Tag Archives: suppression of wages of natives

Jim Manzi’s thoughts on immigration are surprisingly ill-considered

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Jim Manzi, the founder of Applied Predictive Technologies, last year published the book Uncontrolled, an excellent exposition of the view that business and government should rely on more randomised field trials to assess the value of different choices. Overall I found little to disagree with in the book, except when it came to immigration. Manzi leans right in his politics, but in general refrains from regurgitating standard right-wing political bromides; unfortunately, immigration seems to be an exception to this rule.

Manzi only touches on immigration in the book when discussing actual recommendations; besides a selective immigration policy, his other recommendations include expanding school vouchers and promoting government spending in R&D. Manzi views existing US immigration policy as rather destructive, and I agree. He and I both see eye to eye on the point that US policy arbitrarily and absurdly treats high-skilled immigrants. But Manzi paints with an unnecessarily broad brush when it comes to low-skilled and unauthorised immigration.

Manzi suggests that with immigration policy permitting low-skilled immigration:

It is hard to imagine a more damaging way to expose the fault lines of America’s political economy: We have chosen a strategy that provides low-wage gardeners and nannies for the elite, low-cost home improvement and fresh produce for the middle class, and fierce wage competition for the working class.

The “fierce wage competition” bit itself is controversial. It is commonly taken for granted that of course immigration lowers wages, but empirical data supporting this claim is thin on the ground. Manzi wisely limits this critique to the working class (as there is essentially zero convincing evidence that immigration suppresses wages for middle- to upper-income workers), but even there, only a handful of studies have ever shown wage impacts larger than something on the order of reductions around 1 or 2% for low-income earners. The consensus estimate remains that immigration at worst impacts the most vulnerable earners at a negligible level. This is not great, but it hardly suggests “fierce” competition.

Manzi’s other points make even less sense, for one could argue that the only thing preventing the middle class from enjoying low-wage gardeners and nannies, or the working class from enjoying low-cost home improvement, is in fact restrictive immigration policies. The typical citizen of the UAE, after all, enjoys the benefits of cheap immigrant labour, regardless of income level! A tangible example that most people might find more relatable: in Malaysia, it’s typical for middle-class white collar workers to hire live-in maids, and even lower-income workers might be able to afford maids coming in every so often to clean. Manual labour for any task you desire, from moving to home renovation, is both abundant and cheap. In both cases, a very significant portion of the work force is foreign.

You might resist this, arguing that it’s not a slam dunk that this is what would happen if the US or any rich country opened its borders. I agree, it’s not a slam dunk at all. But neither is it implausible. And on the other hand, it’s certainly impossible to take for granted Manzi’s assertion that liberal immigration policy widens the income and socioeconomic gaps between rich and poor.

Manzi agrees that his preferred high-skilled immigration policy is not an obvious slam dunk — he also obliquely points out that it’s difficult to know what criteria on which to select high-skilled immigrants, although he takes pains to cite Australia and Canada as examples to learn from. Manzi proposes that the US “test and learn” via visa allocation. Come up with different rules to target high-skilled immigrants, and approve a small number of visas following these different rules. Follow the population of admitted immigrants over time to see how they perform on a number of indicators, and refine the visa regime accordingly.

I fully agree with the broad thrust of Manzi’s sentiments; test and learn is a fantastic motto. But given the empirical evidence that suggests low-skilled immigration is often highly beneficial in its own way, why limit the test purely to high-skilled options? Surely one can test alternative rules besides those aimed at picking up high-skilled immigrants? Experiment with different visas beyond just granting guest worker permits or green cards? Experiment with different ways of allocating visas altogether? Manzi remarkably omits one of the best test and learn examples of immigration policy I know of in the world today — the Canadian policy of allowing provinces to sponsor a certain number of visas for just about anyone they like.

Finally, Manzi in a throwaway remark suggests that the US can only get its immigration house in order “[o]nce we have reestablished control of our southern border.” I think this makes a remarkable assumption about history: that the US ever had totalitarian control of its borders in the first place. I’m not aware of empirical evidence suggesting that this is the case, and would be glad if anyone could show me that for a reasonable period of time in history, the US government actually tightly monitored and controlled a very large proportion (say >90%) of border crossings. The restrictionist-hallowed 1950s Operation Wetback was necessary in the first place because so many Mexicans were able to cross the border undetected.

A restrictive border control system that can detect and punish most to all unauthorised border crossings is the right-wing ideal, but for any other than the smallest or more geographically-isolated countries, I’m not convinced such a system has historically existed (at least outside totalitarian dictatorships) or can exist. Even North Korea faces difficulties with people smuggling South Korean soap opera DVDs and cellphones across its borders. A determined government can surely stop >90% of unauthorised border crossings, but only at substantial fiscal and political cost. For Manzi to blithely assume this can be so easily accomplished, and then move on to proposing his test-and-learn skills-based immigration policies, strikes me as strange.

None of this is to say Uncontrolled is not worth reading or ill-thought out. The immigration section of the book struck me for how out-of-place it seemed compared to other sections of the book. When I was in university I focused my studies in economics on education and immigration; Manzi has a lot to say on education, and I found little to quarrel with in his characterisation of the academic policy debates around education. Manzi has comparatively little to say on immigration, and unfortunately, it looks like he was not as thorough in his coverage of the issue. And if Jim Manzi, a smart and well-read businessman and public intellectual can make such egregious oversights and oversimplifications in discussing immigration, just about anybody can. The quality of public thinking and discourse about immigration is unfortunately disproportionately poor, compared to the potential it has to offer all of us.

Thomas Sowell on the Economics of Immigration

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Post by Alex Nowrasteh (occasional blogger for the site, joined April 2012; pieces published are by default republished from other sources with permission). See:

FINANCIAL INTEREST DISCLOSURE: Nowrasteh has a paid job as immigration policy analyst at the Cato Institute (since April 15, 2012), and formerly had a similar role at the Competitive Enterprise Institute.

This post was originally published at the Cato-at-Liberty blog and is republished with the author’s permission.

Thomas Sowell, distinguished social scientist and columnist, recently criticized Rep. Paul Ryan (R-WI) for his statement that America needs immigration reform to avoid a “worker shortage.” Ryan was trying to explain that allowing more workers to come in the future would allow the economy to grow. He incorrectly used the word “shortage, which has a specific meaning in economics, and Sowell was right to criticize him for that. 

However, the economics of immigration are far more complex than Sowell’s writings let on. After dinging Ryan for his word choice, Sowell went on to explain that if American farmers don’t have enough workers, they will just raise their wages to attract Americans into the profession:

In agriculture, the farmers would obviously prefer to get workers who get low pay rather than workers they have to pay a higher wage… And as long as there is an unlimited supply of farm workers coming in from Mexico, they will never have to raise the wages very much… And it’s a time when millions of Americans are out of work, and are looking for any kind of work. And so this is utter nonsense.

If Sowell is going to quibble about words like “shortage,” it’s fair to criticize Sowell’s use of the word “unlimited” to describe the supply of farm workers coming from Mexico. If the supply of workers in agriculture was truly unlimited, or infinite, the wage would be 0. Furthermore, Americans are not “looking for any kind of work.” If they were, they would be lowering their wages quite a bit more than they currently are, until they become attractive hires. Relatively sticky wages even during periods of high unemployment are evidence that people are not “looking for any kind of work.”        

Issues of economic vocabulary aside, Sowell only described one possible outcome from a reduction in the supply of low-skilled immigrant farm workers: an increase in wages. The far more likely reaction is that American farmers will stop growing crops that require many workers. Without a large supply of low-skilled immigrant farm workers, labor-intensive farming would either shrink dramatically or disappear entirely.  American farmers would either grow different crops that could be profitably harvested mechanically or stop farming. American consumers would either import fruits and vegetables that require large numbers of workers from countries where those workers are abundant, or scale back their consumption of those food stuffs. Fewer workers also means fewer consumers of these agricultural goods, decreasing demand and partly offsetting some of the increase in price that would occur from a decrease in supply. Those effects would be the economically efficient outcome if increased labor scarcity was driven by changes in the free market. In this case, however, the increase in labor scarcity would come from legislation mandating such scarcity.

Insights from labor economics help explain why the American growing of fruits and vegetables would diminish if low-skilled immigration was ended. If the marginal value of the worker’s production is greater than the wage, it is profitable for a firm to hire that employee. For example, if a worker’s marginal value product (MVP) is $10 per hour, it is profitable to employ that worker at a wage of less than $10. (If MVP = wage, the employer is indifferent assuming no transaction costs). Based on the enormous range of work and welfare options open to Americans, farmers would likely have to pay wages so high to attract enough American workers that most labor-intensive agriculture would be unprofitable. Alabama provides an example.

Furthermore, it’s hard to see why it’s desirable to increase the wages of low-productivity farm workers by increasing their scarcity. Raising the wages in occupations that don’t require a high school degree is antithetical to other aspects of public policy that seek to increase the rate of high school graduation (whether or not that is a valid concern for government). There is evidence that more immigration further incentivizes Americans to actually finish high school. The government should not create a policy designed to increase wages for low-skilled farm workers that could drive relatively higher-skilled Americans into those occupations. Since educated workers have more choices in the labor market, the effect of attracting them into lower-productivity professions through changes in policy will likely diminish economic and productivity growth.

Speaking of immigration reform proponents, Sowell states, “They say Americans won’t do these jobs. These are jobs Americans have done for generations, if not centuries.” In this instance, Sowell cherry-picks his opponent’s arguments and chooses to address the ludicrous ones while ignoring those with substance. Americans sailed wind-powered ships around the world and used horses instead of cars for centuries. That, however, is not an argument that a government law should increase the scarcity of modern ships and cars. Sowell is right that Americans could do these low-skilled agriculture jobs. We could also become hunter-gatherers again. But that does not mean that we should, if cheaper and better options are available. Sowell does not say that we should exclude low-skilled immigrants but his tone and the conspicuous absence of him criticizing economically ignorant arguments from the anti-immigration-reform side are serious indications of his opinions on the issue.         

Furthermore, Sowell is right that the economy would adjust to a decrease in the supply of low-skilled labor, but he fails to mention that it would do so by shrinking. The economy would likewise adjust if the American government declared that electricity was illegal or all imports were banned. Arguing that the economy would adjust to artificially created scarcity does not justify creating such scarcity through government fiat.     

Immigration restrictions increase labor scarcity, especially in niches of the labor market where relatively few Americans work. The main effect of increasing labor scarcity by further restricting the supply of low-skilled immigrant workers will not be to raise the wages of Americans, thereby drawing them to pick crops; it would be to kill large portions of the agricultural sector and other portions of the economy that demand large numbers of relatively low-skilled workers to operate most efficiently and profitably. 

Sowell’s surface explanation of how wages would adjust without low-skilled immigration, which leaves out how the economy would shrink and other well-known effects, is written in a way to obfuscate rather than enlighten. On this issue, Sowell ignores the lessons he has developed throughout his career, and instead seems to support extensive government interventions (his writing is cagey enough that he could claim to not support any policies, but the tone is clear enough) with little evidence besides anecdotes.

Immigration and Cobb-Douglas: A Response to Eric Rasmusen

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Tyler Cowen recently linked to a piece by Eric Rasmusen about potential scenarios where immigration hurts the American economy.

Rasmusen considers a few variations on the Cobb-Douglas production function where the amount produced by the economy is given by the equation: $latex Q=L^{.7}K^{.3}$ where L is the total amount of labor and K is the amount of capital available for production.

According to this model, if L = 100 and K = 100, the total production is 100. Of this amount, 70 is divided among the laborers and 30 goes to owners of capital. If L increases to 140 due to immigration and K remains constant, total production increases to 126.6. 38 of this goes to capital, 63.3 goes to native labor and 25.3 goes to immigrant labor. So capital wins and native labor loses. The amount capital gains is a bit more than the amount native labor loses.

This is a pretty standard analysis, but we should note that it assumes that K remains constant. This is the sophisticated equivalent of assuming that the number of jobs is constant, so that when immigrants enter the country they take “our” jobs. In fact, the amount of capital devoted to production depends on demand, which depends on the number of consumers. Since immigrants are consumers in addition to laboersr, we can expect the amount of capital devoted to production to increase.

But this isn’t the biggest complaint I have with the paper. In his analysis of the standard Cobb-Douglas approach, Rasumsen makes some very confusing comments about the impact of taking the welfare of immigrants into consideration:

“What about the benefit to immigrants? Some readers will want to include those in the policy objective for the United States… Although American labor definitely loses, immigrant labor either wins or is unaffected. The aggregate benefit to labor can be negative because if foreign wages are just a little bit lower than American post-immigration wages, then the gain to the immigrant labor is very small, while the loss to American labor is unaffected and therefore exceeds the immigrant gain. In fact, one might expect that if there is open immigration and the amount of immigration is 40, it must be that wages in the other country are .63, i.e., immigration stops at 40 because foreign and American wages equalize. Suppose further that the rest of the world is large compared to America, so that the rise in wages elsewhere in the world as a result of emigration to America is trivial. Then, the immigrants have neither gained nor lost by immigrating to America. The only welfare effects are the loss to American workers and the gain to American capital-owners.”

This analysis is baffling. If we are using the Cobb-Douglas model to understand the impact of immigration on the US, let’s use the same model to understand the global impact. In particular, let’s assume that we have two countries. In the US, L=100 and K=100, so Q=100 just like in Rasmusen’s model. But then let’s assume that there is one other country where labor and capital are out of balance. That is, L = 1000 and K=50 with the result that Q=407.1. Total production between the two countries is 507.1. Now what happens if we open the borders between the two countries? Then we can combine L and K so that L=1100 and K=150. But we don’t simply add the Q’s. In fact, total production is now 605.1. We got an additional 98 production for free!

How did that happen? We even assumed that the US contribution to K didn’t go up in response to the open borders, a likely result that would push the numbers up even more (if K went all the way up too 1100, then production would go up to 1100 as well). The reason is that the best way to maximize output under the Cobb-Douglas model is to evenly distribute the capital among laborers, not to split it up in disproportionate pieces.

Of course, it remains true that if we prevent K from going up then native labor will suffer. In the closed borders regime, the 100 native laborers received a wage of .7 each and the 1000 foreign laborers got .284. Under the open borders regime, all laborers got a wage of .38. Again, this is because we assumed that K remained constant.

Rasmusen includes a few other scenarios in which not only does native labor lose, but net American output per person goes down. The most plausible of these is a scenario in which he assumes that the production function is a modified Cobb-Douglas function $latex Q=(L^{.7}K^{.3})^{.8}$, which represents the idea that we have diminishing returns to the combination of labor and capital. This could be due to a fixed amount of natural resources or land. In the basic model, the amount capital gains is more than the amount native labor loses. With this modified model, the amount capital gains from immigration is less than the amount lost by native labor.

The problem with this model is that it seems to run counter to experience. It would imply that as our population grows, there would be a very strong tendency for GDP per capita to decrease. That is, the result is not specific to immigration. It applies to any form of population increase. Our population has been growing steadily the nation was founded. Here is a graphic showing the results for GDP per capita:

Of course, Rasmusen doesn’t argue that any of his models actually represents reality. He is trying to explore scenarios in which immigration creates a net economic detriment to natives. In the basic model, cash transfers from capital to labor (e.g., progressive taxation) can be used to compensate native labor. In the modified scenario, the net loss to natives prevents such a program from working. Luckily, the model doesn’t seem very realistic, at least based on our historical experience.

 

How Did We Get Here? The Origins of Immigration Restrictions: The Chinese Exclusion Act

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As promised, here is the start of my historical examination of immigration rule changes, and we begin with the Chinese Exclusion Act of 1882. For those interested in the text of the act itself it can be found here.

For a little background, the first restriction on immigration to the US was actually the Page Act of 1875. This act too focused on Asian immigrants attempting to limit people being brought over for forced labor or prostitution. In practice that latter provision was a significant limiting factor on Chinese women coming to the United States, less because of most emigrating Chinese women actually being prostitutes than officials being overly skeptical towards claims of virtue. This association of the Chinese with crime was one of the major arguments used by anti-Chinese restrictionists in the years leading up to the exclusion act’s passage and parallels modern arguments about immigrant criminality. To explore this (and other major restrictionist arguments) the internet has made easily accessible wonderful resources such as arguments made before the California State Senate (the state with the highest Chinese population) by State Senator Creed Haymond. On page 4 he argues:

The State of California has a population variously estimated at from seven hundred thousand to eight hundred thousand, of which one hundred twenty-five thousand are Chinese…The evidence demonstrates beyond cavil that nearly the entire immigration comes from the lowest orders of the Chinese people, and mainly those having no homes or occupations on the land, but living on boats on the rivers, especially those in the vicinity of Canton.

This class of the people, according to the castes into which Chinese society is divided, are virtually pariahs—the dregs of the population. None of them are  admitted into any of the privileges of the orders ranking above them. And while rudimentary education is encouraged, and even enforced among the masses of the people, the fishermen and those living on the waters and harbors of China are excluded by the rigid and hoary constitutions of caster from participation in such advantages.

It would seem to be a necessary consequence, flowing from this class of immigration, that a large proportion of criminals should be found among it; and this deduction is abundantly sustained by the facts before us, for of five hundred and forty-five of the foreign criminals in our State Prison, one hundred and ninety-eight are Chinese—nearly two-fifths of the whole—while our jails and reformatories swarm with the lower grade of malefactors.

(Emphasis mine).

Continue reading How Did We Get Here? The Origins of Immigration Restrictions: The Chinese Exclusion Act →

How Does Immigration Impact Wages?

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This post was originally published on the Cato-at-Liberty blog here and is republished with the permission of the author.

Many Americans are curious about the impact of immigration on the wages of other Americans.  The best research on this focuses on the period between 1990 and 2006, when almost 17 million people immigrated to the U.S. lawfully and a net 12 million came unlawfully.  The first major study is by Borjas and Katz (B&K) and the second is by Ottaviano and Peri (O&P).  O&P borrowed much of B&K’s methodology.  Here are the long run findings:

B&K draw a more negative conclusion than O&P.  The main differences are that O&P assume capital adjusts quicker to increased labor abundance and immigrants are more complementary.  B&K’s paper reflects their assumptions about native-immigrant substitutability.  Since immigrants are more likely to have less than a high school degree and more likely to have a graduate or professional degree than natives, B&K’s model assumes natives in those categories are competing with immigrants for jobs and therefore experience wage declines. 

Both O&P and B&K found that increased immigration has a larger affect on immigrants than natives.  Depending on their level of education, longer settled immigrants experience greater wage declines and smaller wage gains from more recent immigration compared to natives:

Both sets of authors rightly assume that more recent waves of immigrants are most similar to immigrants from older waves, making the two arrival cohorts of immigrants substitutes in the workplace.  Recent papers by Ethan Lewis and Giovanni Peri and Sparber make convincing argument that language ability of recent immigrants makes them more similar and, thus, substitutable with previous waves of immigrants.  Language ability also makes immigrants complements to natives, partly explaining why O&P and B&K found wage increases for so many American workers as a result of immigration.

Here is a comparison of the long run wages effects on immigrants and natives from the O&P and B&K study:

These charts merely explain the results of previous waves of immigration on the American labor market.  If immigration increases in the future these numbers will likely be different but the past is always a useful guide for anticipating the effects of future policy changes.

Bibliography:

Borjas, George, “The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market.”

Borjas, George and Lawrence Katz, “The Evolution of the Mexican-Born Workforce in the United States.”

Ottaviano, Gianmarco and Giovanni Peri, “Immigration and National Wages: Clarifying the Theory and the Empirics.”

Peri, Giovanni and Chard Sparber, “Task Specialization, Immigration, and Wages.”

Lewis, Ethan, “Immigrant-Native Substitutability: The Role of Language Ability.”