EXECUTIVE OFFICE OF THE PRESIDENTCOUNCIL OF ECONOMIC ADVISERS
WASHINGTON, DC 20502
Immigration’s Economic Impact
June 20, 2007
"Our review of economic research finds immigrants not only help fuel the Nation's economic growth, but also have an overall positive effect on the income of native-born workers."
-Council of Economic Advisers Chairman Edward P. Lazear
Introduction
In 2006, foreign-born workers accounted for 15% of the U.S. labor force, and over the last decade they have accounted for about half of the growth in the labor force. That immigration has fueled U.S. macroeconomic growth is both uncontroversial and unsurprising – more total workers yield more total output.
That immigrant workers benefit from working in the United States is also uncontroversial and unsurprising – few would come here otherwise.
1 Assessing how immigration affects the well-being of U.S. natives is more complicated. This is because immigration’s economic impact is complex and may play out over generations, and because not all natives are alike in terms of their economic characteristics. Even in retrospect it is not easy to distinguish the influence of immigration from that of other economic forces at work at the same time. Nor is it easy to project costs and benefits far into the future.
Nonetheless, economists and demographers have made headway on many of the measurement problems. This white paper assesses immigration’s economic impact based on the professional literature and concludes that immigration has a positive effect on the American economy as a whole and on the income of native-born American workers.
Key Findings
1. On average, US natives benefit from immigration. Immigrants tend to complement (not substitute for) natives, raising natives’ productivity and income.
2. Careful studies of the long-run fiscal effects of immigration conclude that it is likely to have a modest, positive influence.
3. Skilled immigrants are likely to be especially beneficial to natives. In addition to contributions to innovation, they have a significant positive fiscal impact.
General Points
• Immigrants are a critical part of the U.S. workforce and contribute to productivity growth and technological advancement. They make up 15% of all workers and even larger shares of certain occupations such as construction, food services and health care. Approximately 40% of Ph.D. scientists working in the United States were born abroad. (Source: Bureau of Labor Statistics; American Community Survey)
• Many immigrants are entrepreneurs. The Kauffman Foundation’s index of entrepreneurial activity is nearly 40% higher for immigrants than for natives. (Source: Kauffman Foundation)
• Immigrants and their children assimilate into U.S. culture. For example, although 72% of first-generation Latino immigrants use Spanish as their predominant language, only 7% of the second generation are Spanish-dominant. (Source: Pew Hispanic Center/Kaiser Family Foundation)
• Immigrants have lower crime rates than natives. Among men aged 18 to 40, immigrants are much less likely to be incarcerated than natives. (Source: Butcher and Piehl)
• Immigrants slightly improve the solvency of pay-as-you-go entitlement programs such as Social Security and Medicare. The 2007 OASDI Trustees Report indicates that an additional 100,000 net immigrants per year would increase the long-range actuarial balance by about 0.07% of taxable payroll. (Source: Social Security Administration)
• The long-run impact of immigration on public budgets is likely to be positive.
Projections of future taxes and government spending are subject to uncertainty, but a careful study published by the National Research Council estimated that immigrants and their descendants would contribute about $80,000 more in taxes (in 1996 dollars) than they would receive in public services. (Source: Smith and Edmonston)
1. Evaluating the Effect of Immigration on the Income of Natives
Immigrants not only change the size of the labor force, they change the relative supplies of factors such as unskilled labor, skilled labor, and capital in the economy. US natives tend to benefit from immigration precisely because immigrants are not exactly like natives in terms of their productive characteristics and factor endowments. For example, Chart 1 shows that in contrast to their 15% share in the total labor force, foreign-born workers accounted for much higher proportions of workers without high school degrees and of those with Ph.D. degrees (especially for those working in scientific occupations). Differences between natives and immigrants lead to production complementarities that benefit natives.
Example:
• The presence of unskilled foreign-born construction laborers allows skilled US
craftsmen and contractors to build more homes at lower cost than otherwise–therefore the US natives’ productivity and income rise.
• Thus, when immigrants are added to the US labor force, they increase the economy’s total output, which is split between immigrants (who receive wages) and natives (who receive wages and also earn income from their ownership of physical and human capital). Natives may also gain from having a wider variety of goods and services to consume and from lower prices for the goods and services produced by industries with high concentrations of foreign-born workers.
The “immigration surplus” is a simple and frequently cited metric of natives’ total gains from immigration. The surplus accrues to native factors of production that are complemented by immigrant workers – that is, to factors whose productivity is enhanced by the presence of immigrants. In a simple model with just capital and labor (not differentiated by skill), similar in structure to that presented in the National Research Council (NRC) analysis, one can estimate this surplus as the area of a triangle defined by a downward sloping labor demand curve and the shift in labor supply attributed to immigration. Using a standard estimate of labor demand elasticity (0.3) and measures of the foreign-born share of the labor force, the current immigration
surplus is about 0.28% of GDP, or roughly $37 billion per year.
Although the simplicity of the “immigration surplus” approach is attractive, the implicit assumptions are numerous, and it is well-understood by economists that this is not a full reckoning of immigration’s influence on the economy. For example, the approach does not differentiate between different kinds of workers (by skill, experience or nativity) and does not allow for an endogenous and positive capital market response to the change in labor supply.
Because immigration changes the mix of factors in the economy, it may influence the pattern of factor prices, which in turn may induce endogenous changes in other factor supplies. Moreover, implicit in the surplus calculation is an assumed negative effect on average wages for natives –an effect that is difficult to detect in empirical studies of the U.S. wage structure.
A more complex approach to measuring the influence of immigration on natives’ income differentiates workers by skill, nativity, and experience and also allows for a capital accumulation response to changes in the supply of labor. In this scenario complementarities from immigrant workers are allowed to accrue to native workers. A recent paper by Ottaviano and Peri (2006) takes such an approach to measuring the wage effects of immigration and concludes that immigration since 1990 has boosted the average wage of natives by between 0.7% and 1.8% depending on the assessment’s timeframe – the effect is more positive when the capital stock has had time to adjust.4 Fully 90% of US native-born workers are estimated to have gained from immigration. Multiplying the average percentage gains by the total wages of US natives suggests that annual wage gains from immigration are between $30 billion and $80 billion.5
In both approaches described above, natives benefit from immigration because the complementarities associated with immigrants outweigh any losses from added labor market competition. Rather than focusing on average effects, special attention could be paid to the wellbeing of the least-skilled natives. The number of natives with less than a high school degree has declined over time, which is one reason less-skilled immigrants have been drawn into the US labor force to fill relatively low-paying jobs. Even so, based on Chart 1, one might expect the remaining least-skilled natives to face labor market competition from immigrants.6 Evidence on this issue is mixed. Studies often find small negative effects of immigration on the wages of low-skilled natives, and even the comparatively large estimate reported in Borjas (2003) is under 10% for immigration over a 20 year period.7 The difficulties faced by high school dropouts are a serious policy concern, but it is safe to conclude that immigration is not a central cause of those difficulties, nor is reducing immigration a well-targeted way to help these low-wage natives.
• Conclusion: Immigrants increase the economy’s total output, and natives share in part of that increase because of complementarities in production. Different approaches to estimating natives’ total income gains from immigration yield figures over $30 billion per year. Sharply reducing immigration would be a poorly-targeted and inefficient way to assist low-wage Americans.
