No Pain, No Gain ($350 billion/year loss in wages due to immigration)

The Borjas Blog ^ | June 20, 2007 | George Borjas

[ruination]

On June 8, the WSJ editorialized about the gains from immigration:

The President's Council of Economic Advisers recently added up all these benefits, updating the procedures used by the National Academy of Sciences, and concluded that the value of immigrants to the overall economy is a net positive $30 billion a year.

This statistic inspired David Frum to whip out his calculator:

Well let's do some sophisticated economic research. Let's open Google, type "US" and "GDP" and see what we get. Ah, here it is: the very first entry ...

United States — GDP (Official Exchange Rate): $13.22 Trillion (2006 Est.)

Now let's use another sophisticated tool - that little calculator on my computer desktop.

30 billion over 13.22 trillion  ...  Why that's ...  0.22% percent! An extra one-fifth of a penny!

Frum rediscovered a wheel that economists have been aware of for some time: as a fraction of GDP, the gains from immigration are remarkably tiny.

The CEA leaked the $30 billion number to the WSJ hoping to influence the first round of the Senate vote. Just in time for the second round, the CEA puts out a "white paper" detailing their calculations. As the NYT puts it after reading the leaked report: "White House Report Lauds Immigrants' Positive Effects."

One of the beauties of economics is that it provides a rigorous way for thinking about how one should calculate these benefits. And the rigor pays off--it teaches us a brand new insight: the net gains from immigration are closely related to the wage losses suffered by natives. The greater the wage loss, the greater the net gain!

And therein lies an irony. The first method used by the CEA to calculate the $30 billion number updates calculations from the 1997 National Academy study (pages 151-152), which is itself an updating of this 1995 study.

(Full disclosure: I was a member of the National Academy panel that did the updating, and I am the author of the 1995 study that first estimated the "immigration surplus").

My original paper (p. 7) has the formula that can be used to calculate the net benefits from immigration in the simplest textbook supply-demand framework. For reasons that will become obvious very soon (even for those who have an allergic reaction to simple arithmetic), it's worth writing down the formula and working through the exercise:

Net gain from immigration as a fraction of GDP =  - .5
                          times "labor's share of income"
                          times "wage elasticity"
                          times "fraction of workforce that is foreign-born" squared

"Labor's share of income" (that is, the fraction of GDP that goes to workers) is around 0.7 in the United States. And, according to the CEA, the fraction of the workforce that is foreign-born is now around 0.15.

So the only number left to stick in the formula is the value of the "wage elasticity." This is a very contentious number, for it gives the percent change in the wage resulting from an immigration-induced one percent increase in  the size of the workforce. The CEA assumed that the wage elasticity is -0.3, so a 10 percent immigration-induced increase in the size of the workforce reduces the native wage by 3 percent. (This is the estimate used by the NAS study, and it is at the lower end of the -0.3 to -0.4 range reported in my 2003 study of the labor market impact of immigration).

Let's stick in the numbers:

   Gain from immigration = -.5 times 0.7 times -0.3 times .15 times .15

which equals .0024. In other words, immigration increases the income accruing to natives by 0.24% of GDP, or a gain of just over $30 billion.

But, as they say, that is not the end of the story. The same model that generates the $30 billion net gain implies that workers suffered a substantial wage loss. In fact, the total wage loss suffered by native workers is given by this other formula (p. 8 of my 1995 paper):

Wage loss as fraction of GDP = - "labor's share of income"
                          times "wage elasticity"
                          times "fraction of workforce that is foreign-born"
                          times "fraction of workforce that is native-born"

Let's stick in numbers:

        Wage loss = -0.7 times -0.3 times 0.15 times 0.85

which equals 0.0268, or 2.7% of GDP. Since GDP is around $13 trilliion, the implied wage loss is around $350 billion. We are not talking about change anymore!

Finally, if you add the wage loss of $350 billion to the net gain of $30 billion, you get how much employers benefit--almost $400 billion. Of course, some of the gains made by employers eventually trickle down to consumers. But surely employers must keep an important portion: why else would they spend so much trying to lobby Congress for a never-ending supply of cheap labor?

This is all based on a particular economic model--and obviously the answers are sensitive to the underlying assumptions. The CEA, in fact, reports an alternative set of estimates (in the $30 to $80 billion range) based on calculations of the wage impact made by economists Gianmarco Ottaviano and Giovanni Peri (here). But that model also faces various difficulties:

1. The higher benefits result entirely from accounting for the possibility that immigrants increase the productivity of natives who have the same education and work experience (although the importance of this point is often glossed over). In other words, the immigration of high school dropouts who are 30 years old makes natives who are high school dropouts and 30 years old more productive! Put bluntly, young low-skill immigrants made young low-skill African-American construction workers more productive. Maybe--but just think about it for a second. Wouldn't most people be skeptical about this?

2. Suppose we buy into it nevertheless. The Ottaviano-Peri simulation then suggests that immigration raised the wage of natives by 1% to 2%, but simultaneously led to a huge reduction (of around 20%) in the wage of the pre-existing immigrant population. If correct, there must have been a substantial widening of the wage gap between immigrants and natives in the 1990s. In fact, no such widening took place. If anything, the immigrant-native wage gap narrowed slightly for the most educated workers.

I think the most credible estimate of the net benefit from immigration is probably around $30 billion--with four crucial asides:

1. If we are going to accept the $30 billon estimate as "the" estimate of the gains, then we should also accept the same model's predictions of the wage losses. And those losses are staggering.

2. The $30 billion is the net gain resulting from immigration in the short run. Over time, the economy adjusts to the presence of immigrants. Existing firms expand and new firms open up to profit from the lower wage. As the wage rises, however, both the gains and losses from immigration dissipate.

3. The $30 billion net gain does not account for the impact of immigration on the cost of providing social services. Any fiscal losses need to be subtracted from the $30 billion gain.

4. The same factors that determine the size of the net gain for the United States also determine the size of the wage loss for American workers. The larger the losses, the more beneficial immigration is for the United States.

An ironic lesson for supporters of higher immigration levels: Lift up your blindfolds and start arguing that the wage losses are staggering. You have nothing to lose but the chains that now prevent the free flow of labor into the United States.

[ruination]

Summary of Borjas' commentary:

The WSJ reported that immigration results in a gain of $30 billion to the economy each year. Using the same economic model used to calculate that figure, the loss in wages to workers is about $350 billion. And that $30 billion "gain" does not take into account the cost of social services provided to the immigrants.

(The red highlight is mine)

[SirJohnBarleycorn]

The cost of social services must be worked in to get a fair picture. Is there any reason to believe that in our current welfare state, the increased cost of social services required by a significantly larger working poor will not end up exceeding even this small $30 billion gain, especially as time passes and this group consumes more social services, especially medicare and social security?

But it’s even worse than that. Because with the tens of millions of poor, uneducated Mexican and Central Americans, we will get a major increase in the pathological underclass, especially in the second and third generation following the immigrant. Gang membership, crimes, drug usage, illegimacy, welfare usage and other social problems increase in the second and third generation. The underclass is an enormously expensive drag on the economy. More failed schools, more prisons, more barrios, etc etc. What will the cost of this be???

And it’s even worse than that. Because these poor, uneducated foreigners will eventually vote, they will give the balance of power to Democrats, who will raise taxes and the amount and type of social services provided per capita. So the economy will eventually suffer a huge drag from the increased income-redistribution imposed by a Democrat-dominated government.

So there is absolutely no reason, when all things are considered, to believe there is even a net benefit of the illegals as the true costs eventually kick in, but rather a substantial and growing drain on the economy.

[ClaireSolt]

If they are all just hard working families, why do they drive emergency rooms into bankrupcy? Wouldn’t that $100b they send home help bail out the hospitals?

[SirJohnBarleycorn]

Good point about the remittances. Remittances by migrant workers in the US to Latin America/Caribbean were estimated at around $45 billion for 2005, probably higher now.

These remittances should be deducted from the model, more than wiping out even the slight $30 billion net GDP gain.

[2ndDivisionVet]

Do we really need more reasons to call our representatives in Washington, D.C.?

Just say NO to Illegal Alien Amnesty!! Keep calling!! It’s NOT OVER!!

U.S. Senate switchboard: (202) 224-3121

U.S. House switchboard: (202) 225-3121

White House comments: (202) 456-1111

Find your House Rep.: http://www.house.gov/writerep

Find your US Senators: http://www.senate.gov/general/contact_information/senators_cfm.cfm

[AuntB]

Ping!

[gubamyster]

ping

[freekitty]

If this amnesty bill passes, the illegals will be out in full force protesting that their wages need to be increased.

[rolling_stone]

bump for pillage of American taxpayers