Economic and Fiscal Consequences of Immigration

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Last week, the National Academies of Sciences, Engineering, and Medicine released a new report, “The Economic and Fiscal Consequences of Immigration.” It was prepared by a panel of the same name, chaired by Francine Blau, Professor of Economics at Cornell University. The report comes at a time when blaming the country’s economic problems on foreigners and immigrants is very popular. The panel’s research shows that the actual impact of immigration is both less simple and less negative.

Immigrants to the United States and their children number a little over 80 million, or about one-quarter of the population. They are divided about evenly between those born abroad and the children born here, who are automatically U.S. citizens. Of the 40 million who were born outside the country, about 11 million are undocumented, having entered without legal authorization.

Since 2001, legal admissions have averaged just over one million per year. Illegal immigration was increasing up until the financial crisis of 2007, but it has since stabilized. About 300,000 to 400,000 unauthorized immigrants come in each year, but about the same number go out.

When most Americans think of a typical immigrant, they may think of an unskilled Mexican willing to take any job, or an Indian doctor with a medical specialty. There is some truth to these contrasting images. Immigrants are more educationally diverse than the native-born population, being overrepresented both in the lowest educational group (not completing high school), but also in the highest (more than a four-year college education).

Economic impact

The study examined the impact of immigration on wages, employment and economic growth. In general, the effects were smaller and less negative than popular rhetoric would suggest. A lot depends on whether the immigrant labor is competitive with native labor or complementary to it. Immigrant labor is most competitive when it is redundant, just creating or expanding a surplus of workers in a certain kind of work. This is most likely for low-skill work. The workers whose job prospects and wages are most likely to be damaged by competition with newcomers are, interestingly enough, prior low-skill immigrants whose economic position is still tenuous. Native-born high school dropouts are the next most likely group to be hurt.

Even for these low-skilled workers, the economic effect of immigration is not simple. While being threatened as workers, they can benefit as consumers. An ample supply of immigrant labor helps hold down the cost of goods and services in such areas as child care, food preparation, house cleaning and repair, and construction.

A lot of immigrant labor is not redundant, even at the low end of the skill spectrum. Employers have trouble filling some jobs just because the work is too unpleasant to appeal to native-born workers. When immigrants accept such jobs, they do not directly threaten the employment and wages of native job-seekers. (One could argue, of course, that if immigrant labor were not available, employers would have to improve wages or working conditions to appeal to native workers, so that immigration hurts the labor force in a general way. That argument has a counter-argument, that if employers couldn’t employ immigrants in the worst jobs, more of them would move their operations over the border. Even if we could wall foreign workers out, we couldn’t wall domestic employers in.)

Another reason why immigrant labor is complementary rather than competitive is that some immigrants have technical skills that are in short supply. The American educational system has not been doing the greatest job producing mathematicians and scientists. Highly qualified immigrants can fill specialized positions that otherwise would go unfilled, or become entrepreneurs or innovators creating jobs and income for others. “Several studies have found a positive impact of skilled immigration on the wages and employment of both college- and non-college-educated natives. Such findings are consistent with the view that skilled immigrants are often complementary to native-born workers; that spillovers of wage-enhancing knowledge and skills occur as a result of interactions among workers; and that skilled immigrants innovate sufficiently to raise overall productivity.”

The panel also concluded that immigration contributes positively to long-term economic growth, with general economic benefits that go beyond the impact on particular categories of job-seekers. Many economists have warned that the aging of the population in developed countries may hold down the rate of economic growth. Because people have been living longer but having fewer children, many countries are facing a situation with more elderly people to support but fewer working-age people creating the wealth to support them. The influx of foreign workers in their prime working and child-raising years helps alleviate that problem. If the foreigners bring valuable human capital, in the form of needed skills, ambition or a good work ethic, so much the better.

Fiscal impact

Another familiar concern about immigration is its impact on government finances. The fear is that immigrants will consume too much in government services but generate too little in taxes. There is some truth to this, but the actual impact is more complicated.

First, the study makes a generational distinction: “In terms of fiscal impacts, first-generation immigrants are more costly to governments, mainly at the state and local levels, than are the native born, in large part due to the costs of educating their children. However, as adults, the children of immigrants (the second generation) are among the strongest economic and fiscal contributors in the U.S. population, contributing more in taxes than either their parents or the rest of the native-born population.”

One way to think about this is to see it as the normal investment we make in public education, educating children of all income levels in order to reap the rewards of their higher productivity when they are adults. We would do the same if the population grew through a higher native birth rate instead of through immigration. The children of immigrants may need some special services, but so do many native children, especially at the lower end of our increasingly unequal society.

A second important distinction involves levels of government: state and local versus federal. While state and local governments bear the costs of educating children, federal benefits go especially to the elderly, particularly in Social Security and Medicare payments. Since most immigrants are fairly young, they will have many years of paying employment taxes before they can withdraw those benefits. In the long run, much of the fiscal burden of immigration on government is offset by tax contributions of one kind or another, but the trade-off is not as favorable to states, especially those that are points of entry for many low-skilled immigrants, such as Texas, New Mexico, Arizona and California. Federal assistance can even things out somewhat, spreading the costs of serving immigrant families across many taxpayers. Taxpayers will support this only if they see the benefits of immigration and not just the costs.

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