May 22, 2007

Economic Impact of Illegal Immigration

Marc Comtois

Now that the Senate has slowed down the "amnesty" process a bit (phew!), perhaps they will be able to thoughtfully examine the economic impact of allowing massive numbers of low-skilled immigrant workers into this country (whether they're here illegally or not). This isn't to say that we shouldn't allow such workers in, only that we shouldn't allow so many--and we certainly shouldn't do so by enabling illegal entry by "looking the other way."

It is often argued that the American economy relies on low-skill immigrants--illegal or not--who can be paid a low wage to perform the "jobs Americans won't do." What is left unsaid is that these workers effectively hold down the wages of American citizens, as this study {PDF} shows.

• By increasing the supply of labor between 1980 and 2000, immigration reduced the average annual earnings of native-born men by an estimated $1,700 or roughly 4 percent.
• Among natives without a high school education, who roughly correspond to the poorest tenth of the workforce, the estimated impact was even larger, reducing their wages by 7.4 percent.
• The 10 million native-born workers without a high school degree face the most competition from immigrants, as do the eight million younger natives with only a high school education and 12 million younger college graduates.
• The negative effect on native-born black and Hispanic workers is significantly larger than on whites because a much larger share of minorities are in direct competition with immigrants.
• The reduction in earnings occurs regardless of whether the immigrants are legal or illegal, permanent or temporary. It is the presence of additional workers that reduces wages, not their legal status.

Further, this study examines the specific impact that that low-skilled, non-native laborers have on African-American workers. Another argument is that we need these low-wage, low-skill (illegal) immigrant workers in our fields so that we Americans can pay low prices for such things as apples and lettuce. I've gotta admit that this one always made sense to me. But I may be wrong.

One of the most frequently asked questions is what would happen to US food prices if legal and unauthorized farm workers were not readily available. It is important to emphasize that most of the flexibility in the farm labor market is on the demand, not the supply side. For example, when wages increased in the past, farmers responded by producing food with fewer workers, not by inducing more Americans to do farm work. Generally, substituting capital (machines) for workers reduced food prices.

In order to determine how much raising farm worker wages would affect food prices, we have to know: (1) the farmer's share of retail food prices, as well as; (2) what share farm worker wages and benefits are of farmer revenue or costs. For most fruits and vegetables, wages and benefits paid to farm workers are about one-third of a farmer's costs. Thus, farmers who get about $0.16 for a $1 pound of apples, and $0.19 for a $1 head of lettuce, have farm-worker costs of 5-6 cents on a typical $1 retail item of produce.

If a 40 percent farm-worker wage increase were fully passed on to consumers, and if there were no farm productivity improvements in response to higher farm wages, the 5-6 cent farm labor cost of a pound of apples or a head of lettuce would rise to 7-8 cents, and the retail price would rise from $1 to $1.02-$1.03.

A large increase in farm wages translates into a small retail cost increase because: (1) farm labor is a third of farmers' costs; and (2) farmers receive only a fraction of the retail price of food. For a typical 2.5-person consumer unit, a 40 percent increase in farm worker wages that led to a three percent increase in retail fresh fruit and vegetable costs would increase the spending of a typical consumer unit by $9 a year, raising expenditures from $301 to $310.

For more information: (

Finally, this study explains the cost-benefit of having a low-skilled, non-native work force:
In FY 2004, low-skill immigrant households received $30,160 per household in immediate benefits and services (direct benefits, means-tested benefits, education, and population-based services). In general, low-skill immigrant households received about $10,000 more in government benefits than did the average U.S. household, largely because of the higher level of means-tested welfare benefits received by low-skill immigrant households.

In contrast, low-skill immigrant households pay less in taxes than do other households. On average, low-skill immigrant households paid only $10,573 in taxes in FY 2004. Thus, low-skill immigrant households received nearly three dollars in immediate benefits and services for each dollar in taxes paid.

A household's net fiscal deficit equals the cost of benefits and services received minus taxes paid. When the costs of direct and means-tested benefits, education, and population-based services are counted, the average low-skill household had a fiscal deficit of $19,588 (expenditures of $30,160 minus $10,573 in taxes).

At $19,588, the average annual fiscal deficit for low-skill immigrant households was nearly twice the amount of taxes paid. In order for the average low-skill household to be fiscally solvent (taxes paid equaling immediate benefits received), it would be necessary to eliminate Social Security and Medicare, all means-tested welfare, and to cut expenditures on public education roughly in half.

Understanding of the fiscal consequences of low-skill immigration is impeded by a lack of understanding of the scope of government financial redistribution within U.S. society. It is a common misperception that the only indi­viduals who are fiscally dependent (receiving more in benefits than they pay in taxes) are welfare recipients who per­form little or no work, and that as long as an individual works regularly he must be a net tax producer (paying more in taxes than his family receives in benefits).

In reality, the present welfare system is designed primarily to provide financial support to low-income working families. Moreover, welfare is only a modest part of the overall system of financial redistribution operated by the gov­ernment. Current government policies provide extensive free or heavily subsidized aid to low-skill families (both immigrant and non-immigrant) through welfare, Social Security, Medicare, public education, and many other ser­vices. At the same time, government requires these families to pay little in taxes. This very expensive assistance to the least advantaged American families has become accepted as our mutual responsibility for one another, but it is fis­cally unsustainable to apply this system of lavish income redistribution to an inflow of millions of poorly educated immigrants.

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You mean to say that it may not have been only the ruthless, uncaring "market" and the self centered capitalists that were slowing the growth of real wages for working families in this country?

Robert Rector of the Heritage Foundation had a good analysis of the costs (in the trillions) associated with any amnesty in the immigration bill.

Posted by: Frank at May 22, 2007 12:22 PM

FYI, I included a link and excerpt from Rector's study in the extended portion of this post. Hit the "Continue Reading..." link.

Posted by: Marc Comtois at May 22, 2007 1:52 PM

Sorry, didn't mean to be redundent, I should have checked more thoroughly.

These are some sobering numbers, though. No wonder so many risk so much to come here. It seems that for every dollar earned by an immigrant houshold, that household receives a dollar in services and programs from the Government. Not a bad deal for them, but it's crushing the rest of us.

Posted by: Frank at May 22, 2007 3:07 PM

how about this for a reason: during the same time, the Federal Government allowed a corporate suppression of union organizing and activity and that was what resulted in the decline in real wages for the demographic groups you talk about.

Posted by: Pat at May 23, 2007 8:35 PM

>>how about this for a reason: during the same time, the Federal Government allowed a corporate suppression of union organizing and activity and that was what resulted in the decline in real wages for the demographic groups you talk about.

That's a crock.

Unions can temporarily distort the market, and appear to raise wages - for a while. But eventually Mr. Market has his way; union or union-free.

Look at the UAW (or airlines or steel). The UAW members' compensation is above what it would be in a union-free market. But Economics 101 tells us that once you increase price you decrease demand and/or create an opening for lower-cost competitors to arise.

The UAW's current membership is what, half of what it once was? Soooo while superficially its members' compensation appears high (it is), one should also factor in the "0" pay of the UAW members who have lost their jobs.

That is what unions do - raise compensation for those who keep their jobs at the expense of those who don't.

The bankruptcies of airlines, steel companies (and perhaps soon one or more of the former "Big Three" automakers) means that even the union members who keep their jobs eventually feel the sting of Mr. Market reasserting his preeminence.

Unions in the private sector are a fraud - entities that fulfill the desires of collectivists who want to continue living in a fantasy world of 1930's industrial age dogma of working classes and capital.

While there can be short-term distortions, ultimately both are subject to the market.

After all, if employers set compensation every non-union employee would be paid no more than minimum wage (an instant huge increase in profitability). But of course, employers can't - they have to pay market rates for particular skills and based upon their market areas supply and demand for labor.

Unions can't set compensation in the long run either. There's no free lunch - higher union wages eventually lead to less employment.

Union density of the workforce peaked in the mid-1950's (so much for corporate suppression starting in the 1980's). Average family incomes peaked about twenty years later. There is no correlation.

The union bosses' problem isn't corporate suppression, it's that (like the UAW) they've been hemorrhaging existing members while much of the remainder of the workforce has caught on to the dynamic and (rationally) wants no part of it.

This is why in the private sector union organizers are concentrating on low-skilled / immigrant work groups, because their unsophistication makes them more susceptible to the entreaties of union organizers.

It's also why the only sector with increases in unionization in recent decades is the public sector - where Mr. Market doesn't exist, for it does not have to produce a product or service that anyone would willingly purchase, or of quality (just look at what has become of public education since teachers started unionizing). Neither do unionized employees in the public sector have to concern themselves with their own performance, or that their employer will face competition of any kind (much less a lower cost competitor). Since they don't face expectations of performance of the risk of ever losing their job to competition, of course unionization remains appealing to public sector employees.

Posted by: Tom W at May 23, 2007 10:20 PM
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