North American North American Competitiveness andCompetitiveness and

Labor Market Labor Market

InterdependenceInterdependence Raul Hinojosa Ojeda, UCLA, Principle Raul Hinojosa Ojeda, UCLA, Principle

InvestigatorInvestigatorWith: Robert McCleery, MIISWith: Robert McCleery, MIIS

Fernando De Paolis, MIIS/DRCOGFernando De Paolis, MIIS/DRCOGTerrie Walmsley, Purdue Terrie Walmsley, Purdue

Stylized Facts of NAFTA Stylized Facts of NAFTA TodayToday Massive US trade deficitMassive US trade deficit

($70 Billion in August despite rapid export growth)($70 Billion in August despite rapid export growth) Despite falling oil prices, the 2006 record deficit will exceed Despite falling oil prices, the 2006 record deficit will exceed

the 2005 record deficit, which exceeded the 2004 record…the 2005 record deficit, which exceeded the 2004 record… Growing discontent in US, particularly with China (trade Growing discontent in US, particularly with China (trade

and investment diversion) and India (trade and outsourcing)and investment diversion) and India (trade and outsourcing) Large and growing US undocumented Large and growing US undocumented

population population Credible estimates (Pew Hispanic Center, 2006, and Urban Credible estimates (Pew Hispanic Center, 2006, and Urban

Institute) place this population at 11 to 12 (Urban Institute)Institute) place this population at 11 to 12 (Urban Institute) Growth is accelerating, now about 500,000-800,000 per Growth is accelerating, now about 500,000-800,000 per

yearyear About 14 million in homes where one or more are About 14 million in homes where one or more are

undocumented (Pew Hispanic Center, 2006)undocumented (Pew Hispanic Center, 2006) Concern about economic and social costs of existing system Concern about economic and social costs of existing system

in US and Mexicoin US and Mexico Questions about positive and negative impacts of Questions about positive and negative impacts of

remittancesremittances

IssuesIssues

Competitiveness and Trade Policy in Competitiveness and Trade Policy in NAFTANAFTA

US Immigration and Remittance US Immigration and Remittance Reform Reform

Development in MexicoDevelopment in Mexico

Historical Separation of Historical Separation of Trade and Trade and

Immigration/Remittance Immigration/Remittance ResearchResearch Trade largely studied by economists, Trade largely studied by economists,

migration/remittances by sociologistsmigration/remittances by sociologists Yet the two issues are clearly Yet the two issues are clearly

intertwined, nowhere more so than in intertwined, nowhere more so than in North AmericaNorth America

Thus we have assembled a team of trade Thus we have assembled a team of trade and migration researchers and and migration researchers and constructed a model that considers constructed a model that considers interactions among these two crucial interactions among these two crucial flows flows

The Importance of TradeThe Importance of Trade Most early studies of NAFTA focused exclusively Most early studies of NAFTA focused exclusively

on trade issueson trade issues NAFTA lowers trade barriers among the three NAFTA lowers trade barriers among the three

countries, leading to:countries, leading to: Production, investment and employment expansion in Production, investment and employment expansion in

areas of comparative advantage areas of comparative advantage Corresponding contractions in areas of comparative Corresponding contractions in areas of comparative

disadvantagedisadvantage Net efficiency gains, perhaps after a period of transitionNet efficiency gains, perhaps after a period of transition In sectors with economies of scale, production levels In sectors with economies of scale, production levels

could rise, costs fall, and prices fall by even more as could rise, costs fall, and prices fall by even more as competition increased, creating even larger gainscompetition increased, creating even larger gains

Modest redistribution impacts, presumably favoring a Modest redistribution impacts, presumably favoring a country’s relatively abundant factors of productioncountry’s relatively abundant factors of production

The Importance of The Importance of Immigration and Immigration and

RemittancesRemittances Although the economic impact of immigration in Although the economic impact of immigration in NA is widely recognized, few NAFTA modelers NA is widely recognized, few NAFTA modelers considered impacts on immigration and few considered impacts on immigration and few immigration specialists were included in the immigration specialists were included in the NAFTA debatesNAFTA debates

Conventional wisdom: NAFTA will raise Conventional wisdom: NAFTA will raise employment and income in Mexico, thus lowering employment and income in Mexico, thus lowering undocumented migrationundocumented migration

Alternative perspective: Elements of the NAFTA Alternative perspective: Elements of the NAFTA transition will have conflicting impacts on transition will have conflicting impacts on migration, with the net effect likely to be an migration, with the net effect likely to be an increase, due primarily to a collapse in corn prices increase, due primarily to a collapse in corn prices and production levels in Mexico. This transition and production levels in Mexico. This transition period could be long.period could be long.

Remittance impacts outpace other financial flowsRemittance impacts outpace other financial flows

Why Rethink NAFTA Why Rethink NAFTA Trade?Trade?

Despite trade liberalization (and increased FDI), Despite trade liberalization (and increased FDI), we have seen modest income and employment we have seen modest income and employment growth in Mexicogrowth in Mexico

Despite tariff reduction, domestic subsidies, non-Despite tariff reduction, domestic subsidies, non-tariff barriers, and agricultural protection tariff barriers, and agricultural protection continue to distort production and restrict gainscontinue to distort production and restrict gains

““North American” competitiveness vis-à-vis the North American” competitiveness vis-à-vis the world (especially China and India) has not world (especially China and India) has not improved as hopedimproved as hoped

Exchange rate variability, in and beyond NAFTA, Exchange rate variability, in and beyond NAFTA, decreases potential integration and gainsdecreases potential integration and gains

Massive adjustments loom, if the US trade deficit Massive adjustments loom, if the US trade deficit proves unsustainableproves unsustainable

Why Rethink Immigration Why Rethink Immigration Policy?Policy?

Undocumented migration has not decreased as Undocumented migration has not decreased as had been predicted/hoped (post-IRCA or post-had been predicted/hoped (post-IRCA or post-NAFTA)NAFTA)

Labor market conditions for undocumented Labor market conditions for undocumented migrants in the US are embarrassing, a point of migrants in the US are embarrassing, a point of bilateral contention with Mexico, and undermine bilateral contention with Mexico, and undermine the push for improved labor standards world-widethe push for improved labor standards world-wide

The presence of exploitable undocumented The presence of exploitable undocumented workers lowers wages and worsens working workers lowers wages and worsens working conditions for all lower-skilled workersconditions for all lower-skilled workers

Reducing poverty and inequality is made more Reducing poverty and inequality is made more difficult and costly in migrant-receiving difficult and costly in migrant-receiving communitiescommunities

Potential public backlash against all immigrationPotential public backlash against all immigration

Asymmetries in Trade and Asymmetries in Trade and Immigration PolicymakingImmigration Policymaking

One reason trade and immigration One reason trade and immigration policies are not considered in a holistic policies are not considered in a holistic fashion is that trade is considered an fashion is that trade is considered an international policy with domestic international policy with domestic effects, while immigration is viewed as a effects, while immigration is viewed as a domestic policy with international effectsdomestic policy with international effects

Even the EU finds it difficult to seize the Even the EU finds it difficult to seize the ability to regulate labor movement ability to regulate labor movement within the Union from member within the Union from member governments, much less craft a governments, much less craft a reasonable policy towards immigration reasonable policy towards immigration from outside the Unionfrom outside the Union

Our Trade and Immigration Our Trade and Immigration ModelModel

Trade is motivated by both price Trade is motivated by both price differentials and regional characteristics differentials and regional characteristics of goods (Armington)of goods (Armington)

Services trade is included, such that Services trade is included, such that none of the 29 sectors in the models (see none of the 29 sectors in the models (see appendix for sectoral definitions) are appendix for sectoral definitions) are “purely non-traded”“purely non-traded”

Trade liberalization can consist of Trade liberalization can consist of reducing or eliminating manufacturing reducing or eliminating manufacturing tariffs, all tariffs, or all barriers, tariffs, all tariffs, or all barriers, including non-tariff barriers. including non-tariff barriers.

Our Trade and Immigration Our Trade and Immigration Model (2)Model (2)

Immigration is motivated by real wage Immigration is motivated by real wage differentials and influenced by immigration differentials and influenced by immigration policiespolicies

Migrant remittances are explicitly modeled, Migrant remittances are explicitly modeled, and are impacted by any policy that affects and are impacted by any policy that affects migration levels or migrant earningsmigration levels or migrant earnings

Immigration policies:Immigration policies: Impact the Impact the wage differentials wage differentials directly, raising or directly, raising or

lowering the percentage of domestic wages earned lowering the percentage of domestic wages earned by migrants (0.6 people revisited?). For example, by migrants (0.6 people revisited?). For example, wages (and productivity) of legalized migrants wages (and productivity) of legalized migrants increases with immigration reformsincreases with immigration reforms

Impact the Impact the responsivenessresponsiveness (elasticity) of migration (elasticity) of migration with respect to any given wage differential. For with respect to any given wage differential. For example, additional enforcement lowers immigration, example, additional enforcement lowers immigration, for a given wage differential (Dallas Fed, 2001)for a given wage differential (Dallas Fed, 2001)

Our Trade and Immigration Our Trade and Immigration Model (3)Model (3)

Immigration and trade interact in several Immigration and trade interact in several important ways:important ways: The presence or absence of immigrants in a The presence or absence of immigrants in a

country impacts the relative price of goods, country impacts the relative price of goods, and thus trade flowsand thus trade flows

Openness to trade impacts wage levels, and Openness to trade impacts wage levels, and thus immigration incentivesthus immigration incentives

Remittances impact the balance of payments Remittances impact the balance of payments and thus trade flowsand thus trade flows

Remittances further fuel investment and Remittances further fuel investment and growth in migrant-sending regions, thus growth in migrant-sending regions, thus impacting wages, prices, trade and migrationimpacting wages, prices, trade and migration

Scenario DescriptionsScenario Descriptions We run three types of scenarios, although We run three types of scenarios, although

only the first two types will be presented only the first two types will be presented today:today:

1.1. Change migration policy, with direct impact Change migration policy, with direct impact on migration and indirect impacts on tradeon migration and indirect impacts on trade

2.2. Change trade policy, with direct impact on Change trade policy, with direct impact on trade and indirect impacts on migrationtrade and indirect impacts on migration

3.3. Change both policies, with direct and indirect Change both policies, with direct and indirect effects on both types of international flowseffects on both types of international flows

Within each type of scenario, we tighten or loosen Within each type of scenario, we tighten or loosen US and Canadian policy, decomposing impacts US and Canadian policy, decomposing impacts of various “sub-policies” whenever possibleof various “sub-policies” whenever possible

Tighter Immigration Tighter Immigration PoliciesPolicies

Version 1-deportation/closed border with Version 1-deportation/closed border with MexicoMexico In this scenario, over 6 million migrant workers In this scenario, over 6 million migrant workers

(and their dependents) are deported (or, (and their dependents) are deported (or, alternatively, never allowed to enter the alternatively, never allowed to enter the country). In this “country). In this “YearYear without Mexicans,” we without Mexicans,” we see the impacts on GDP, real wages for skilled see the impacts on GDP, real wages for skilled and unskilled workers in the three countries, and unskilled workers in the three countries, total exports, imports, and the trade balance as total exports, imports, and the trade balance as shown on the next slideshown on the next slide

All figures in the table are percentage changes, All figures in the table are percentage changes, relative to today’s “status quo” or “baseline”relative to today’s “status quo” or “baseline”

(1a) Mass Deportation(1a) Mass DeportationDeportation (2 million skilled and 2 million unskilled Mexican migrants workers (and dependents) are no longer in the US)

Mexico Rest of LAIncrease in unskilled labor migration to US, from: -2000(In thousands of people)

Mexico Rest of LA US CanadaChange in GDP, in: 2.2 0 -1.2 0(% change from base)

US (Native) US (Mexican Migrant)US (LA Migrant) Mexico Rest of LAReal Wages for unskilled workers in: 44 NA 27 -34 0(Change in $)Real Wages for skilled workers in: 470 NA -920 1(Change in $)

Mexico Rest of LARemitances from immigrants in US to: -100.0% 0%(percent change from base)

Mexico Rest of LA US CanadaChange in Trade Balance, Millions 8872 -941 4118 -192

Tighten Border and Anti-Tighten Border and Anti-Immigrant PoliciesImmigrant Policies

A less extreme policy option is increased A less extreme policy option is increased border enforcement and weaker legal border enforcement and weaker legal rights and protections for existing rights and protections for existing undocumented migrantsundocumented migrants

Wages for undocumented migrants in the Wages for undocumented migrants in the US and Canada will drop from about 50% US and Canada will drop from about 50% to about 40% of the earnings of “natives”to about 40% of the earnings of “natives”

A one percent increase in the wage A one percent increase in the wage differential now elicits a 0.3% differential now elicits a 0.3% immigration response, down from 0.4% immigration response, down from 0.4% in the status quoin the status quo

(1b) Tighten Border and (1b) Tighten Border and Anti-Immigrant PoliciesAnti-Immigrant Policies

Tighten Border Controls

Mexico Rest of LAIncrease in unskilled labor migration to US, from:-375 -580(In thousands of people)

Mexico Rest of LA US CanadaChange in GDP, in: 0.6 0.24 -0.4 -0.01(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LAReal Wages for unskilled workers in: 51 32 31 -8 -2(Change in $)Real Wages for skilled workers in: 15 4 -15(Change in $)

Mexico Rest of LARemitances from immigrants in US to: -15.0% -22%(percent change from base)

Mexico Rest of LA US CanadaChange in Trade Balance, Millions 1264 3578 -216 -7

Loosen Immigration Loosen Immigration PoliciesPolicies

Two potential “loosening” policies are Two potential “loosening” policies are considered, with different motivating considered, with different motivating philosophies and impacts:philosophies and impacts: A) “Wink and Nod” The historical practice A) “Wink and Nod” The historical practice

of reducing border enforcement when the of reducing border enforcement when the US labor market is tight, which lets in more US labor market is tight, which lets in more migrants but does not address migrant-migrants but does not address migrant-native disparitiesnative disparities

B) Greater legal protection of existing B) Greater legal protection of existing migrants, probably through “regularization” migrants, probably through “regularization” rather than blanket legalization rather than blanket legalization

Loosen Immigration Loosen Immigration Policies (A):Policies (A):

“Wink and Nod”“Wink and Nod”Relax border controls

Mexico Rest of LAIncrease in unskilled labor migration to US, from:460 760(In thousands of people)

Mexico Rest of LA US CanadaChange in GDP, in: -0.7 -0.25 0.5 0.1(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant)Mexico Rest of LAReal Wages for unskilled workers in: -67 -42 -42 10 3(Change in $)Real Wages for skilled workers in: 12 171 19(Change in $)

Mexico Rest of LARemitances from immigrants in US to: 17% 27%(percent change from base)

Mexico Rest of LA US CanadaChange in Trade Balance, Millions -1384 -4532 316 11

Regularization/Regularization/Legalization (B)Legalization (B)

Legalize/Regularize Migrant's Status

Mexico Rest of LAIncrease in unskilled labor migration to US, from:-100 185(In thousands of people)

Mexico Rest of LA US CanadaChange in GDP, in: -0.29 -0.09 0.63 0.2(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant)MexicoRest of LAReal Wages for unskilled workers in: 50 3104 3076 2 0.5(Change in $)Real Wages for skilled workers in: 84 79 5(Change in $)

Mexico Rest of LARemitances from immigrants in US to: 6.5% 7%(percent change from base)

Mexico Rest of LA US CanadaChange in Trade Balance, Millions -343 -674 -7466 -40

Legalization Plus Legalization Plus Remittance Banking and Remittance Banking and Re-Investment PoliciesRe-Investment Policies

In addition to the legalization of migration In addition to the legalization of migration flows, both countries would most benefit flows, both countries would most benefit through remittance banking and re-through remittance banking and re-investment policies :investment policies : A) Greater legal protection of existing migrants, A) Greater legal protection of existing migrants,

through “regularization” and legalization should through “regularization” and legalization should include easy access to opening bank and credit include easy access to opening bank and credit union accounts for low cost remittance transfersunion accounts for low cost remittance transfers

B) “Community Re-investment” programs B) “Community Re-investment” programs should be put in place to encourage these banks should be put in place to encourage these banks and credit unions to invest in migrant sending and credit unions to invest in migrant sending areas, further increasing intermediation and areas, further increasing intermediation and productivity gains in both countriesproductivity gains in both countries

Legalization Plus Legalization Plus Remittance Banking and Remittance Banking and

Reinvestment PoliciesReinvestment PoliciesLegalize/Regularize Migrant's Status

Mexico Rest of LAIncrease in unskilled labor migration to US, from:-500 185(In thousands of people)

Mexico Rest of LA US CanadaChange in GDP, in: 2.2 -0.09 0.78 0.2(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant)MexicoRest of LAReal Wages for unskilled workers in: 85 3220 3112 178 0.5(Change in $)Real Wages for skilled workers in: 98 95 5(Change in $)

Mexico Rest of LARemitances from immigrants in US to: 8.5% 7%(percent change from base)

Mexico Rest of LA US CanadaChange in Trade Balance, Millions -343 -674 -7466 -40

Trade liberalization Trade liberalization scenariosscenarios

These also come in two types: These also come in two types: Expansion of trade preferences Expansion of trade preferences within NAFTA to all products and within NAFTA to all products and multilateral trade liberalization in multilateral trade liberalization in manufacturesmanufactures

Further NAFTA Further NAFTA LiberalizationLiberalization

Preferential Trade liberalization under NAFTA (Eliminate remaining trade barriers on ALL products and services)

Mexico Rest of LAIncrease in unskilled labor migration to US, from: -15 -2

(In thousands of people)Mexico Rest of LA US Canada China India

Change in GDP, in: 0.22 -0.04 0.02 -0.05 -0.01 -0.01(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA China IndiaReal Wages for unskilled workers in: 2 1 2 4 0 0 0

(Change in $)Real Wages for skilled workers in: 1 8 0 0 0

(Change in $)

Mexico Rest of LARemitances from immigrants in US to: -0.03% 0.0%

(percent change from base)Mexico Rest of LA US Canada China India

Change in Trade Balance, Millions -361 75 -365 -38 -6 5

Multilateral Multilateral Liberalization (Mfg.)Liberalization (Mfg.)

Multilateral elimination of all tariffs on manufactured goods

Mexico Rest of LAIncrease in unskilled labor migration to US, from: -6 -11

(In thousands of people)Mexico Rest of LA US Canada China India

Change in GDP, in: 0.33 0.17 0.01 0.01 0.58 0.7(% change from base)

US (Native) US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA China IndiaReal Wages for unskilled workers in: 22 14 13 17 13 5 2

(Change in $)Real Wages for skilled workers in: 53 38 22 24 8

(Change in $)

Mexico Rest of LARemitances from immigrants in US to: -1.4% -1.5%

(percent change from base)Mexico Rest of LA US Canada China India

Change in Trade Balance, Millions -1566 -8970 26853 1724 -7656 -4583

Trade Barriers Targeting Trade Barriers Targeting India/ChinaIndia/China

Double US and Canadian manufacturing tariffs against China and India

Mexico Rest of LAIncrease in unskilled labor migration to US, from: 0 0(In thousands of people)

Mexico Rest of LA US Canada China IndiaChange in GDP, in: 0.01 0.01 -0.01 -0.02 -0.11 -0.04(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA China IndiaReal Wages for unskilled workers in: -5 -3 -3 1 0 -0.4 -0.1(Change in $)Real Wages for skilled workers in: -11 1 0 -2 -0.3(Change in $)

Mexico Rest of LARemitances from immigrants in US to: 0.00% 0.0%(percent change from base)

Mexico Rest of LA US Canada China IndiaChange in Trade Balance, Millions -6 -1 693 71 -1372 -92

Double Tariffs Globally Double Tariffs Globally (Mfg)(Mfg)

Double US and Canadian manufacturing tariffs against all partner countries

Mexico Rest of LAIncrease in unskilled labor migration to US, from: -3 3(In thousands of people)

Mexico Rest of LA US Canada China IndiaChange in GDP, in: 0.08 -0.02 -0.04 -0.06 -0.05 -0.01(% change from base)

US (Native)US (Mexican Migrant)US (LA Migrant) Mexico Rest of LA China IndiaReal Wages for unskilled workers in: -17 -10 -10 5 -1 -0.3 -0.1(Change in $)Real Wages for skilled workers in: -45 8 -1.5 -1.5 -0.13(Change in $)

Mexico Rest of LARemitances from immigrants in US to: 0.40% 0.5%(percent change from base)

Mexico Rest of LA US Canada China IndiaChange in Trade Balance, Millions -408 528 282 184 -1204 -135

Interpreting the Results Interpreting the Results and Moreand More

Key FindingsKey Findings Interesting sectoral detailsInteresting sectoral details Areas for further researchAreas for further research

Key FindingsKey Findings Migration scenarios have impacts that Migration scenarios have impacts that

are an order of magnitude greater than are an order of magnitude greater than trade scenarios. trade scenarios.

Therefore NAFTA studies that ignore Therefore NAFTA studies that ignore labor markets miss the primary driver of labor markets miss the primary driver of integration and the primary source of integration and the primary source of both gains and conflict.both gains and conflict.

Trade impacts of migration scenarios can Trade impacts of migration scenarios can also be large, confirming that a model also be large, confirming that a model incorporating both channels is important incorporating both channels is important to understanding either phenomenon.to understanding either phenomenon.

DeportationsDeportations Massive deportations of 4 million Massive deportations of 4 million skilled and unskilledskilled and unskilled

Mexican-origin workers would lead to a sharp Mexican-origin workers would lead to a sharp economic contraction in the US. US GDP falls by 1.2% economic contraction in the US. US GDP falls by 1.2% (around $130 billion).(around $130 billion).

Mexico’s initial GDP gains from more labor must be Mexico’s initial GDP gains from more labor must be balanced against the foreign exchange and balanced against the foreign exchange and development impacts of reduced remittances. A $9 development impacts of reduced remittances. A $9 billion trade balance adjustment (increase exports and billion trade balance adjustment (increase exports and decreased imports) is needed.decreased imports) is needed.

Distributional impacts are mixed in the US, with Distributional impacts are mixed in the US, with modest gains for low skilled labor (under $50/year), modest gains for low skilled labor (under $50/year), greater gains for skilled labor, and losses of 0.5% of greater gains for skilled labor, and losses of 0.5% of capital income and 1% for landowners.capital income and 1% for landowners.

Wage declines in Mexico are similar in magnitude, but Wage declines in Mexico are similar in magnitude, but greater in percentage terms. Capital and land owners greater in percentage terms. Capital and land owners gain, but modest amounts (0.2% and 0.5%, gain, but modest amounts (0.2% and 0.5%, respectively).respectively).

Tighter Border ControlsTighter Border Controls Tighter controls cannot reasonably halt migration. Tighter controls cannot reasonably halt migration.

Our benchmark was to “deter” about 1 million Our benchmark was to “deter” about 1 million unskilled (and 0.5 million skilled) migrants, 375 unskilled (and 0.5 million skilled) migrants, 375 thousand from Mexico and 580 thousand from the thousand from Mexico and 580 thousand from the rest of Latin America.rest of Latin America.

The macro impact on the US and Mexico is less The macro impact on the US and Mexico is less extreme, but still very significant. US GDP extreme, but still very significant. US GDP declines by 0.4% (nearly $50 billion), while declines by 0.4% (nearly $50 billion), while Mexico’s increases by 0.6% (just 6 billion) and GDP Mexico’s increases by 0.6% (just 6 billion) and GDP for rest of LA rises by ¼ percent ($4 billion). This for rest of LA rises by ¼ percent ($4 billion). This differential of nearly 5 to 1 between gains and differential of nearly 5 to 1 between gains and losses illustrates the global efficiency of migration.losses illustrates the global efficiency of migration.

Distributional impacts are similar, but are now Distributional impacts are similar, but are now born disproportionately by low skilled labor.born disproportionately by low skilled labor.

Modest impacts on “rest of LA” as a whole clearly Modest impacts on “rest of LA” as a whole clearly obscure large negatives for some small Central obscure large negatives for some small Central American and Caribbean countries.American and Caribbean countries.

LegalizationLegalization Legalizing existing migrants creates large Legalizing existing migrants creates large

gains for the US (0.6% of GDP), with only gains for the US (0.6% of GDP), with only modest GDP declines in Mexico (0.3%) and rest modest GDP declines in Mexico (0.3%) and rest of LA (0.1%). of LA (0.1%).

Migrants themselves are the big winners, with Migrants themselves are the big winners, with modest declines for other US workers.modest declines for other US workers.

Even the modest negatives above rest on an Even the modest negatives above rest on an increase in immigration in response to increase in immigration in response to legalization (about 350,000 low skilled workers, legalization (about 350,000 low skilled workers, 150,000 from Mexico). Studies (Dallas Fed 150,000 from Mexico). Studies (Dallas Fed 2001) did 2001) did notnot indicate such an increase indicate such an increase immediately before and after IRCA in 1986.immediately before and after IRCA in 1986.

Weaker Border ControlsWeaker Border Controls Compared to legalization, the US Compared to legalization, the US

gains less (0.5 versus 0.63), gains less (0.5 versus 0.63), unskilled US workers lose more ($67 unskilled US workers lose more ($67 versus $50), and Mexico and rest of versus $50), and Mexico and rest of LA lose more (0.7% and 0.3% versus LA lose more (0.7% and 0.3% versus 0.3% and 0.1%). 0.3% and 0.1%).

Additional migration inflows are Additional migration inflows are three times greater, explaining why three times greater, explaining why costs to Mexico and rest of LA are costs to Mexico and rest of LA are about three times higher. about three times higher.

Interesting Sectoral Interesting Sectoral DetailsDetails

Tigher border controlsTigher border controls reduces output in all reduces output in all US sectors, in the long run.US sectors, in the long run.

In dollar terms, output falls by more than $2 In dollar terms, output falls by more than $2 billion in: Other processed foods, leather-billion in: Other processed foods, leather-wood-paper, Chemicals-rubber-plastics, other wood-paper, Chemicals-rubber-plastics, other metal products, motor vehicles and parts, metal products, motor vehicles and parts, electronic equipment, and non-electrical electronic equipment, and non-electrical machinery. Construction falls over $5 billion, machinery. Construction falls over $5 billion, and total capital goods production falls $9 and total capital goods production falls $9 billion.billion.

In percentage terms, the largest declines are In percentage terms, the largest declines are in textiles, garments, transport equipment and in textiles, garments, transport equipment and electronic equipment, all of which fall by more electronic equipment, all of which fall by more than 0.6%. Many other sectors see decreases than 0.6%. Many other sectors see decreases of more than 0.5%. of more than 0.5%.

Legalization-Sectoral Legalization-Sectoral ImpactsImpacts

One sector (other agriculture) contracts, but 13 One sector (other agriculture) contracts, but 13 sectors record gains of more than $2 billion. sectors record gains of more than $2 billion. Those with gains above $3 billion are: leather-Those with gains above $3 billion are: leather-wood-paper, chemicals-rubber-plastics, motor wood-paper, chemicals-rubber-plastics, motor vehicles and parts, non-electric machinery, and vehicles and parts, non-electric machinery, and construction. Note that all of these sectors were construction. Note that all of these sectors were $2 billion losers from tighter controls. Total $2 billion losers from tighter controls. Total capital goods production rises by $14 billion.capital goods production rises by $14 billion.

Large percentage gainers besides those noted in Large percentage gainers besides those noted in the last slide are: Ferrous metals, trade and the last slide are: Ferrous metals, trade and transport, and government and misc. services.transport, and government and misc. services.

Note that there are three potential effects in this Note that there are three potential effects in this scenario—labor supply, income, and productivity. scenario—labor supply, income, and productivity. Each can influence sectoral output, in potentially Each can influence sectoral output, in potentially offsetting ways. offsetting ways.

Weaker Border Controls-Weaker Border Controls-Sectoral ImpactsSectoral Impacts

The usual suspects gain, with the largest The usual suspects gain, with the largest absolute gain in construction and the greatest absolute gain in construction and the greatest percent gains in textiles and garments. percent gains in textiles and garments.

On the Mexican side, large absolute On the Mexican side, large absolute contractions of about $1 billion are seen in contractions of about $1 billion are seen in trade and transport, non-electrical machinery, trade and transport, non-electrical machinery, and electronic equipment. In addition, large and electronic equipment. In addition, large (<1%) percentage reductions can also be seen (<1%) percentage reductions can also be seen in: textiles, ferrous metals, other metal in: textiles, ferrous metals, other metal products, and motor vehicles and parts. In products, and motor vehicles and parts. In contrast, no sector experiences a contraction contrast, no sector experiences a contraction of ½ billion or more in the legalization of ½ billion or more in the legalization scenario. scenario.

Notes for Further Notes for Further ResearchResearch

First and foremost, this is a First and foremost, this is a comparative static model. Many of comparative static model. Many of the interesting questions related to the interesting questions related to NAFTA involve looking at transition NAFTA involve looking at transition periods and impacts of policies on periods and impacts of policies on economic growth. This model is not economic growth. This model is not well suited to those tasks, hence our well suited to those tasks, hence our long-term goal is to make the model long-term goal is to make the model dynamic. dynamic.

Notes for Further Notes for Further Research 2Research 2

Following on the above point, the Following on the above point, the model assumes integrated, national model assumes integrated, national labor markets for both high and low labor markets for both high and low skilled labor. Even before making skilled labor. Even before making the model fully dynamic, introducing the model fully dynamic, introducing more realistic labor market frictions more realistic labor market frictions could allow us to address some could allow us to address some adjustment issues with respect to adjustment issues with respect to our trade and migration scenarios. our trade and migration scenarios.

Notes for Further Notes for Further Research 3Research 3 A huge advantage of this model is A huge advantage of this model is

that it is based on a standardized, that it is based on a standardized, consistent international data set, over consistent international data set, over many countries and sectors. Thus the many countries and sectors. Thus the users can “dial in” the combination of users can “dial in” the combination of countries/regions-sectors they countries/regions-sectors they choose. The disadvantage is that one choose. The disadvantage is that one cannot introduce the most up-to-date cannot introduce the most up-to-date data on a particular relationship, data on a particular relationship, such as US-Mexico-Canada migration, such as US-Mexico-Canada migration, from North America-specific sources. from North America-specific sources.

Our 29 sector definitions related to the 57 sector GTAP “base” data set:

(1-7, primary products)1-Irrigated ag in Mexico (Mexico’s CA) = 4+62-Traditional ag in Mexico (US/Canada CA)= 3+5+73- Animals and animal products = 9,10,11,124-Other Ag = 1,2,85-Forestry and fisheries = 13+146-“raw” energy = 15,16,177-Mining = 18(8-23, manufactures)8-other processed foods = 19,20,21,22,23,259-Sugar = 2410-beverage and tobacco = 2611-textiles = 2712-garments = 2813-leather, wood and paper products = 29,30,3114-“refined” energy = 3215-Chemicals, plastics, rubber = 33

16- mineral products = 3417-ferrous metals = 3518-Other metals and products = 36+3719-motor vehicles and parts = 3820- transportation equip = 3921-Electronic equipment = 4022-Non-electric machinery and equipment = 4123-other manufactures = 42(24-29, services)24-utilities = 43,44,4525-Construction = 4626-Trade and transport = 47,48,49,5027-high-tech services (finance, insurance,

real estate) = 51,52,53,5428-Government and misc services = 55,5629-Dwellings = 57

Appendix

Questions?Questions?