Labor's complex situation
- Kathleen Pender
Thursday, April 27, 2006
A BIG PART OF the illegal immigration debate centers on this question: Do immigrants depress wages of native-born Americans?
Simple economics would tell you the answer is yes: Increase the supply of anything, in this case labor, and the price, in this case wages, will generally fall.
Yet in our complex, mobile economy, the real-life answer is not so simple.
It depends on many factors, including the extent to which workers move if competition increases and whether employers, in the absence of immigration, would hire native-born workers at higher wages or simply move the work overseas, replace workers with machines or not do the work at all.
There is no foolproof way to measure this phenomenon. Various economists have estimated immigration's impact on the wages of native-born workers and found it to be modestly negative, zero or slightly positive.
Politicians and pundits on both sides of the debate have seized these results -- selectively, of course -- to bolster their cases, often without mentioning the limitations.
Opponents of immigration often trumpet a factoid from a study published last year by two Harvard economists, George Borjas, who was born in Cuba, and Lawrence Katz, a native of Los Angeles.
The study's main purpose was to examine the long-term economic progress of Mexican immigrants and contrast it to the experience of other immigrant groups.
At the end of the paper, almost as an afterthought, the authors ran a chart estimating how immigration from 1980 through 2000 affected the wages of native-born workers in different educational categories.
The authors estimated that in the short run, immigration reduced the wages of all native workers by 3.4 percent on average.
High school dropouts suffered the most. Their wages, on average, fell an estimated 8.2 percent in the short run.
This 8 percent figure has been frequently cited as the damage illegal immigrants have done to unskilled U.S workers.
Katz says people are putting too much emphasis on this analysis and the 8 percent figure in particular. "This was a back-of-the-envelope simulation at the end of the paper," he says.
Katz says readers should focus on the lower half of the chart, which estimates the more modest, long-run impact of immigration.
The authors assume that in the long run, "capital is perfectly elastic." If an influx of Mexican immigrants brings down the cost of housekeeping, for example, more people will start housecleaning services, which will increase the demand for housekeepers and raise their wages.
Little impact over long run
Over the long run, Borjas and Katz estimate that immigration had virtually no impact on the average U.S. wage and depressed wages for native-born high-school dropouts by only 4.8 percent.
Katz says the most important part of the chart estimates what would have happened to wages if there had been no Mexican immigration from 1980 to 2000. (Between 1970 and 2000, the percentage of Mexican-born workers in the U.S. labor force swelled from 0.4 percent to 4 percent.)
If you took out Mexicans, a large percentage of immigrants were highly educated workers from other parts of the world (think engineers on H-1B visas).
Without the Mexican influx, he says, the average wage for all workers would have been unchanged over the long run. The average wage for college graduates would have fallen by 1.2 percent. The average wage for high school dropouts would have actually risen by 2.2 percent.
"Every Ph.D. buys a lot of services that low-skilled people provide," like gardening and dry-walling, says Katz.
How did the authors get these numbers?
Using census data from 1970 through 2000, they divided workers into four education groups: no high school, high school graduate, some college and college graduate. They subdivided these groups into eight age groups, a proxy for years of work experience.
Then they looked at wage trends for each of these 32 "cells" and compared it with the native and immigrant supply of labor in each cell. (Census data includes an estimate of illegal immigrants.)
What they found: When there is a 10 percent increase in immigration in one cell, the wages of natives in that cell fall 3 to 4 percent on average. "That's pretty much holds across the groups," Katz says.
Some groups got hurt more than others because they had more immigration.
The biggest group of immigrants came from Mexico, and about 60 percent of Mexican immigrants lack a high school diploma, compared with roughly 9 percent of U.S.-born workers, Katz says. That is why native high-school dropouts suffered the largest estimated wage declines from immigration.
A different study, by economist David Card of UC Berkeley, found that immigration had no impact on wages.
Card noted that recent immigrants have come largely from countries like Mexico, the Philippines, Vietnam and El Salvador, which supply relatively low-education immigrants.
If immigrants were driving down the wages of low-skilled workers, the wage gap between low- and high-skilled workers would be the greatest in cities with large immigrant populations.
To test this theory, Card looked at the wage differential between workers with and without a high school diploma in each of the largest 175 U.S. cities. Next, he looked at the fraction of immigrant dropouts in each city's adult population.
If immigrants were depressing the wages of low-skilled workers, there would be a positive correlation between these two data points. But Card found no correlation.
Borjas has criticized Card's findings, saying Card found no correlation because low-skilled natives, faced with increased competition from immigrants, can simply move.
"Native workers are not stupid, they move to where there are higher wages and fewer immigrants," Borjas says.
Card disagrees: "I've actually studied that a number of times. There is some modest migration of natives in response to immigration. But it's not like when one dropout immigrant comes in, one dropout native leaves. If there's any mobility, it's among the higher educated."
Borjas, in a rejoinder, says businesses know that immigration reduces wages, which is why they are lobbying for increased immigration. "Why would employers care if immigration didn't affect wages?" Borjas says.
Card says there's no guarantee that limiting immigration will raise wages of native-born dropouts.
If the United States were to cut off immigration from Mexico, "a whole range of jobs will just disappear," he says.
Fruit and vegetable growers might move their farms to Mexico or follow the lead of Australian farmers and buy mechanical harvesters. Hand car washes would disappear.
"The U.S., by letting in all these unskilled immigrants, is letting jobs exist that otherwise wouldn't exist," Card says. "When I first moved to the United States, only extremely wealthy people had landscapers. Today, everyone in California has a landscaper."
Katz, playing the middleman, says Borjas and Card are both right; it's a matter of degree.
"There is no doubt that if you walled off immigration, that for internationally tradable goods like strawberries and furniture, we'd either make it in Mexico or import it. But you are not going to export the cleaning of your house to China," he says. "If you had to pay more for housekeepers, some people would pay more, some would clean their own house."
Katz adds: "We have incorporated that into our estimates. That's why a 10 percent increase in immigration drives down wages 3 percent, not 10 percent."
Although Katz says he and Borjas agree on the data, they interpret it differently.
"In my view, the effects are modest. In George's view, they are very large," he says.
Katz and Borjas agree that their data should not be used to strangle immigration.
"I strongly disagree with anyone who (takes) these numbers and says we should build a wall or not build a wall," says Borjas. "I think the kind of immigration that hurts poor people the most is clearly not in the country's interest. We should have an immigration (policy) that attempts to equalize the wage gap, not make it worse."
That said, "I think it's very foolish to grant any kind of amnesty unless we fix the illegal immigration problem first," Borjas adds.
Katz agrees that tilting our nation's immigration policy toward those with more education and away from those with little education would help narrow our nation's growing income gap.
The gap between those with and without a college education has grown by 30 to 40 percent over the past 25 years, he says. The influx of Mexican immigrants may have played a small role in that, lowering the wages of high-school dropouts by a few percent.
But the much bigger story has been advancements in technology, which have changed where, how and by whom work is done.
"I don't agree with any anti-immigration sentiment," Katz says. "My view is that the U.S. economy on average benefits from immigration. Consumers and most workers benefit. But we do have to look at groups that are disadvantaged. We need to think about expanding the earned income tax credit for people who work hard and play by the rules" and expanding educational opportunities for low-skilled workers.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at email@example.com.