Immigration and the U.S. EconomyWhere do we go from here?

Pia Orrenius, Ph.D.

Federal Reserve Bank of Dallas

The Houston Economics Club October 18, 2007

Disclaimer: the views expressed herein are those of the presenter; they do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Overview

• Immigration and

– Population, labor force growth

– Cyclical, regional effects

– U.S. workers

– Taxpayers

– Policy

U.S. immigration, population, and labor force growth

The foreign-born population islarger than ever before

Source: Census Bureau

0

5

10

15

20

25

30

35

40

1850 1870 1890 1910 1930 1950 1970 1990 20060

2

4

6

8

10

12

14

16Millions Percent

Number

And foreign-born share of population headed toward historic peak

Source: Census Bureau

0

5

10

15

20

25

30

35

40

1850 1870 1890 1910 1930 1950 1970 1990 20060

2

4

6

8

10

12

14

16Millions Percent

Percent of total population

Number

Three out of ten foreign-born are undocumented

Legal permanent residents

32%

Undocumented immigrants30%

Naturalized citizens35%

Legal temporary residents

3%

Source: Pew Hispanic Center (2005)

Illegal inflows rival legal

Source: Jeffrey Passel and Roberto Suro, Pew Hispanic Center (2005)

0

200

400

600

800

1000

1200

1400

1600

1990 1992 1994 1996 1998 2000 2002 2004

Legal PermLegal TempUndoc

Thousands

Increasingly bimodal education distribution of foreign-born workers

0

5

10

15

20

25

30

35

0 to 11 Years 12 Years(High School

Grads)

13 to 15Years

16 Years(CollegeGrads)

Master,Professional

Degree

Doctorate

19802004

Percent

Source: Ottaviano & Peri, 2005

0 20 40 60 80 100

Legal

Protective service

Total

Healthcare support

Construction and extraction

Computer and mathematical

Architecture and engineering

Percent

Foreign-born share of employment growth by selected jobs

2003-2006 Source: BLS

Share of workers who are undocumented by occupation

0

5

10

15

20

25

30

Farming Cleaning Construction Food Prep. Production Transport Other

Overall share

4.9

Percent

Source: Pew Hispanic Center (2005)

Projected foreign-born contribution to labor force growth significant as baby boomers retire

Source: PEW Hispanic Center

05

101520253035404550

2010 2020 2030 2040 2050

Percent

Foreign-born share of labor force growth by census division

U.S. immigration, the business cycle and regional growth

40

50

60

70

80

90

100

Undocumented Migrants Legal Immigrants Natives

Percent

Source: Pew Hispanic Center (2005)

Immigrants work moreLabor Force Participation: Men

40

50

60

70

80

90

100

Undocumented Migrants Legal Immigrants Natives

Percent

Correction: male immigrants work moreLabor Force Participation: Women

Source: Pew Hispanic Center (2005)

Unemployment rate of foreign-born, native-born very similar

3

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percent

Foreign-born

Native born

Source: BLS

Immigrants are more mobile, responsive to economic growth

• More likely come in good times, leave in bad times– Flexibility allows for faster economic growth, more

efficient use of resources – Lower unemployment

• Some immigrant groups are even more mobile once here– Move to where the jobs are

• Fewer regional discrepancies in growth– Lower unemployment, regional convergence

Skilled flows pro-cyclical

0

50

100

150

200

250

92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06

Thousands

Source: Department of Homeland Security

H1-B petitions approved for initial employment

Peak

Post-recession

“Real-time” immigration pro-cyclicalApprehensions along southwest border

Source: DHS

0

20

40

60

80

100

120

140

160

180

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Thousands, SA

Apprehensions fall as demand in construction weakens

0

20

40

60

80

100

120

140

160

180

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-200

-150

-100

-50

0

50

100

150

200Apprehensions Construction Employment

Thousands, SA

Source: DHS; BLS

Among less-educated, undocumented immigrants more mobile than natives

0

5

10

15

20

25

State-to-State International

US BornIllegals

Percent

Source: Bean et al, 2007

Among Mexican immigrants, illegals more mobile than legals

0

5

10

15

20

25

State-to-State International

LegalIllegal

Percent

Source: Bean et al, 2007

0

5

10

15

20

25

30

35

State-to-State International

LegalIllegal

Percent

Among Chinese immigrants, illegals more mobile than legals

Source: Bean et al, 2007

U.S. immigration andthe effect on natives

Effects of immigration on natives• Immigration has effects similar to trade

– Greater specialization, efficiency– More choice, innovation– GDP rises, GDP per capita rises

• Who benefits?– Immigrants

• Bulk of GDP increase goes to them• Natives get $30 to $60 billion

– Consumers• Prices of certain goods and services fall

– Capitalists (investors, producers, homeowners)

Effects of immigration on natives

• Who loses?– Wage effects

• Low-skilled native workers

• Prior immigrants

– Fiscal effects• Taxpayers

300

400

500

600

700

800

900

1000

1100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

BA degree & higher$/week

Some college, Associate degree

Less than high school diploma

Source: BLS

Wages of less-skilled workers in long-run stagnation

Real median weekly earnings by education level

High school diploma, no college

300

400

500

600

700

800

900

1000

1100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

BA degree & higher$/week

Some college, Associate degree

Less than high school diploma

Source: BLS

Wages of less-skilled workers in long-run stagnation

Real median weekly earnings by education level

High school diploma, no college

Wage Effects of Immigration

• Models with large adverse effects (Borjas 2003)– Assume perfect substitutability, no change in K– 3% drop in native earnings on average– 9% drop for natives who are low-skilled

• Other models (Ottaviano & Peri 2006)– Allow imperfect substitutability, change in K

Native-born labor force change, by education

-1787

-655

3231

7428

-3000 -1000 1000 3000 5000 7000 9000

Less than highschool

High school grad

Some college

College grad

Native

Source: 1996-2006; BLS, Haver AnalyticsThousands

Native and foreign-born labor force change, by education

-1787

-655

3231

7428

2151

1983

1020

2904

-3000 -1000 1000 3000 5000 7000 9000

Less than highschool

High school grad

Some college

College grad

Foreign-born

Native

Source: 1996-2006; BLS, Haver AnalyticsThousands

Wage Effects of Immigration

• Models with large adverse effects (Borjas 2003)– Assume perfect substitutability, no change in K– 3% drop in native earnings on average– 9% drop for natives who are low-skilled

• Other models (Ottaviano & Peri 2006)– Allow imperfect substitutability, change in K– 2% rise in native earnings on average– 1% drop for low-skilled natives– Big declines for prior immigrants

Fiscal impact of immigration

• Fiscal impact– Tax contributions minus transfer payments and cost of public services

received– Net present value

• Tax contributions include– Payroll, income, sales, property taxes

• Majority of illegal immigrants have payroll taxes withheld

• Public transfers and services include– Education, health care, welfare (EITC, TANF), police and fire

• Estimates– Gold standard: National Research Council (1997)– Recent work: Robert Rector’s piece for Heritage

• Household-level analysis

NRC: Immigrants have positive fiscal impact when including their descendants

Level of Education

1996 Dollars, NPV

-50000

0

50000

100000

150000

200000

250000

Overall < High School High School > High School

Source: National Research Council, The New Americans (1997)

-100,000

-50,000

0

50,000

100,000

150,000

< High School High School > High School

Level of Education

NRC: But immigrants have a negative fiscal impact in their lifetime

1996 Dollars, NPV

Source: National Research Council, The New Americans (1997)

Immigrant households rely moreon public assistance

Percent

0

5

10

15

20

25

30

35

Native Immigrant

Household participation in public assistance programs

Source: Center for Immigration Studies, March 2005 Current Population Survey

U.S. immigration policy

Walls on the Southern border are not new…

Where do we go from here?

• More enforcement– No-match program, Real ID Act, worksite raids– Local, state law enforcement cooperation w feds

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006 2007

Criminal ArrestsAdministrative Arrests

Worksite enforcement jumps in ‘06, ‘07

Source: DHS

Where do we go from here?

• More enforcement– No-match program, Real ID Act, worksite raids– Local, state law enforcement cooperation w feds

• Less chance of reform– Issues need to be addressed

• H-2B, H-1B visas, green card quotas outdated, insufficient• Existing illegal immigrants, inflows

– Piecemeal reform?• Ag Jobs• DREAM Act

No-match letter program: new safe harbor guidelines could have big impact

• SSA sends no-match letters to employers with workers whose SS numbers don’t match their names

• Under new rules, employers have to fire workers with unresolved no-matches within 90 days

• If caught, employers assumed to have ‘constructive knowledge’ and may face stiff penalties– Massive interior enforcement policy, could impact millions of

workers if enforced– Currently under preliminary injunction in U.S. District Court

• If implemented, no-match could substantially grow the shadow economy

Shadow economy small in U.S.

0

5

10

15

20

25

30

Italy Spain Sweden Denmark Germany France UK USA Switzerland

Percent of GDP

Source: Schneider (2000)

…partly due to relatively low tax burden

0

5

10

15

20

25

30

Italy Spain Sweden Denmark Germany France UK USA Switzerland0

10

20

30

40

50

60

70

80

90

Percent of GDPCumulative tax rate %

Source: Schneider (2000)

Conclusion

• Foreign-born important role in economic growth

• Benefits of immigration extensive

• Labor market impacts limited; fiscal impact sizable

• More enforcement without reform will grow the shadow economy; worsen fiscal effects

Where undocumented immigrants live

Other57%

California17%

Florida6%

New York4%

Georgia3%

Texas10%

Arizona 3%

Source: Pew Hispanic

Center (2005)

Share undocumented immigrant workers by industry

0

5

10

15

20

25

Overall Proportion

4.9

Source: Pew Hispanic

Center (2005)

Priv. Households

Food mfg.

Ag. Furniture mfg.

Const. Textiles Food Svcs.

Admin & Support

Hotels Other mfg.

Percent

Source: BLS (2006)

0 5 10 15 20 25 30 35 40

Legal occupations

Protective service occupations

Total

Food preparation and servingrelated occupations

Production occupations

Construction and extractionoccupations

Building and grounds cleaningand maintenance operations

Farming, fishing, and forestryoccupations

Percent

Foreign-born share of employment by sector

Job-based green cards remain in short supply

0

100

200

300

400

500

600

700

800

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Temp Work VisasJob-Based Green Cards

Thousands

Source: Department of Homeland Security, Department of State

Fiscal and wage impact of immigration: Take-Aways

• Fiscal impact depends on education level and time horizon– High school graduates or below impose net costs– Almost all costs are made up for by descendants

• Wage impact is among prior immigrants, less so natives– Market-driven selection of immigrants is key

• Complement native labor

– Flexibility is important in allowing K, L to adjust• Mitigates adverse effects

By JOEL MILLMAN September 18, 2006