Liberalization of Immigration Would Be An Instant Blessing to the Economy
January 28th 2010 00:22
In August of last year, Peter Dixon and Maureen Rimmer released a report on immigration via the Cato Institute titled “Restriction or Legalization?: Measuring the Economic Benefits of Immigration Reform.” From the Executive Summary (w/ highlighting added):
Their study uses a complex model that incorporates 38 industries and 50 occupations, as well as labor demand and supply, wages, capital investment, public expenditures and revenues, exchange rates, and trade. This model, known as USAGE, is used by several different government agencies to predict the outcome of policies.
The first simulation that Dixon and Rimmer ran was the scenario where the government enacted a policy of stricter border enforcement. Presumably due to a shortage of illegal labor supply, this led to an increase in wages for illegal immigrants who already reside in the U.S. As well, with illegal immigrants less available to work low-skilled jobs and wage rates now increased, more Americans shift to these jobs, leading to a lower average wage for Americans. Thus, reducing illegal immigration lowers the average welfare of Americans.
The second simulation tests the policy of stricter enforcement on employers for hiring illegal immigrants. Unlike Scenario 1, illegal immigrants do not see higher wage rates; rather, employers pay for lawyers, accountants, and others to help avoid prosecution. This leads to expenditures on activities to merely avoid a legal penalty, which, in economics, is known as a dead-weight loss. Therefore, both Scenario 1 and Scenario 2 have negative effects on the welfare of U.S. citizens.
The remaining scenarios (3-7) all test a far different government policy, the legalization of immigrants through a guest worker program, with each simulation making different assumptions about the effect of immigrants. The effects of each scenario are approximately the same, with differing magnitudes, so I will summarize the general findings from all of these scenarios as they pertain to allowing more immigrants into the U.S.:
1. Increasing the number of low-skilled immigrants would lead to a larger economy. In turn, this would create high-skilled jobs that would eventually be filled by formerly low-skilled American workers. As a result, unemployment would not increase among low-skilled domestic workers. They point to the “Great Migration” for historical evidence to support these results:
2. The difference in welfare between the worst policy, stricter border enforcement, and the best policy, opening borders with an “optimal” visa fee, is substantial: $260 billion per year.
3. When the government restricts immigration, immigrants go through difficult and expensive measures to come to the U.S. As a result, U.S. employers must entice immigrants with a higher wage. After liberalization of immigration, this wage can be lower, since immigrants do not have to endure the costs to enter the country. Also after liberalization, immigrants would have more stable jobs. Since employers would likely invest more in these types of immigrants, then the gap between productivity (high) and wages (low) would increase, causing a boost to the U.S. economy that benefits everyone.
4. As those opposed to liberalizing immigration like to highlight, more low-skilled workers leads to higher government outlays, at the expense of taxpayers. This study agrees with the critics. However, the productivity increases that strengthen the economy are much greater than the increases to government spending. Those same U.S. taxpayers see increases in “wages, investment income, and employment.” Along with increased tax revenue from a more productive economy, the increases in spending are trivial (see Point 2 again as a reminder for what is at stake).
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This study uses the U.S. Applied General Equilibrium model that has been developed for the U.S. International Trade Commission and other U.S. government agencies to estimate the welfare impact of seven different scenarios, which include increased enforcement at the border and in the workplace, and several different legalization options, including a visa program that allows more low-skilled workers to enter the U.S. workforce legally.
This study finds that increased enforcement and reduced low-skilled immigration have a significant negative impact on the income of U.S. households. Modest savings in public expenditures would be more than offset by losses in economic output and job opportunities for more-skilled American workers. A policy that reduces the number of low-skilled immigrant workers by 28.6 percent compared to projected levels would reduce U.S. household welfare by about 0.5 percent, or $80 billion.
In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households. Legalization would eliminate smugglers’ fees and other costs faced by illegal immigrants. It would also allow immigrants to have higher productivity and create more openings for Americans in higher-skilled occupations. The positive impact for U.S. households of legalization under an optimal visa tax would be 1.27 percent of GDP or $180 billion.
This study finds that increased enforcement and reduced low-skilled immigration have a significant negative impact on the income of U.S. households. Modest savings in public expenditures would be more than offset by losses in economic output and job opportunities for more-skilled American workers. A policy that reduces the number of low-skilled immigrant workers by 28.6 percent compared to projected levels would reduce U.S. household welfare by about 0.5 percent, or $80 billion.
In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households. Legalization would eliminate smugglers’ fees and other costs faced by illegal immigrants. It would also allow immigrants to have higher productivity and create more openings for Americans in higher-skilled occupations. The positive impact for U.S. households of legalization under an optimal visa tax would be 1.27 percent of GDP or $180 billion.
The first simulation that Dixon and Rimmer ran was the scenario where the government enacted a policy of stricter border enforcement. Presumably due to a shortage of illegal labor supply, this led to an increase in wages for illegal immigrants who already reside in the U.S. As well, with illegal immigrants less available to work low-skilled jobs and wage rates now increased, more Americans shift to these jobs, leading to a lower average wage for Americans. Thus, reducing illegal immigration lowers the average welfare of Americans.
The second simulation tests the policy of stricter enforcement on employers for hiring illegal immigrants. Unlike Scenario 1, illegal immigrants do not see higher wage rates; rather, employers pay for lawyers, accountants, and others to help avoid prosecution. This leads to expenditures on activities to merely avoid a legal penalty, which, in economics, is known as a dead-weight loss. Therefore, both Scenario 1 and Scenario 2 have negative effects on the welfare of U.S. citizens.
The remaining scenarios (3-7) all test a far different government policy, the legalization of immigrants through a guest worker program, with each simulation making different assumptions about the effect of immigrants. The effects of each scenario are approximately the same, with differing magnitudes, so I will summarize the general findings from all of these scenarios as they pertain to allowing more immigrants into the U.S.:
1. Increasing the number of low-skilled immigrants would lead to a larger economy. In turn, this would create high-skilled jobs that would eventually be filled by formerly low-skilled American workers. As a result, unemployment would not increase among low-skilled domestic workers. They point to the “Great Migration” for historical evidence to support these results:
This positive occupation-mix effect will be familiar to students of the history of U.S. immigration. The influx of low-skilled immigrants during the “Great Migration” of the early 20th century induced native-born U.S. residents by the millions to complete their education and enhance their skills. The greater competition to fill low-skilled jobs helped to spur a sharp increase in high-school graduation rates from 1910 to 1930, a phenomenon known to educational historians as the “High School Movement.” In this way, low-skilled immigrants chased native-born workers up the occupational ladder. A greater inflow of legalized workers today would have the same beneficial, long-term effect on U.S. households.
2. The difference in welfare between the worst policy, stricter border enforcement, and the best policy, opening borders with an “optimal” visa fee, is substantial: $260 billion per year.
3. When the government restricts immigration, immigrants go through difficult and expensive measures to come to the U.S. As a result, U.S. employers must entice immigrants with a higher wage. After liberalization of immigration, this wage can be lower, since immigrants do not have to endure the costs to enter the country. Also after liberalization, immigrants would have more stable jobs. Since employers would likely invest more in these types of immigrants, then the gap between productivity (high) and wages (low) would increase, causing a boost to the U.S. economy that benefits everyone.
4. As those opposed to liberalizing immigration like to highlight, more low-skilled workers leads to higher government outlays, at the expense of taxpayers. This study agrees with the critics. However, the productivity increases that strengthen the economy are much greater than the increases to government spending. Those same U.S. taxpayers see increases in “wages, investment income, and employment.” Along with increased tax revenue from a more productive economy, the increases in spending are trivial (see Point 2 again as a reminder for what is at stake).
Follow me on Twitter: @AGoldenDoor
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