by immigrants minus the costs they create for government. The fiscal impact is a separate question from the labor market impact. This report does not address the size of the fiscal impact.
The Standard “Textbook” Model
The presence of all immigrant workers (legal and illegal) in the labor market makes the U.S. economy (GDP) an estimated 11 percent larger ($1.6 trillion) each year. This “contribution” to the aggregate economy, however, does not measure the net benefit to the native-born population.
Of the $1.6 trillion increase in GDP, 97.8 percent goes to the immigrants themselves in the form of wages and benefits; the remainder constitutes the “immigration surplus” — the benefit accruing to the native-born population, including both workers, owners of firms, and other users of the services provided by immigrants.
The standard textbook model of a competitive labor market yields an estimate of the immigration surplus equal to $35 billion a year — or about 0.2 percent of the total GDP in the United States — from both legal and illegal immigration.
The immigration surplus of $35 billion comes from reducing the wages of natives in competition with immigrants by an estimated $402 billion a year, while increasing profits or the incomes of users of immigrants by an estimated $437 billion.
Three key results are implied by the standard economic model: (1) if there are no wage losses, then there is no immigration surplus; (2) the redistribution of income is much larger than the surplus; and, (3) the size of the net benefit accruing to natives is small relative to GDP.
Applying the standard textbook model to illegal immigration shows that illegal immigrants increased GDP by $395 to $472 billion. As before, this “contribution” to the economy does not measure the net benefit to natives.
The immigration surplus or benefit to natives created by illegal immigrants is estimated at around $9 billion a year or 0.06 percent of GDP — six one-hundredths of 1 percent.
Although the net benefits to natives from illegal immigrants are small, there is a sizable redistribution effect. Illegal immigration reduces the wage of native workers by an estimated $99 to $118 billion a year, and generates a gain for businesses and other users of immigrants of $107 to $128 billion.
The above estimates are generated by the presence of additional workers in the labor market, not by the legal status of those workers.
Measuring the Effects of Immigration Directly
Early research measuring the labor market impact of immigration focused on comparing outcomes in different cities. This approach is now seen as inadequate because the movement of goods, labor, and capital tends to diffuse the impact of immigration across the country.
Classifying workers by education level and age and comparing differences across groups over time shows that a 10 percent increase in the size of an education/age group due to the entry of immigrants (both legal and illegal) reduces the wage of native-born men in that group by 3.7 percent and the wage of all native-born workers by 2.5 percent.
The results from the education/age comparisons align well with what is predicted by economic theory. Further support for the results from the education/age comparisons can be found in studies using the same method in other countries.
A theory-based framework predicts that the immigrants who entered the country from 1990 to 2010 reduced the average annual earnings of American workers by $1,396 in the short run. Because immigration (legal and illegal) increased the supply of workers unevenly, the impact varies across skill groups, with high school dropouts being the most negatively affected group.
The same type of education/age comparison used to measure the wage impact shows that a 10 percent increase in the size of a skill group reduced the fraction of native-born blacks in that group holding a job by 5.1 percentage points.
Immigration has its largest negative impact on the wage of native workers who lack a high school diploma, a group that make up a modest (and, in recent decades, shrinking) share of the workforce. These workers are among the poorest Americans. The children of these workers make up a disproportionate number of the children in poverty: 24.8 percent of all children of the native-born working poor live in households headed by a high school dropout.
Findings from Recent Studies: Could All Americans Gain from Immigration?
Some research argues that virtually all American workers gain from immigration because immigrants and native workers with the same level of education and age do not compete with each other, but in fact complement each other. Although the early empirical studies that examined this assumption claimed that there were substantial complementarities, the published version of these studies reports much weaker, if any, complementarities (Ottaviano and Peri, 2006 and 2012; Borjas, Grogger, and Hanson, 2012).
In fact, even if the extent of complementarity is at the upper end of the estimated range in the most recent studies, immigration still reduced the wage of native high school dropouts by between 2 to 5 percent (depending on whether the effect is measured in the long run or the short run).
Some studies also argue that native high school dropouts and high school graduates are interchangeable in the workplace (Card, 2009; Ottaviano and Peri, 2012). If true, the impact of immigration on the relative size of the low-skill workforce is small and the wage impact of immigration is correspondingly small. The data, however, do not provide convincing evidence that high school dropouts and high school graduates are, in fact, interchangeable (Borjas, Grogger, and Hanson, 2012).
Economists have long known that immigration redistributes income in the receiving society. Although immigration makes the aggregate economy larger, the actual net benefit accruing to natives is small, equal to an estimated two-tenths of 1 percent of GDP. There is little evidence indicating that immigration (legal and/or illegal) creates large net gains for native-born Americans.
Even though the overall net impact on natives is small, this does not mean that the wage losses suffered by some natives or the income gains accruing to other natives are not substantial. Some groups of workers face a great deal of competition from immigrants. These workers are primarily, but by no means exclusively, at the bottom end of the skill distribution, doing low-wage jobs that require modest levels of education. Such workers make up a significant share of the nation’s working poor. The biggest winners from immigration are owners of businesses that employ a lot of immigrant labor and other users of immigrant labor. The other big winners are the immigrants themselves.
Illegal immigration continues to vex the public and policymakers. Illegal immigrants have clearly benefited by living and working in the United States. Many business owners and users of immigrant labor have also benefited by having access to their labor. But some native-born Americans have also lost, and these losers likely include a disproportionate number of the poorest Americans.
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 "Immigration and the American Worker", George Borjas, Center for Immigration Studies, April 2013