The Economics of Immigration

We Wanted Workers

Immigration has emerged in recent years as one of the most controversial issues of our time. Those calling for restriction frequently argue that immigrants depress wages for native workers and burden the welfare state, while their opponents often dismiss such fears as baseless or exaggerated and counter that immigration grows the economy.

George J. Borjas, a Cuban-American economist and professor at the Harvard Kennedy School, is no stranger to this debate. Described as “America’s leading immigration economist” by the Wall Street Journal, Borjas has authored many scholarly articles and books over the past thirty years on the economics of immigration. We Wanted Workers, published in October of last year, is his latest contribution to the field.

The title of the book is taken from the Swiss writer Max Frisch’s famous quip about Europe’s experience with guest workers: “We wanted workers, but we got people instead.” The quote serves to illustrate a point that Borjas makes throughout his book: viewing immigrants simply as additional labor tends to skew one’s assessment of their impact.

Borjas criticizes the often made claim that immigrants simply “do the jobs that natives don’t want to do” and thus have no impact on native wages or employment. “It is instead”, he explains, “that immigrants do jobs that natives don’t want to do at the going wage.” Borjas cites the highly-publicized experience of a chicken-processing plant in Stillmore, Georgia. As a result of a series raids by immigration agents in September 2006, the plant lost some 75 percent of its workforce and, faced with the possibility of having to cease operations, started offering higher wages. In the following months, the plant attracted and hired hundreds of new job applicants from among the local, native-born population.

The fact that the reduction in the supply of something—in this case, labor—resulted in an increase in its price—i.e., wages—should, Borjas notes, hardly be surprising, since it is simply an illustration of the laws of supply and demand. “Few dispute the obvious link between the supply of oil and the price of gas. But because of its political implications, the restatement of the same idea in the immigration context is widely contested.” The available data, Borjas contends, shows that when a skill group experiences a ten percent increase in size, it can expect at least a three percent reduction in wages.

Since most immigrants are low-skilled, it is low-skilled Americans who bear the brunt of the negative impact on wages. Borjas’s numbers show that this impact is not trivial. Native high school dropouts have fared worst. According to data that Borjas cites, the 1990-2010 influx of immigrants increased the population of high school dropouts in America by about 25 percent, and this, he calculates, reduced the wages earned by native-born high school dropouts by six percent in the short run and even three percent in the long run after the economy adjusted. “The average high school dropout earns about $29,000 a year,” he writes, “so a 3-6 percent wage effect implies a loss of $900-$1,700.”

Borjas devotes many pages to tackling studies that claim to find immigration has little to no effect on wages. In what is probably the most famous of such studies, David Card, an economist at the University of California—Berkeley, found that the 1980 Mariel boatlift—in which some 125,000 Cubans emigrated to Florida—had essentially no negative impact on wages in Miami. The study is frequently cited as evidence that immigration does not harm the economic prospects of native workers. However, Borjas argues that a major problem with Card’s study is that it lumped natives who graduated high school together with those who did not. After separating out those groups, Borjas calculated that the Mariel influx of refugees (almost two-thirds of whom lacked a high school diploma) substantially reduced wages for native high school drop outs.

Nevertheless, those who favor increased immigration are correct to say that it grows the economy. As one would expect, the addition of so many new workers has greatly increased GDP. However, as Borjas shows, most of that increase has gone to the immigrants in the form of their wages. Since immigration is usually sold as a policy that is good for everyone—natives and immigrants alike—Borjas devotes some time to determining who among the native population benefits and by how much.

As Borjas reminds us, “somebody’s lower wage is somebody else’s higher profit.” Native firms benefit from lower labor costs and native consumers from lower prices. Borjas calculates that immigration increases native wealth by roughly $50 billion annually. However, he describes this “immigration surplus” as being quite small in the context of an $18 trillion economy, amounting to “less than three-tenths of 1 percent of GDP.” The $50 billion figure also masks a substantial transfer of wealth away from native workers and to their employers. While the gains to native firms may exceed losses to native workers, those losses are considerable, totaling roughly $500 billion every year.

Borjas next turns to the fiscal cost of immigration. This debate focuses largely on whether immigrants consume more in public services than they pay in taxes. During the mid-1990s, the National Academy of Sciences (NAS) was asked to settle this question. In 1997 a panel of NAS experts, of which Borjas was a member, issued a report finding that, at least in the short run, immigration definitely imposed a net fiscal cost on natives. When updated for today’s figures, the burden totals about $50 billion each year. Borjas argues that assessing the long-term fiscal impact is far more difficult, as estimates vary dramatically depending on the assumptions built into the model.

Thus, when one takes into account fiscal costs, the $50 billion immigration surplus more or less vanishes, leaving the native population as a whole essentially no better or worse off. “The most credible evidence,” Borjas writes, “suggests that it is not far-fetched to conclude that immigration is a net economic wash.” However, while immigration might not affect the amount of native wealth, it does still significantly affect the distribution of that wealth. As noted, immigration transfers about a half-trillion dollars from labor to capital annually. Borjas declares that “[t]his redistribution of wealth—in an economy where the size of the native economic pie remains relatively fixed—is the key insight I have gleaned from decades of research on the economics of immigration.”

In terms of policy recommendations, Borjas reminds the reader that these depend on what goals we seek to achieve. If the goal is simply to maximize native wealth, he suggests limiting immigration to the highly skilled. Such immigrants, he argues, would be more likely to increase the immigration surplus and help subsidize the welfare state. But he is hesitant on this point, stating that he does “truly buy into the exceptional role that our country has played by offering hope to the poor abroad.” Another possibility would be to use taxes and subsidies to compensate those who lose out from immigration, but that, he admits, would require “massive new government programs to supervise” and would encounter fierce political opposition from those who benefit from the status quo. “In the end,” he writes, “the policy choice depends mostly on our own values, on what we believe the United States is all about, and on what kind of country we want our children to live in.”

We Wanted Workers is recommended to anyone interested in the immigration debate. In page after page, Borjas demonstrates a remarkable talent for taking a difficult and technical subject and explaining it clearly and succinctly. Whether one agrees with his findings or not, his standing among economists is such that they cannot be ignored.