Wages Under a Moratorium: Part 7

By Edwin S. Rubenstein
Published in The Social Contract
Volume 21, Number 2 (Winter 2010-2011)
Issue theme: "The Economic Case for a Moratorium on Immigration"
http://www.thesocialcontract.com/artman2/publish/tsc_21_2/tsc_21_2_rubenstein_7_wages.shtml




After World War I, laws were passed severely limiting immigration. Only a trickle of immigrants have been admitted since then…. By keeping supply down, immigration policy tends to keep wages high.

—Paul Samuelson, Economics [1964].

As Paul Samuelson suggests, in a competitive labor market immigrant workers will lower the wages of native workers. No surprise there: If his Economics textbook taught us anything, it is that an increase in the supply of labor will reduce the price (wage) of labor.

Despite what economic theory says, there is much uncertainty as to the size — and even the direction — of immigration’s impact on native incomes. The estimates vary widely from study to study, but seem to be disturbingly low.

One of the earliest and most extensive studies of the impact of immigration on native workers is The New Americans (more commonly known as the National Academy of Sciences [NAS] report), published in 1997 by the National Research Council.1 Written by a panel of the National Academy of Sciences, the report surveyed all the academic literature on immigration and wages.

The NAS panel concluded that immigration had, at most, lowered wages of competing natives by 1 percent to 2 percent. Impacts were also weak for native African-American workers, a group often assumed to be in competition with immigrant workers.

The NAS report’s conclusion was widely accepted thirteen years ago. Since then, much has changed. Refinements in economic methodology have uncovered far larger negative effects than those reported in the studies reviewed by the NAS. Immigrants are a far larger share of the labor force today than when the studies surveyed by NAS were done. More importantly, the quality of foreign-born labor, as measured by education and skills, has deteriorated relative to native-born labor during that period of time.

As a result:

The literature that has emerged since the National Academy Report points to several notable changes. First, the general consensus that existed ten years ago on the comparatively limited impact of immigration on natives’ wages and employment, particularly on the most vulnerable of those workers, appears to have fractured. The assertion that immigrants do not significantly affect natives’ wages is now more broadly contested….2

What has changed? Let us count the ways.

Adjustment for education and skills

Immigrants affect some U.S.-born workers more than others. Early research on immigration’s wage effects focused on the “average” native while ignoring parts of the labor force facing above-average competition from immigrants.

The best single predictor of income in the U.S. is years of education. Foreign workers are overrepresented at both the bottom and top of the educational spectrum. Nearly one-third (32 percent) of recently arrived foreign-born workers in 2005 had not finished high school, while just 12 percent of U.S.-born adults had not finished high school. At the other extreme, about 33 percent of recently arrived foreign-born had at least a college degree, much higher than the college-educated share of U.S.-born.3

As detailed below, research by Harvard economist George Borjas finds that immigrants arriving in the 1980s and 1990s lowered wages of the average native worker by 3.7 percent. Native high school dropouts lost twice that much — about 7.4 percent of their wage — to competing immigrants. By contrast, the wages of natives who graduated from high school or had some college fell by around 2 percent.4

Geographic displacement

Early studies of immigration’s impact on native wages typically compared cities with higher and lower shares of immigrant workers. They begin with the assumption that if immigrants depress wages or displace workers, cities with a higher share of immigrants will have depressed wages or higher unemployment rates, especially among similar native-born workers. Econometric studies typically compare wage and unemployment rates for blacks, Hispanics, and women in cities with different percentages of immigrants, such as Los Angeles and Minneapolis. If immigrants depressed wages or increased unemployment, wages should be lower and unemployment higher in Los Angeles.

To the surprise of most economists, city comparisons found few of the expected effects. For example, a study comparing wages and unemployment rates of black workers in Miami, Atlanta, and Tampa found no significant differences even though the 1980 Mariel boatlift from Cuba increased the Miami labor force by 7 percent in just four months.5

Reasons why adverse effects were not found include more jobs to build housing for the newcomers, the different occupations favored by the Cuban newcomers and local blacks (few Cubans got government jobs), and the outmigration of native workers — Miami’s population growth slowed in the early 1980s relative to the rest of Florida.

Such findings led economist George Borjas to summarize the 1980s research literature by saying “ modern econometrics cannot detect a single shred of evidence that immigrants have a sizable adverse impact on the earnings and employment opportunities of natives in the United States .6

During the 1990s, however, researchers began to question the underlying methodology of studies which focused on individual cities or regions. An assumption common to all such studies — that these places were “closed economies” in which newly arrived immigrants increased the local labor supply and lowered the wages of competing natives — just did not hold up.

Researchers began to see a great deal of connectivity among local labor markets. They found that instead of staying in “immigrant cities,” U.S.-born workers who are displaced by immigrants move to other cities, where they generally make less. Demographer William Frey called such internal migration in response to immigration “the new white flight.”

Companies also move to take advantage of the low-wage immigrant labor pool. By doing so, they cushion the adverse impact of immigration on native workers in cities favored by immigrants while exacerbating wage declines in their former location.

Similarly, native workers who, but for immigration, might have bettered their lot by moving to immigrant gateways, stay put as the new arrivals reduce the potential benefit of such a move. Borjas estimates that for every ten new immigrants in a metropolitan area favored by immigrants, three to six fewer natives will choose to live there.7

“The flow of jobs and workers tends to equalize economic conditions acrosscities,”writesBorjasin analyzing the impact of immigration on natives, adding that“In the end, all laborers, regardless of where theylive, are worse off because there are now many more of them.”8

Conclusion: because local labor markets adjust to immigration, the impact of immigration on native wages is measurable only at the state or national level.

Labor market displacement

Many natives are too old or too poor to relocate in response to immigration. The former group may be forced to apply for Social Security earlier than planned. Although their benefit payments will usually replace only a fraction of their former incomes, this will not be reflected in wage statistics for their city or metro area.

Similarly, younger natives often drop out of the labor force when displaced by immigrants. One study found that a 10 percent rise in the immigrant share of a city’s labor force reduced labor force participation rates of native-born dropouts by 2.7 percent in immigrant-dense cities, and by only 0.3 percent in other cities.9

Workers who drop out of the labor force cannot collect welfare or unemployment insurance. By definition, their “wage” is zero. Yet because they are not working, this is not reflected in Bureau of Labor Statistics wage data for the city or metro area in which they live. Early research missed this hidden negative wage impact of immigration: “While acknowledging that immigrants who arrived in 175 cities between 1985 and 1990 did little to depress wages, [David] Card found that they lowered both native employment rates and those of earlier immigrant cohorts.”10

Clearly, the impact of immigration on natives is understated in official government statistics.

Increased numbers, reduced quality

In 2009 there were 24 million immigrants in the U.S. labor force, up from 15.4 million in 1997, the year The New Americans was published. Nearly one-half of immigrants working in the U.S. today arrived after 1994, when the economic research summarized in that volume was completed.

No one could have anticipated the subsequent growth in foreign-born employment. Consider this:

During the decade of the 1990s, when research for The New Americans was in full gear, foreign workers accounted for 47 percent of U.S.civilian labor force growth. This represented the largest influx of foreign workerseverto enter theU.S.in a given decade — substantially exceeding the number who came here during theGreat Wave of 1890 to 1910.11

But records are made to be broken, and nowhere more so than in immigration. From 2000 to 2009, foreign workers accounted for virtually all of the rise of U.S. employment:

tsc_21_2_wages_table_1.gif


Thanks to the worst recession since before World War II, total employment in 2009 was a mere 3.5 percent above the level of 2000. Yet the number of foreign-born employees rose by 4.654 million, or by a whopping 27.5 percent. Natives bore the brunt of hard times, eking out a minuscule 0.013 percent job gain.

More important than their numbers are the diminished skills of foreign-born workers. In 1960 the average male immigrant living in the United States actually earned about 4 percent more than the average native male. By 1998, the average immigrant earned about 23 percent less. Similarly, immigrants arriving in the country in 1960 were better educated than natives; by 1998 the newest immigrants had almost two fewer years of education.12

Today (2009) the average immigrant male earns 20.2 percent less than the average native male. For Mexican and Central American immigrants the income shortfall was more than double that: 44 percent. Their income gap persists even when adjusted for educational attainment. For example, among men with a high school diploma or GED, those born in Mexico and Central America earned 22 percent less than natives (an average of $650 per week as compared with $840).13

In 2009 the average immigrant worker from Mexico or Central America had completed only 9.7 years of education — 4.4 fewer years than the average native worker. The quality of immigrants’ education is also problematic, as only a small fraction of them are likely to have received any elementary or secondary education in the U.S. Only 23 percent of Mexicans in the labor force came here at age 15 or younger.14

By contrast, most foreign workers arriving here in the 1950s, 1960s, and 1970s were Europeans or well-educated Asians. Their “human capital” — i.e., education and skills — enhanced the productivity of natives working alongside them. Labor market studies focusing on those years found, not surprisingly, that immigration helped expand the U.S. economy and raise average earnings. New immigrants flourished: they started out with lower incomes than natives, but caught up and even surpassed them after a few decades in the country.

In retrospect, those upbeat conclusions reflect a unique set of circumstances that no longer exist. Subsequent cohorts of immigrants arrive with less education. Mexican immigrants (legal and illegal) start their American journeys with much lower earnings than did immigrants in the 1950s and 1960s. Many lack high school diplomas; they fail to catch up with natives. Their increased presence in the workforce exacerbates the economic gulf between haves and have-nots in the U.S.

But, but: Doesn’t higher labor force growth = higher GDP growth?

A typical pro-immigration argument runs like this:

“Relatively faster growth in the U.S. population will translate into relatively faster economic growth…. This is not optimism, but simple arithmetic. Japan and many European countries face long-term stagnation or even decline in their real GDPs — and hence the aggregate economic and fiscal resources available to pursue future-oriented agendas, from investing in the young to investing in national defense.”15

Get it? More immigration means more workers, which means higher GDP — which means we need more immigration.

Reality check: GDP does indeed rise when new immigrants enter the labor force. But the average standard of living falls.

Living standards are best measured by per capita GDP, not total GDP. Per capita income falls when new immigrants are less educated, productive, motivated, and earn less than natives or earlier immigrant groups. This is the case in the U.S., as seen by average annual incomes:

Native-born workers: $45,400
All immigrants: $37,000
Mexican immigrants: $22,300

Economists focus on Mexicans not because many are illegal aliens, but because they are entering in larger numbers than any other immigrant group and, relative to the rest of the labor force, they have far fewer skills. More than 60 percent of Mexican immigrants are school dropouts; fewer than 10 percent of native workers are. As a result they make far less than native-born men as well as other immigrants.16

The major beneficiaries of immigration are the immigrants themselves — who earn far more here than in their home country — followed by their U.S. employers, whose profits rise. Among native-born Americans, only the skilled and affluent benefit from the presence of unskilled immigrants, as when professionals hire migrants to do household work or pay slightly less in restaurants where immigrants hold down wages.

Most Americans do not own their own business. Most of us are not affluent. Most of us are close to the average worker. As such, we lose ground to competing low-wage immigrants.

The truth is that nations with stagnant or falling populations often produce higher living standards. Take Japan, for example, where population is shrinking, but the labor force is rising as older people rejoin the workforce and more women take jobs. If per capita GDP depended on a rising population, Africa, Latin America, Indonesia, and the Philippines would be rich.

Even in China, where population growth has clearly played a role in growing the economy, the accumulation of human capital — essentially education and workforce experience — is deemed by Goldman Sachs to have contributed more to GDP growth than the growth of the labor force since the capitalist reforms began in 1979.17

The bottom line

George Borjas has quantified the native wage loss arising from immigration.18 Among his research findings:

• Immigrants arriving between 1980 and 2000 reduced the average annual earnings of native-born men by about $1,700 or roughly 4 percent.

• Among high school dropouts, who roughly correspond to the poorest tenth of the workforce, the impact was even larger — a 7.4 percent wage reduction.

• Wage losses of native-born blacks and Hispanics are significantly larger than whites because a much larger share of those minorities directly compete with immigrants.

Native-born college graduates are not immune; their income is 3.6 percent lower due to the two decades worth of competing immigrants.

Borjas’s rule of thumb: native wages decline by 3 percent to 4 percent for each 10 percent increase in the foreign-born share of the workforce. In the following analysis we use the average of those figures — 3.5 percent — as the wage loss incurred by native workers per each 10 percent foreign-born share of the labor force.

In 2008 15.7 percent of the U.S. labor force was foreign-born. Following Borjas, this implies the average native worker suffered a wage loss equal to 3.5 percent x (15.7 percent/10.0 percent) — or 5.5 percent — due to immigration. This translates to an average loss of $2,503 per native worker — money that would have been theirs, but for the presence of foreign-born competitors in the workforce.

Wage loss in high immigration states

The foreign-born labor force is disproportionately located in certain states, and in those states its impact on native wages is well above the U.S. average. In 2009, 6 million of the 24 million foreign-born members of the labor force lived in California alone, and another 9 million lived in just five additional states — New York, Florida, Texas, New Jersey, and Illinois.

A third of the labor force in California is foreign-born, as is over a fifth of the labor force in the five other states. By comparison, in the remaining 44 states, immigrants make up less than 10 percent of the labor force.

Using Borjas’s rule of thumb, native workers in states with the 10 greatest concentrations of foreign-born workers have suffered the following income declines:

tsc_21_2_wages_table_2.gif


California, with the largest foreign-born labor force share, suffered the largest percent wage reduction from immigration. U.S.-born Californians lost $6,162, or 12 percent of the average annual wage, due to competition from foreign-born workers in 2008. New Yorkers were second, losing $5,674 or 9.4 percent of their average wage to competing immigrants.

Natives in both states lost more than twice what the average U.S. native is estimated to have lost from immigration in 2008.

A surprising fourth place goes to Nevada, whose native-born workers lost $3,642, or 8.5 percent, due to the presence of immigrants in the state labor force.

Native-born Arizonans lose $2,695, or 6.3 percent of their average annual wage, due to the presence of immigrant workers. U.S.-born workers in Massachusetts lost an estimated $3,455 to competing immigrants. In percentage terms this a 6.1 percent loss.

The fiscal implications of such losses are enormous. State governments collect less income and sales tax revenues from native workers; they pay more cash and in-kind benefits to native workers, many of whom are pushed into poverty by the immigration-related wage loss.

Of course, foreign-born workers also pay state and local taxes. But because they are relatively poor and poorly educated, the value of government benefits they receive usually exceeds their tax contributions. This is especially true for young families with children who are educated at great expense in public schools.

The fiscal deficit imposed by foreign-born workers and their families — and its potential reduction under a moratorium — are discussed in a later section.

Wage gains under a moratorium

If immigration continues at current levels, new immigrants and their children will account for all of the growth in the U.S. labor force between 2010 and 2050.19 The resulting wage loss to native (and earlier immigrant) workers will occur regardless of whether the new arrivals are legal or illegal, temporary or permanent. By contrast a 40-year moratorium will reduce the immigrant share of the labor force and raise native wages above levels that would have been reached under current immigration policy.

By how much will a moratorium reduce future labor force growth, and in particular, the foreign-born share of the labor force? We have already projected a moratorium’s impact on U.S.-born and foreign-born population growth. The foreign-born share of a state’s population is a good proxy for its foreign-born labor force share.

There is one adjustment that must be made, however. Immigrants are generally younger and more likely to be in the labor force than natives. In 2008, for example, immigrants accounted for 12.5 percent of U.S. population and 15.7 percent of its civilian labor force.20 That’s a 25 percent larger labor force share.

Moreover, this gap varies from state to state. States with large concentrations of illegal immigrants generally have disproportionately large immigrant workforces. The reason: Most illegals come here to work, while the great majority of legal entrants arrive through family reunification, humanitarian (refugee and asylum), diversity, and other non-employment-related programs.

Under current immigration policy, we project the immigrant labor force will reach 23.4 percent of the total U.S. labor force in 2050, up from 16.2 percent in 2010. Under a 40-year moratorium, it falls to 7.9 percent as many pre-2010 immigrants die and post-2010 immigration falls to zero:

tsc_21_2_wages_chart_4.gif


What does this portend for wages? Using the Borjas rule of thumb, we estimate that the average native-born worker will suffer an 8.2 percent wage reduction in 2050, if current immigration policy remains in place. A moratorium would cut the loss to 2.8 percent.

In today’s dollars and income levels, the wage loss in 2050 comes to $3,892 under current immigration policy versus $1,310 under a moratorium.

Bottom line: a 40-year moratorium will raise wages of the native-born American workers by an average of $2,582 (2010 dollars), or 5.4 percent, above the level that would have been reached under current immigration policy.

As things stand now, immigration will be the major driver of U.S. labor force growth to mid century. However, the growth rate will vary among the states. Thus while the nation’s foreign-born labor force will more than double between 2010 and 2050, California’s will increase by only 20 percent as immigrants increasingly leave for greener pastures elsewhere. California will still have the largest immigrant labor force in 2050 — 8.0 million — but the state will rank seventh in the immigrant share of its labor force.

By mid-century, Nevada, Georgia, and Maryland will have displaced California, New York, and New Jersey as the states with the largest foreign-born labor force shares. Only six states ranked in the top 10 in 2008 are projected to be in the top 10 in 2050: California, New Jersey, Nevada, Florida, Texas, and Massachusetts. The four new top 10 states are Georgia, Maryland, Virginia, and South Carolina.

In the first table on page 49, we compare immigration-related wage losses in 2050 under two scenarios: a continuation of current immigration policy and a 40-year moratorium.

With nearly 40 percent of their state’s labor force projected to be foreign-born in 2050, U.S.-born Nevadans will suffer a 13.6 percent wage reduction from immigration. In current dollars, that comes to $6,118. By contrast, a moratorium would pare that loss to $2,059, or 4.6 percent of wages in Nevada.

Thus a 40-year moratorium would increase wages of native-born Nevadans by an average $4,059, or 9.0 percent, above the level projected under current immigration policy.

Similarly, a moratorium would boost wages by 8.0 percent in Georgia and Maryland, 8.8 percent in New Jersey, and about 7.0 percent in Virginia, Texas, California, Massachusetts, Florida, and South Carolina.

Immigration and the
vanishing middle class

The middle class is in trouble. Census data show that from 1990 to 2000, the share of U.S. households in the middle-income brackets declined from 34 percent to 20 percent. Middle income is defined as between $35,000 and $67,000 in constant 2000 dollars.

Immigration is an important factor. New legal immigrants cluster in both the upper- and lower-income brackets, reflecting the influx of employer-sponsored workers with special skills at the top and family reunification, refugees, and asylum flows at the bottom. New illegal immigrants are disproportionately in low-income brackets. Relatively few new immigrant families are in middle-income brackets.

While only 15 percent of the U.S. population is foreign-born, immigrants are the fastest growing component. Studies show that states and metropolitan areas with large and rapidly growing immigrant populations generally experience the largest declines in middle-class population shares.

When 2000 Census data for Washington, D.C. and the 27 states with foreign-born population shares higher than 5 percent are arranged in order of ascending middle-income shares, a trend becomes evident. The states with above-average foreign-born shares tend to have smaller middle-income shares of their population.

tsc_21_2_wages_table_3.gif

tsc_21_2_wages_table_4.gif


California and New York, for example, with the largest foreign-born population shares in 2000 (26.2 percent and 20.4 percent, respectively), had the smallest fraction of households in the middle class (27.9 percent and 27.1 percent, respectively). At the other extreme were Kansas and Idaho, where immigrants accounted for only 5.0 percent of 2000 population and middle- class households accounted for 31.6 percent and 31.9 percent of all households, respectively.

The trend is clear: states with above-average foreign-born shares tend to have below-average middle-income shares. California, the state with the largest settlement of both legal and illegal immigrants, displays the greatest income inequality.

A declining middle class could, of course, be a sign of economic strength if households formerly in that bracket were pushed into upper-income brackets. If the number of low-income households were falling while high-income households were increasing, this would be a very welcome change — a sign of prosperity. Unfortunately, this is not what was happening between 1990 and 2000.

Nationally, between 1990 and 2000, low-income households increased by 5.3 million. More than half of that increase occurred in California, Florida, Texas, New York, North Carolina, Georgia, and Arizona — states where most of the foreign-born population growth occurred in those years.

A moratorium will help sustain middle-class income and lifestyles by lowering competition from foreign-born workers and by adding fewer people to the low-income and high-income populations. While all parts of the country will benefit, states where the foreign-born population share is rising most rapidly will be the biggest beneficiaries. We project the following 10 states will experience the largest reductions in foreign-born population shares under a 40 year moratorium (see table at left).

If recent population trends and immigration policies continue, 45.8 percent of Nevada’s population will be foreign-born in 2050, the largest immigrant share of any state. If an immigration moratorium were in effect over the 2010 to 2050 period, we estimate Nevada’s foreign-born population would dwindle to only 5.7 percent. Bottom line: Nevada’s immigrant population share falls a whopping 40.1 percentage points under a moratorium. No other state comes close.

For the U.S. as a whole, a moratorium will lower the foreign-born share by 12.3 percentage points in 2050.

Notice that California and Florida are not among the top ten. Their foreign-born population shares would have declined under current policy as new arrivals increasingly locate to other parts of the country and existing immigrants move elsewhere. While a moratorium will improve the condition of middle-income native households in those states, its impact is muted because immigrants are already moving to greener pastures. ■

Endnotes

1. http://www.nap.edu/openbook.php?isbn=0309063566

2. Julie Murray, Jeanne Batalova, and Michael Fix, The Impact of Immigration on Native Wages: A Fresh Look at the Evidence, Migration Policy Institute, July 2006.

3. Phillip Martin and Elizabeth Midgley, Immigration: Shaping and Reshaping America, Population Reference Bureau, December 2006.

4. George Borjas, Increasing the Supply of Labor Through Immigration, Center for Immigration Studies , May 2004

5. David Card, The Impact of the Mariel Boatlift on the Miami Labor Market, Industrial and Labor Relations Review, 1990.

6. George J. Borjas, Friends or Strangers: The Impact of Immigrants on the U.S. Economy, New York: Basic Books, 1990, p. 81.

7. Murray et al., op.cit.

8. Borjas, op.cit., 2004.

9. Robert Cherry, Immigration and Race: What We Think We Know, The Review of Black Political Economy, Summer-Fall 2003.

10. Murray et al., op.cit.

11. Andrew Sum, et al., Foreign Immigration and the Labor Force of theU.S. Center for Labor Market Studies, Northeastern University, July 2004. [PDF]

12. George Borjas, The Top Ten Symptoms of Immigration, Center for Immigration Studies, November 1999.

13. Congressional Budget Office, The Role of Immigrants in the U.S. Labor Market: An Update, July 2010, Table 10.

14. Ibid., Table 5.

15. Richard Jackson, 300 Million Americans: What Does It Mean?, Center for Strategic and International Studies, October 2006. 

16. Roger Lowenstein, The Immigration Equation, New York Times Magazine, July 9, 2006.

17. Helen Qiao ,Will China Grow Old Before Growing Rich?, Goldman Sachs, July 14, 2006.

18. George Borjas, Increasing the Supply of Labor Through Immigration: Measuring the Impact on Native-born Workers, Center for Immigration Studies, May 2004.

19. Martin and Midgley, op.cit.

20. Migration Policy Institute, Data Hub.

About the author

Edwin S. Rubenstein , president of ESR Research, economic consultants, has 25 years of experience as a business researcher, financial analyst, and economics journalist. Mr. Rubenstein joined Hudson Institute, a public policy think tank headquartered in Indianapolis, as Director of Research in November 1997. While at Hudson he wrote proposals and conducted research on a wide array of topics.

As a journalist, Mr. Rubenstein was a contributing editor at Forbes Magazine and economics editor at National Review , where his “Right Data”column was featured for more than a decade. His TV appearances include Firing Line, Bill Moyers, McNeil-Lehrer, CNBC , and Debates-Debates. In The Right Data (National Review Press, 1994), Rubenstein debunks many widely held beliefs surrounding the distribution of income, government spending, and the nature of economic growth.

From 1980 to 1986 he was senior economist at W.R. Grace & Co., where he directed studies of government waste and inefficiency for the Grace Commission. From 1978 to 1980 he was a municipal bond analyst for Moody’s Investors Service. Mr. Rubenstein has a B.A. in economics from Johns Hopkins and an M.A. in public finance from Columbia University .


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