Immigration

In the early 1900s, when immigration reached historically high levels, half the growth in U.S. population was due to immigration. In the 1970s, only about one-quarter of the growth in population was due to immigration. Current immigration again accounts for about half the growth in population, not only because of the large number of immigrants, but also because of the declining fertility rate of American women.

Just as numbers of immigrants have changed, so have the means of selection. Between 1924 and 1965, immigrants were selected mainly on the basis of national origin. The United Kingdom and Germany received more than 60 percent of the visas allocated outside the Western Hemisphere. (Visa applicants originating in North or South America were not subject to these quotas.) That all changed with the 1965 amendments to the Immigration and Nationality Act. Under the new system, most visas are reserved for relatives of U.S. residents. Between 2000 and 2002, for example, 63 percent of immigrants were admitted because of family ties, and an additional 10 percent were refugees.

The 1965 amendments dramatically altered the mix of immigrants (Figure 1). In the 1950s, 53 percent of immigrants originated in Europe, 25 percent in Latin America, and 6 percent in Asia. By the 1990s, only 15 percent of immigrants originated in Europe, while 49 percent originated in Latin America and 31 percent in Asia.

The U.S. government enacted two major changes in immigration policy between 1985 and 1990. First, the 1986 Immigration Reform and Control Act granted amnesty to three million illegal aliens and introduced penalties for employers who hire undocumented workers. Although the act’s purpose was to stem the illegal flow, it obviously failed in its goal. The second piece of legislation was the 1990 Immigration Act, which permits the entry of an additional 175,000 immigrants per year, with half of the extra visas reserved for skilled applicants.

Because of the increasing economic and demographic importance of immigration—and because of the national security implications of immigration in a post 9/11 world—we are now in the midst of a renewed debate over the “immigration problem.” In terms of the economic impact, the debate will inevitably be guided by three issues: (1) How well do immigrants adapt to the United States? (2) What is their impact on the labor market opportunities of natives? (3) What immigration policy is most beneficial for the country?

When immigrants enter the United States, they typically lack skills—such as proficiency in the English language— that American employers value. Hence, it is not surprising that new immigrants earn less than native workers. As immigrants acquire these skills, however, their economic status catches up to that of natives (Figure 2). But because the recent immigrants are relatively less skilled than earlier waves were, the wage disadvantage of newly arrived immigrants has worsened over time. Immigrants who arrived in the late 1950s earned, on their arrival, 9 percent less than natives. The wage disadvantage for new arrivals increased to 26 percent in the late 1970s and to 28 percent in the late 1990s. Because recent immigrants start so far behind, they do not attain wage parity with natives even after two or three decades in the United States (see Figure 1).

There are large differences in economic performance among the various national origin groups that make up the immigrant population. In 2000, immigrants from Jamaica earned 12.2 percent less than natives, and Mexican or Guatemalan immigrants earned nearly 40 percent less (Table 2). Compare these figures with immigrants from Canada or the United Kingdom, who earned almost 40 percent more than natives.

The large disparity in earnings for various nationalities arises partly because skills acquired in advanced, industrialized economies (such as Canada and the United Kingdom) are more easily transferable to the American labor market. But another reason is that the typical worker who emigrates from a country such as Sweden differs substantially from the typical worker who leaves Mexico. The Swedish government taxes skilled workers heavily and subsidizes the unskilled. Hence the brain drain: skilled Swedes migrate to the United States, where they can keep a larger portion of their income. In contrast, there is a great deal of income inequality in Mexico. Unskilled workers have few economic opportunities and skilled workers are well rewarded; therefore, it is the unskilled who wish to emigrate.

An important consequence of the shift toward a less-skilled immigrant flow is a sizable increase in the costs associated with welfare use among immigrants. In 1970, immigrant households were slightly less likely to receive public assistance than were native households: 5.9 percent of immigrant households received cash benefits, versus 6.0 percent of native households. By 2002, immigrant households were much more likely to receive assistance: 22.7 percent of immigrant households received some type of welfare (defined as cash benefits, Medicaid, or food stamps) versus 14.6 percent of native households.

There are two opposing views about how immigrants affect the labor market opportunities of natives. One view is that they have a harmful effect because immigrants and natives tend to have similar skills and compete for the same jobs, thus driving down the native wage. The other view is that the services of immigrants and natives are not interchangeable but instead complement each other. Put differently, immigrants do jobs that natives do not want to do. For instance, some immigrant groups may be unskilled but particularly adept at harvesting crops. Immigration then increases native productivity and wages because natives can specialize in tasks for which they are better suited.

The early empirical evidence on this subject seemed to indicate that immigration did not have a substantial impact on the labor market opportunities of native workers. This evidence was based on the speculation that if the services of natives and immigrants are interchangeable, natives should earn less in cities where immigrants are in abundant supply, such as Los Angeles or New York, than in cities with relatively few immigrants, such as Nashville or Pittsburgh. Although natives do earn somewhat less in cities with large immigrant populations, the correlation between the native wage and the presence of immigrants is close to zero.

Further evidence of the weak correlation comes from the Mariel boatlift. In April 1980, when Fidel Castro declared that Cubans wishing to emigrate could leave from the port of Mariel, 125,000 people accepted the offer and Miami’s labor force suddenly grew by 7 percent. Yet, the trends in wages and unemployment rates in Miami between 1980 and 1985, including those of black workers, resembled those observed in comparable cities.

Such evidence, however, is not conclusive. This approach to measuring the labor market impact of immigration ignores the fact that labor and capital are mobile between cities. If an influx of immigrant workers reduced wages substantially in a particular city, native workers and some immigrants would leave that city and find work elsewhere. And natives who contemplated migrating to that city would choose another destination. Also, capital would “migrate” to cities with large numbers of unskilled immigrants, where capitalists can earn a greater return on their investment. Large-scale immigration, therefore, may not drive down wages in particular cities. Rather, its depressing effect on wages is nationwide.

Recent evidence on the national labor market impact of immigration is striking. The evidence indicates that the wage of the skill groups—defined in terms of educational attainment and labor market experience—that experienced the largest influx of immigrants grew most slowly over the 1960–2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3–4 percent for every 10-percent increase in the number of workers that can be attributed to immigration. So, for example, if there are 1,000,000 workers in a particular skill group and that group is expanded by 100,000 immigrants, the hourly wages of the entire group would fall by 3 to 4 percent.

Although the entry of immigrants reduces the wages of comparable natives, it increases slightly the income of U.S. natives overall. Using a well-known formula in economics (a variation on the theme of the so-called Harberger triangle), we can estimate that immigration increases the real income of natives, but only by about 0.2 percent. U.S. natives’ economic gains from immigration, therefore, are relatively small: about $22 billion per year (in 2003 dollars). Of course, not everyone benefits equally from immigration; workers with competing skills lose, while owners of land and capital gain.

Many people believe that because a large percentage of immigrants go on welfare, the costs to American taxpayers may wipe out the gains from immigration. Increasingly, the evidence tends to indicate that because of these fiscal impacts, immigration is essentially a wash for the U.S. economy. The National Academy of Sciences estimated in 1997 that the typical native household pays somewhere between $195 and $265 in additional taxes (in 2003 dollars) because of immigration. There are around ninety million native households in the United States, which puts the national fiscal burden somewhere between $18 billion and $24 billion per year. In the short run, therefore, there is little support for the argument that immigration is a great boon for the country. One solution would be to have a ten-year residency requirement for welfare recipients; those who planned to immigrate for welfare would then be much less inclined to do so. Welfare reform legislation passed in 1996 prohibits immigrants from receiving welfare as long as they are noncitizens. Becoming naturalized takes at least five years. This new provision in welfare eligibility may not have had the impact that the planners intended. Most large immigrant-receiving states simply ignore the federal restrictions and use their own money to pay for immigrant services.

Because the net gains from immigration depend on the skill level of immigrants, some host countries (e.g., Australia and Canada) use a “point system” to allocate visas. Applicants are graded on the basis of such factors as education, age, and occupation, and only those applicants who “pass the test” are awarded entry visas. It is not surprising that people migrating to those countries are more skilled than those admitted by the United States. The United States, in effect, is losing the competition for skilled workers in the immigration market.

Changes in U.S. immigration policy since 1965 have greatly altered the number, national origin mix, and skill composition of immigrants. Importing unskilled workers helps fill menial jobs at low wages, but these immigrants also impose substantial costs, mainly by being disproportionately on welfare. Although it is unclear that U.S. natives benefit from immigration on net, immigration does induce a sizable redistribution of wealth—away from competing workers and toward Americans who hire or use immigrant-provided services.