An Economic Case for Immigration

Benjamin Powell*

 

"Don't the laws of supply and demand dictate that wages would fall? Not when other things change at the same time. Those immigrants who increase the supply of labor also demand goods and services, causing the demand for labor to increase."

Arizona's recent passage of a new immigration law has re-ignited the national immigration debate. The law gives state and local police the power, once they have apprehended people for other suspected violations of law, to arrest those that they suspect of being illegal alien if they do not have their papers with them. The law also increases regulation of employers to enforce immigration law. The law is likely to be challenged in the courts and has prompted national politicians to consider immigration reform. 

 

 

Unfortunately, much of the popular debate on immigration is based on fallacies and misconceptions. Immigrants are not a drag on the economy. They don't take jobs from the native born population and they don't depress overall wage rates. Fears of immigrant crime are overblown. Finally, objections to immigration because of the welfare state or public property are misplaced.

Fallacy 1: Immigrants Are a Drag on the Economy

Immigrants boost the overall size of the U.S. economy for the existing native-born population. Free trade in labor, like trade in goods and services, frees existing Americans to do what's in their comparative advantage. In fact, the basic economic case for free trade in labor really isn't different than that for trade in goods and services. Economists are in nearly universal agreement that free trade promotes national wealth. This led to Professor Richard Freeman's puzzled observation:

Restrict trade and cries of protectionism resound. Suggest linking labor standards to trade and it's protectionism in disguise. Limit capital flows and the International Monetary Fund is on your back. But restrict people flows? That's just an accepted exercise of national sovereignty! During the last few decades, when most countries reduced barriers to trade in goods and services and liberalized financial capital markets, most also sought to limit immigration.1

How big is the net benefit of immigration to the native-born population? Harvard Economist George Borjas is probably the most established academic critic of immigration. But even he admits that immigrants create net benefits for the native-born and, in the Concise Encyclopedia of Economics, puts this gain at $22 billion a year.2 Using his method of calculation and updating for more recent immigrant flows puts the number at more than $36 billion.
As part of a $14 trillion economy, $36 billion is a rather small number. However, a few words of caution are in order. First, other methods of calculating the net benefits of immigration lead to larger numbers, though all remain modest as a percent of our economy. Second, the current level of benefits that natives derive from immigration is directly related to the U.S. government's restrictive immigration policies. If greater numbers were let in, if the U.S. government didn't severely limit the number of skilled-worker H1-B visas, and if illegal immigrants had better access to formal-sector employment, the net gains could be larger. In any event, economists have wide agreement that immigration, like free trade, brings net benefits to the existing native-born population.

Fallacy 2: They Take Our Jobs

That immigrants "take our jobs" is probably the most repeated and most economically ignorant objection to immigration.3 It's a classic example of Bastiat's 'what is seen and what is not.'4 Everyone can see when an immigrant takes a job that used to be held by a native-born worker. But not everyone sees the secondary consequence of the new jobs that are created because native-born labor has been freed up for more-productive uses.5 In the market's process of creative destruction, jobs are created and destroyed all the time.

 

Figure 1. Civilian Labor Force

ZOOM

If immigrants really did take jobs, on net, from existing native-born workers without new jobs also being created, the same should be true any time we add more workers to the economy. Is it? Since 1950, there has been massive entry of women, baby boomers, and immigrants into the work force. As Figure 1 shows, the civilian labor force grew from around 60 million workers in 1950 to more than 150 million workers today. Yet there has been no long-term increase in the unemployment rate. In 1950, the unemployment rate was 5.2 percent, and in 2007, the year before the current recession started, the unemployment rate was 4.6 percent. As more people enter the labor force, more people get jobs.
Immigration advocates often argue that "immigrants do the jobs Americans won't do." Critics of immigration often reply that if the wages were higher, Americans would be more willing to do the jobs. However, this reply overlooks the fact that if wages were higher, many of the jobs simply wouldn't exist. Approximately one third of all garment workers in the United States are immigrants. If wages needed to be higher to get Americans to take the jobs, many of these jobs would have gone overseas. Examples abound of farmers deciding that it was better not to produce than to pay higher wages. In Arizona, for example, only 30 percent of the 2004 lettuce crop was harvested; the rest was left in the ground to rot. Losses were nearly $1 billion. Farmers certainly could have paid higher wages to get the crop harvested, but losses would presumably have been even greater.

Fallacy 3: Immigrants Systematically Depress the Wages of the Native-Born

Any student who has taken an introductory economics course would think, quite plausibly, that if the supply of labor increases, more workers will be employed, but the wage rate will fall. The first part is true: as noted above, more workers are employed. However, the second part is not: wage rates don't fall. A survey of the economics literature on immigration concluded that

[d]espite the popular belief that immigrants have a large adverse impact on the wages and employment opportunities of the native-born population, the literature on this question does not provide much support for the conclusion.6

More research has been done since that survey was written, but the general conclusions remain much the same. Economists find no evidence for widespread wage decreases. The debate on the effect of immigration on wage rates of native-born workers has, believe it or not, narrowed down to the effect on wages of high-school drop-outs. Estimates range from slightly positive to, at worst, an eight-percent fall.
How is this possible? Don't the laws of supply and demand dictate that wages would fall? Not when other things change at the same time. Those immigrants who increase the supply of labor also demand goods and services, causing the demand for labor to increase. This means that the effect of immigration on wages shifts from being a theoretical question to being an empirical one.
Second, immigrants don't simply shift the supply of labor. Labor is heterogeneous. When the immigrants have different skills than the native-born population, they complement the native-born labor rather than substitute for them. Many of the immigrants to the United States are either extremely highly-skilled or very low-skilled. Yet most native-born labor falls somewhere in between. The native-born population makes up around one third of adults in the United States without a high school diploma. A large portion of new Ph.D.s is awarded to foreign-born people. To the extent that immigrants are complementing U.S. labor, they can increase, rather than decrease, the wages of the native-born.
Third, even for the unskilled, there is the issue of price sensitivity. If demand for workers is perfectly elastic in the relevant range, then there also need not be any effect on wages.7
Finally, as Adam Smith pointed out centuries ago, specialization and the division of labor are limited by the extent of the market. Bringing more immigrants into the United States expands our market and allows for greater specialization. That makes each of us more productive and able to earn higher wages.

Other Issues Associated with Immigration

There is a great deal of consensus in the economics profession that the above fallacies are, in fact, just that: fallacies.8 That doesn't mean that there aren't many other problems with immigration that economists and others are concerned about. However, most of them involve immigration interacting with existing government policy, not immigration per se.

Immigrant Crime, or Letting Terrorists In

The vast majority of immigrants, legal and illegal, who come to the United States are not criminals or terrorists. Most simply want to work to create a better life for themselves and their families. Some studies report that illegal immigrants are even less likely than the native-born population to commit crimes.9
What about the immigrants who do commit crimes? Many people advocate restricting immigration because of the threat that some immigrants may commit crimes. But why restrict, just to prevent the potential crimes of a few, the vast majority who want to work? A better solution would be to not admit known criminals or terrorists but to welcome the rest. Then, the government could deport any immigrants who do commit a crime once they are here. That would help keep incarceration costs down while simultaneously bringing us the benefits of non-criminal immigrants.
But wouldn't an open-borders policy open the way for more terrorists to come into the country? An open border with legal check points could help authorities search for those on the terrorist-watch list. Sure, some might slip through, but right now terrorists could sneak into the country illegally while hiding among more than a million other illegal immigrants crossing the border in the desert. If a more open immigration policy were established, the legitimate workers could come through check points, freeing existing border-control enforcement to focus on finding the terrorists.

The Welfare State

Many people who would be labeled "classically liberal" or "free-market" on most issues support restricting immigration because of the welfare state. Milton Friedman famously said, "It's just obvious that you can't have free immigration and a welfare state."10 From this, far too many supposed free-market advocates assume that, therefore, we must restrict immigration.11 They are wrong.
Even though the vast majority of immigrants come to the United States to work, it is likely true that completely open borders would result in a tremendous drain on the welfare state.12 The appropriate free market response is, "so much the worse for the welfare state." Instead of advocating further interventions in the market to preserve the welfare state, they should, instead, spend their time trying to repeal the welfare state.
Ludwig Von Mises argued that each intervention in the market would have secondary and undesirable consequences that would cause policy makers to either eliminate the intervention or create another intervention to deal with the secondary consequences. However, that intervention would also lead to other undesirable secondary consequences. Thus, Mises believed that a mixed economy was unstable and middle-of-the-road policies would lead to socialism if policy makers continued to intervene.13
Supposed classical liberals who advocate restricting immigration because of the welfare state are running the wrong way down the road Mises describes. When government socializes health care, as it has been busy doing since the mid-1960s, people have an incentive to take less care of themselves because they expect the government to cover some of their health-care costs. Some people advocate, therefore, that the government restrict what we can eat and what we can smoke. If classical liberals who want to restrict immigration because of the welfare state followed the same logic on health care, they would favor such restrictions on people's freedom to eat and smoke. But they don't. They still say that what people smoke and drink is none of the government's business. The same logic applies to immigration. Some would say that it's not realistic to repeal the welfare state. But the likelihood of repealing it would certainly increase as immigrants put a greater strain on it.
Finally, few people who object to immigration because of the welfare state are willing to endorse the logical conclusion of their objection. If I have a cousin in Ireland who wants to move into my home in the United States, they would say that he should not be allowed to because he might be a burden to other taxpayers. Consistency would demand that I should also be restricted from freely deciding to have a baby, as well. After all, children are likely to be a net tax burden for their first 18 years and possibly afterward. The problem is not immigration per se. The real problem is that in the midst of a welfare state, immigration, like having children, lets some people push the costs of their decisions onto others.

Freedom of Association

People often contrast the rights of U.S. citizens with the supposed "right" to immigrate. There is no "right" to immigrate if we have a right to private property. Private property implies the ability to exclude. But it also implies the right to freely associate with anyone you wish to have on your property.
The right to immigration is the right of existing American property owners to freely associate by employing people on their property or renting or selling their property to people born in other countries. Immigration restrictions attenuate those property rights.
Some otherwise free-market advocates argue that open immigration is actually "forced integration" because of publicly owned streets and other property. They argue that as long as the state exists, it should act as a de facto property owner, excluding some people and admitting others. These people are making the same mistake as those who object to immigration because of the welfare state.14 The two are separate issues. By advocating restrictions on immigration because of state ownership of roads, they, too, are helping push down the road to socialism.15

What Is the Optimal Number of Immigrants?

What is the optimal number of people to migrate from California to Massachusetts? No one knows. We find out through the market process. Potential migrants evaluate offers of employment, compare rents on apartments or prices of homes, and evaluate where they should live. When home prices go too high, or wages too low, people decide not to move. Whatever number do decide to move is roughly the optimal number.
The same should be true at the national level.16 Absent a market process, there is no way to centrally plan the optimal number and mix of immigrants any more than it was possible for the Soviet Union to centrally plan its markets. Instead of restricting labor flows at arbitrary places where politicians happened to draw lines on maps, we need a free market in labor. That means open borders. Not only would free immigration make the native-born population richer, but also it would be an effective way to help the poor of the world.