Following the Money: Immigration and the Economy

In addition to the recurring security and cultural concerns, economic considerations always figure as a third recurring cyclical concern. Immigrants, of course, follow the money in the sense that better work opportunities at better wages continue to fuel migration worldwide. But there are broader questions involving the fiscal implications of large-scale migration and whether it depresses the wages of native workers. There is also a more basic question as to whether large numbers of immigrants are even needed in the knowledge-intensive economies of the 21st Century.

Teaching Immigration Studies at Harvard would always bring up tough questions from students skeptical of the long-term economic consequences of large-scale immigration. Students would rightly point out that the US economy, a 12-plus trillion-dollar economy, is so enormous, dynamic, and globalized that it is doubtful that immigrants will either “make it” or “break it” as its proponents and opponents routinely claim. Even in the low-skill sectors of the US economy, the contribution of migrants is surely quite modest. For example, in 2000 the vast majority of workers with less than a high school education in the 25 to 64 age range were native workers. Only 36 percent were immigrant workers. Indeed, in the larger universe of US global economics, today’s immigration is a relatively minor item secondary to other concerns such as out-of-control health care costs, outsourcing, US global competitiveness, and the cost of the war in Iraq.

Yet in these days of deep anxiety over immigration, it is important to keep in mind that US economy, society, and culture have historically benefited enormously, and free of any outlays, from the talents, energy, and hard work of millions of immigrants who are raised elsewhere but bring their skills and energies to the new country. Today that story repeats itself only with a new cast of characters. It is estimated that every year the United States receives high-quality human capital in excess of US$50 billon in the form of the skills brought into the economy by thousands of Ghanaian physicians, Jamaican and Philippine nurses, Indian computer programmers, Argentine scientists, Bulgarian artists, and Mexican Hollywood Stars—not to mention Dominican baseball players. If you enjoy your iPod, thank an immigrant: he developed it! Any effort to address immigration that fails to fully consider just how much of the US edge in the era of global competition is predicated upon its ability to attract and nourish immigrant talent may end up sacrificing the goose that lays the golden eggs. In the measured words of former Federal Reserve Bank Chairman Alan Greenspan: “Under the conditions that we now confront, we should be very carefully focused on the contribution which skilled people from abroad, as well as unskilled people from abroad, can contribute to this country, as they have for generation after generation.”

Yet some economists remain skeptical. They tend to focus on the fiscal implications of large-scale immigration. After all, there are significant costs incurred in educating the children of immigrants, as well as health and administration-of-justice outlays related to immigration. But surely a society cannot have it both ways: it cannot reap the benefits of immigration without bearing the costs it necessarily generates. Other economists, apparently concerned by the impact of large-scale, low-skill immigration on growing US inequality have examined its effects on the wages of low skilled native workers—such as blacks and poor whites who are high school drop-outs. In an NBER paper widely quoted in anti-immigrant radio shows and the popular press, Harvard’s Larry Katz and George Borjas argued that new immigrants, especially low skilled Mexican workers, are hurting the US economy by lowering the wages of its most vulnerable citizens—native workers who are high school drop outs. Yet for all the debate that the study created, the evidence was somewhat underwhelming, suggesting a drop in approximately three to eight percent of the wages of native high school drop-outs that could be traced to large-scale immigration. Other economists, such as Berkeley’s David Card, simply reject the argument that migrants have harmed the opportunities of less educated native workers.

But even if there are limited marginal effects on the wages of some native workers, it remains obvious that in some of the least desired sectors of the US economy, such as agriculture and other services, employers have little choice but to rely on immigrants because only they show up on Monday morning to do the difficult jobs that nobody wants to do. While some critics of immigration suggest raising wages to cause native US workers to show up to pick up strawberries and lettuce, others claim that without a pool of eager-to-work migrants, some sectors of the US economy would sooner rather than later be outsourced to more competitive agricultural enterprises in other parts of the world. The tomatoes for salsa will then come from Mexico and no longer from California.

Three generations of basic research in the field of immigration suggest that there are sharp limits to the economic arguments that can be deployed to guide immigration policy. The estimated direct gains achieved by large-scale immigration, according to a blue ribbon panel of the National Research Council, are in the order of US$1 to US$10 billon annually—a very marginal direct gain indeed. But the most coherent rationale for how immigrants enrich the US economy is via its indirect effects. Immigrant labor allows citizen workers to pursue their fortunes in domains where they are more productive, better self-actualized workers, and where they gain better returns for their labor. When immigrants cut the grass, manicure nails, feed children, dress wounds, and change beds, native workers are free to sell their labor in other, arguably more profitable, domains.

Moving Forward

But a demographic predicament unfolding before our very eyes suggests that cooler heads need to prevail in the immigration debate. Moving forward, the United States—very much like Europe—will likely need more rather than less migration. As the nearly 80 million baby boomers continue to retire in growing numbers over the next generation and as the white European origin population of the United States continues to show relatively low fertility rates, the United States will face complex options. In the words of President Bush: "The retirement of the baby-boom generation will put unprecedented strains on the federal government. By 2030, spending for Social Security, Medicare, and Medicaid alone will be almost 60 percent of the entire federal budget…[presenting] future Congresses with impossible choices—staggering tax increases, immense deficits, or deep cuts in every category of spending.” By then, it is very likely that the United States will once more turn to immigration to deal with its “impossible choices.” It is most likely that immigrant workers will once again be summoned this time to take care of retired citizens, to pay into the social security system, and to help the country maintain its economic vitality.