Immigration Reform and Red Herrings

By Sebastian Mallaby
Monday, May 16, 2005

Last week, in a triumph of hope over experience, Sens. John McCain and Teddy Kennedy introduced an immigration bill. This will now be engulfed by all the usual rhetoric. "America is a Land of Immigrants" vs. "the English language is at risk." "Immigrants are criminals" vs. "forcing immigrants to remain illegal is the real source of crime." But consider the economic question. Will letting in those foreigners harm American workers?

Start by knocking down the dumb arguments on both sides. It's implausible to claim that poor immigrants generally do jobs that Americans won't do. Mexicans mow all the lawns in Southern California, but it doesn't follow that largely immigrant-free suburbs in Pennsylvania are choked with waist-high grass. According to the 2000 Census, 82 percent of New York taxi drivers are foreign-born. But there are still cabs to be hailed in Detroit and Cincinnati, where more than 90 percent of taxi drivers are U.S.-born.

Then there's the opposite dumb argument: that immigrants push unemployment up. Setting aside swings in the business cycle, the level of unemployment in an economy is determined by the flexibility of the labor force, not by how many people are in it and certainly not by what passports they hold. Every economy has something called the NAIRU -- the non-accelerating-inflation rate of unemployment -- and the central bank's job is to keep the monetary taps open until the jobless rate falls to that level. If the rate falls below the NAIRU, the shortage of workers will push wages up faster than output. The resulting inflation will force the central bank to jack up interest rates, slowing the economy and halting job growth.

So if you're worried about unemployment, you have to worry about the NAIRU -- about how you create a workforce that's flexible and motivated, so companies can find people to hire at sustainable wages even when unemployment is quite low. A willingness to relocate, retrain and reinvent oneself makes for a lower NAIRU; the growth of temp agencies, which give firms an efficient way of finding workers, has reduced the NAIRU, too. Immigrants, who tend to be extremely motivated, probably drive down the overall sustainable unemployment rate. In theory, if their presence somehow renders native-born workers less motivated, immigrants could simultaneously increase unemployment in the native-born section of the workforce. But attempts to measure this demoralization suggest that it is minimal.

The serious economic question is not what immigration does to unemployment but what it does to wages, particularly for poor workers. According to the census of 1970, 63 percent of immigrants in the United States had been born in Europe or Canada and were generally well educated. By 2000, however, 48 percent had been born in Mexico, Central America or the Caribbean, and more than one-third of all immigrants had less than a high school education. While immigrants counted for only 13 percent of the working-age population in 2000, they made up over half of those with less than eight years of schooling.

Logic suggests that if you increase the supply of certain workers, their wages will go down. Harvard's George Borjas, one of the nation's top immigration economists, has found that this logic holds in practice. By grouping workers according to education and experience and measuring rates of immigration and wage trends in each category, he concludes that between 1980 and 2000 immigration reduced the average annual earnings of U.S.-born college graduates by 3.6 percent and high school graduates by 2 percent. But natives without high school education were hit harder: Their wages were reduced 7.4 percent compared to what they would have been without immigration.

That's not the end of the story, however. Berkeley's David Card, another top authority, employs a different statistical technique and gets the opposite result. He starts from the fact that different cities experience different rates of immigration, and then he looks to see whether cities with lots of low-skilled immigrants have lower wages for laborers. He finds no wage effect whatsoever. This could be because demand for these workers increases with the supply of them: A gardening company with five Mexican workers armed with fancy electric hedge-trimmers would just as soon hire eight workers and give them manual shears if eight workers were available.

This academic debate is not conclusive. Borjas argues that Card's method is flawed because an influx of immigrants into one city drives U.S.-born workers to move elsewhere, so the downward pressure on wages can be captured only in nationwide numbers. This may be right for college graduates, who operate in a national labor market. But Card may have the upper hand when it comes to understanding low-wage workers. His latest paper shows that cities with high rates of unskilled immigration have reported no offsetting shrinkage in the number of native-born laborers.

What to conclude from this? Immigration does not cause unemployment; the wage effects may well be small. And if anyone can make a conclusive argument about some other consequence of immigration, Congress might as well listen. The debate over wages is not a slam-dunk for either side. It should not determine this issue.

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