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Immigration and the U.S. Economy Where do we go from here?. The Houston Economics Club October 18, 2007. Pia Orrenius, Ph.D. Federal Reserve Bank of Dallas. Disclaimer: the views expressed herein are those of the presenter; they do not necessarily reflect the views of the Federal Reserve

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Immigration and the U.S. EconomyWhere do we go from here?

The Houston Economics Club

October 18, 2007

Pia Orrenius, Ph.D.

Federal Reserve Bank of Dallas

Disclaimer: the views expressed herein are those of the presenter;

they do not necessarily reflect the views of the Federal Reserve

Bank of Dallas or the Federal Reserve System.


Overview

  • Immigration and

    • Population, labor force growth

    • Cyclical, regional effects

    • U.S. workers

    • Taxpayers

    • Policy


U.S. immigration, population, and labor force growth


The foreign-born population islarger than ever before

Source: Census Bureau


And foreign-born share of population headed toward historic peak

Source: Census Bureau


Three out of ten foreign-born are undocumented

Source: Pew Hispanic Center(2005)


Illegal inflows rival legal

Source: Jeffrey Passel and Roberto Suro, Pew Hispanic Center (2005)


Increasingly bimodal education distribution of foreign-born workers

Percent

Source: Ottaviano & Peri, 2005


Foreign-born share of employment

growth by selected jobs

Percent

2003-2006 Source: BLS


Share of workers who are undocumented by occupation

Percent

Overall share

4.9

Source: Pew Hispanic Center(2005)


Projected foreign-born contribution to labor force growth significant as baby boomers retire

Source: PEW Hispanic Center


Foreign-born share of labor force growth by census division


U.S. immigration, the business cycle and regional growth


Immigrants work moreLabor Force Participation: Men

Percent

Source: Pew Hispanic Center(2005)


Correction: male immigrants work moreLabor Force Participation: Women

Percent

Source: Pew Hispanic Center(2005)


Unemployment rate of foreign-born, native-born very similar

Source: BLS


Immigrants are more mobile, responsive to economic growth

  • More likely come in good times, leave in bad times

    • Flexibility allows for faster economic growth, more efficient use of resources

    • Lower unemployment

  • Some immigrant groups are even more mobile once here

    • Move to where the jobs are

      • Fewer regional discrepancies in growth

        • Lower unemployment, regional convergence


Skilled flows pro-cyclical

H1-B petitions approved for initial employment

Peak

Post-recession

Source: Department of Homeland Security


“Real-time” immigration pro-cyclical

Apprehensions along southwest border

Source: DHS


Apprehensions fall as demand in construction weakens

Source: DHS; BLS


Among less-educated, undocumented immigrants more mobile than natives

Percent

Source: Bean et al, 2007


Among Mexican immigrants, illegals more mobile than legals

Percent

Source: Bean et al, 2007


Among Chinese immigrants, illegals more mobile than legals

Percent

Source: Bean et al, 2007


U.S. immigration andthe effect on natives


Effects of immigration on natives

  • Immigration has effects similar to trade

    • Greater specialization, efficiency

    • More choice, innovation

    • GDP rises, GDP per capita rises

  • Who benefits?

    • Immigrants

      • Bulk of GDP increase goes to them

      • Natives get $30 to $60 billion

    • Consumers

      • Prices of certain goods and services fall

    • Capitalists (investors, producers, homeowners)


Effects of immigration on natives

  • Who loses?

    • Wage effects

      • Low-skilled native workers

      • Prior immigrants

    • Fiscal effects

      • Taxpayers


Wages of less-skilled workers in long-run stagnation

Real median weekly earnings by education level

High school diploma, no college

Source: BLS


Wages of less-skilled workers in long-run stagnation

Real median weekly earnings by education level

High school diploma, no college

Source: BLS


Wage Effects of Immigration

  • Models with large adverse effects (Borjas 2003)

    • Assume perfect substitutability, no change in K

    • 3% drop in native earnings on average

    • 9% drop for natives who are low-skilled

  • Other models (Ottaviano & Peri 2006)

    • Allow imperfect substitutability, change in K


Native-born labor force change, by education

Thousands

Source: 1996-2006; BLS, Haver Analytics


Native and foreign-born labor force change, by education

Thousands

Source: 1996-2006; BLS, Haver Analytics


Wage Effects of Immigration

  • Models with large adverse effects (Borjas 2003)

    • Assume perfect substitutability, no change in K

    • 3% drop in native earnings on average

    • 9% drop for natives who are low-skilled

  • Other models (Ottaviano & Peri 2006)

    • Allow imperfect substitutability, change in K

    • 2% rise in native earnings on average

    • 1% drop for low-skilled natives

    • Big declines for prior immigrants


Fiscal impact of immigration

  • Fiscal impact

    • Tax contributions minus transfer payments and cost of public services received

    • Net present value

  • Tax contributions include

    • Payroll, income, sales, property taxes

      • Majority of illegal immigrants have payroll taxes withheld

  • Public transfers and services include

    • Education, health care, welfare (EITC, TANF), police and fire

  • Estimates

    • Gold standard: National Research Council (1997)

    • Recent work: Robert Rector’s piece for Heritage

      • Household-level analysis


NRC: Immigrants have positive fiscal impact when including their descendants

1996 Dollars, NPV

Level of Education

Source: National Research Council, The New Americans (1997)


NRC: But immigrants have a negative fiscal impact in their lifetime

1996 Dollars, NPV

Source: National Research Council, The New Americans (1997)


Immigrant households rely moreon public assistance

Percent

Household participation

in public assistance programs

Source: Center for Immigration Studies, March 2005 Current Population Survey


U.S. immigration policy


Walls on the Southern border are not new…


Where do we go from here?

  • More enforcement

    • No-match program, Real ID Act, worksite raids

    • Local, state law enforcement cooperation w feds


Worksite enforcement jumps in ‘06, ‘07

Source: DHS


Where do we go from here?

  • More enforcement

    • No-match program, Real ID Act, worksite raids

    • Local, state law enforcement cooperation w feds

  • Less chance of reform

    • Issues need to be addressed

      • H-2B, H-1B visas, green card quotas outdated, insufficient

      • Existing illegal immigrants, inflows

    • Piecemeal reform?

      • Ag Jobs

      • DREAM Act


No-match letter program: new safe harbor guidelines could have big impact

  • SSA sends no-match letters to employers with workers whose SS numbers don’t match their names

  • Under new rules, employers have to fire workers with unresolved no-matches within 90 days

  • If caught, employers assumed to have ‘constructive knowledge’ and may face stiff penalties

    • Massive interior enforcement policy, could impact millions of workers if enforced

    • Currently under preliminary injunction in U.S. District Court

  • If implemented, no-match could substantially grow the shadow economy


Shadow economy small in U.S.

Percent of GDP

Source: Schneider (2000)


…partly due to relatively low tax burden

Cumulative

tax rate %

Percent of GDP

Source: Schneider (2000)


Conclusion

  • Foreign-born important role in economic growth

  • Benefits of immigration extensive

  • Labor market impacts limited; fiscal impact sizable

  • More enforcement without reform will grow the shadow economy; worsen fiscal effects


Where undocumented immigrants live

Source: Pew Hispanic Center(2005)


Share undocumented immigrant workers by industry

Percent

Overall Proportion

4.9

Priv. Households

Food mfg.

Ag.

Furniture mfg.

Const.

Textiles

Food Svcs.

Admin

& Support

Hotels

Other mfg.

Source: Pew Hispanic Center(2005)


Foreign-born share of employment

by sector

Source: BLS (2006)


Job-based green cards remain in short supply

Source: Department of Homeland Security, Department of State


Fiscal and wage impact of immigration: Take-Aways

  • Fiscal impact depends on education level and time horizon

    • High school graduates or below impose net costs

    • Almost all costs are made up for by descendants

  • Wage impact is among prior immigrants, less so natives

    • Market-driven selection of immigrants is key

      • Complement native labor

    • Flexibility is important in allowing K, L to adjust

      • Mitigates adverse effects


By JOEL MILLMAN September 18, 2006


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