Immigration from Mexico

Jeffrey M. Perloff & Robert Whaples

 

            On March 7, 2004 Mexico’s president, Vicente Fox, and President Bush stood in the bright sunshine at Bush’s Texas ranch and explained to reporters how a new program to grant unauthorized immigrants status as temporary workers would be good for both countries.  Many U.S. critics disagreed, arguing that we should make it more difficult for such immigrants to work in the United States, not easier.

Background

            Immigration has always been an important political and economic issue in the United States.  The first wave of immigration occurred in the 1840s and 1850s, at the time of the Irish famine. The arrival of over 300,000 immigrants per year (14 immigrants per every 1,000 people in the U.S.) sparked a political backlash in the form of the American (or Know-Nothing) Party.  In the late 1800s and early twentieth century, immigration surged again reaching almost 900,000 per year between 1900 and 1914 (10.2 immigrants per every 1,000 people in the U.S.).  This upsurge generated an even stronger reaction that led to legislation setting restrictive immigration quotas by country in the 1920s.  In 1965, the immigration law was changed making entry easier, and the number of immigrants immediately increased.  During the 1990s, it is estimated that about 1.3 million immigrants – legal and unauthorized – came to the United States (about 5 immigrants per every 1,000 people in the U.S.) and rates seem to have climbed only since then.  Currently the foreign-born population is about 33 million or 11.5% of the U.S. population.

            In recent decades, the source of immigrants has changed considerably.  The flow was almost entirely from Europe in the early twentieth century, but, between 1991 and 1998, approximately 31% arrived from Asia and 49% from Latin America, with the largest segment, about a quarter, coming from Mexico. Moreover, the average education and skill level of immigrants has declined markedly in comparison to the U.S.-born population.  In 1960, about 66% of immigrant men had not graduated from high school versus 53% of native men – a gap of 13 percentage points. By 1998, however, the high school dropout gap had ballooned from 1960’s 13 percentage points to 25 percentage points.  (This growth of the gap occurred despite rising education levels of immigrant men, whose high school dropout rate fell to 34%.  The native-born dropout rate fell even faster to only 9%.)  Currently immigrants account for 31% of high school dropouts in the workforce, although they make up only 12% of the overall workforce.

Partly as a result of this widening education gap, the pay rates of immigrants and U.S.-born workers have diverged.  In 1960, immigrant males were paid about 4% more than native men, but immigrants were paid 23% less by 1998.  The newest immigrants (whose proficiency in English is lower and whose skills aren’t as adapted to the U.S. labor market) did even worse.  In 1960 they earned 13% less than natives, but by 1998 they earned 34% less. 

The arrival of these immigrants has provoked a mixed reaction.  Organizations like the Federation for American Immigration Reform decry the trend, saying “Americans deserve decent jobs at decent wages, not unfair competition from imported foreign workers … We need immigration reform to stop the massive influx of foreign workers from harming the living standard of our most vulnerable citizens.”  Others disagree.  A recent Wall Street Journal editorial, for example, asserted that “the plain truth is that the U.S. depends on these workers … the reality is that our economy continues to create opportunities for low-skilled workers while the pool of Americans willing to fill these jobs continues to shrink.”  Without these immigrants, “certain jobs would not get done, as is now the case in Europe, as companies automated or moved more jobs overseas.”

The federal government spends considerable resources trying to keep unauthorized immigrants out of the country.  The border enforcement budget swelled from $740 million in 1994 to $3.8 billion in 2004, yet the effort didn’t prevent the number of illegal immigrants from continuing to grow.  Average U.S. wages are about ten times those in Mexico, where wages are higher than in most other Latin American countries.  Immigrants are so eager to come to the U.S. that they’ve been only slightly deterred by improved security (walls, fences, guards, motion detectors and the like) near major crossings.  Instead many venture into the lightly-guarded desert portion of the border or hide in cramped compartments in vehicles and trains. Roughly 300 die each year in such attempts.  Some argue that the military should be deployed to halt the influx of illegal immigrants, but their opponents disagree.  As the Wall Street Journal editors argued, the U.S. military already has enough missions. “Somehow draining the terror swamp in the Middle East seems a lot more vital to U.S. than stopping busboys from crossing the Rio Grande.”

Task

Does immigration hurt the U.S. economy or help it?  Are American workers helped by immigration or harmed by it?  Why can’t people see eye-to-eye on this matter?  One reason for the disagreement is that immigration can simultaneously help and hurt American workers – boosting the wages of some, but depressing the wages of others.

The best way to understand the impact of immigration would be to use general equilibrium analysis.  General-equilibrium analysis is useful any time that an event spills over into multiple markets.  Immigration fits this bill.  Immigrants work in the labor market – which can be broken down into several interacting markets based on skill levels.  They also buy in product markets, and invest in capital markets, as well as paying taxes and utilizing government services.

Rather than undertaking the daunting challenge of modeling complex interactions across markets and across time, we can obtain some idea about the potential impacts of immigration by using a single market model.  That is, we will indirectly capture these general equilibrium effects using the supply and demand model from Chapters 2 and 3 and shifting supply and demand curves appropriately. 

We start by examining the supply and demand for labor in the low-skilled (poorly educated worker) labor market.  Immigrants account for 31% of the high-school dropouts in the workforce, so U.S.-born workers make up 69% of this workforce and this 31% share is a 45% increase (69% × 1.45 = 100%) in the low-skilled workforce.  If this immigration causes a parallel shift in the labor supply curve and the long-run elasticity of demand for labor is -0.3 (a common estimate), how will this immigration affect wages and employment in the low-skilled labor market? 

            To answer the question, we first examine the case in which the supply of labor curve is vertical, then the case in which it is positively sloped.  Finally, we consider how this immigration affects the demand for labor and equilibrium in the market.

Analysis

The figure shows the market for low-skilled (poorly-educated) labor.  We assume for now that the labor supply curve is vertical.  In the absence of immigration, the supply curve of unskilled labor is S0, the supply curve of U.S. citizens.  The equilibrium wage, w0, is determined by the intersection of S0 and the initial demand curve for labor D0 at equilibrium point e0.  Entry by immigrants into this labor market causes the supply curve to shift to the right from S0 to S1.  If this supply curve shift is the only impact of immigration on this market (and there is no minimum wage), the shift in the supply curve results in a movement along the demand curve, D0, pushing the equilibrium wage down from w0 to w1, at equilibrium e1.  The number of workers increases from L0 to L1.

            We can use the information we have about the demand for labor and the size of the immigration flow to estimate the drop in the equilibrium wage if the supply curve is vertical and there is no change in demand.  The immigration increased the initial employment level by 45%.  Since the elasticity of labor demand (the percentage change in labor divided by the percentage change in labor) equals -0.3 and the percentage change in labor is 45%, then the percentage change in the wage is -13.5% (= -0.3/.45). 

It is unlikely that the supply of labor curve is vertical, however.  Because the number of relatively unskilled people who want to work increases with the wage, the labor supply curve has an upward slope.  If the initial supply curve of labor is the upward-sloping S2 and immigration causes a rightward shift of this supply curve to S3 (the rightward shift is same as the horizontal shift from S0 to S1), then the equilibrium wage will fall by less: from w0 to w2.  However, employment grows from L1 to L2 (compared to a shift from L1 to L3 with vertical supply curves).  Before immigration, L0 U.S. citizens were employed at w0 (the horizontal distance on the S2 U.S. citizen supply curve at w0).  When immigration cause the wage to fall to w2, the number of these workers who continue supply labor to this market falls to L3.  Thus, a more elastic labor supply curve means that wages fall by less, but that employment of U.S. citizens falls. 

If this estimate of the elasticity of demand for labor is accurate, the worst case scenario is that the inflow of unskilled immigrants pushes the U.S.-born unskilled wage down by about 13.5%.  However, if the supply of labor curve is upward-sloping (rather than vertical)—as it undoubtedly is—the wage falls by less but some U.S. citizens exit this labor market.  These workers may simply drop out of the labor force due to the low wage, or they may receive training and enter the skilled-labor market.  The payoff for getting additional training increases as the unskilled wage falls relative to that of skilled workers.

The impact of immigrants on the unskilled labor market will be smaller than these calculations suggest if consumption by immigrants increases the demand for unskilled labor.  Immigrants often buy the goods and services produced by unskilled labor.  In doing so, they cause the demand curve for labor to shift to the right.  If immigration causes a large shift in the demand curve from D0 to D1, then immigration does not reduce the wage.

Some foes of immigration believe that immigration pushes the supply of labor curve out considerably, while not shifting the demand curve much.  Some fans of immigration believe that it pushes the demand curve for such labor out almost as much or more than the supply curve.  Relatively unskilled immigrants certainly have a relatively large effect on the demand curve in the skilled-labor market.  Because they do not work in that market, immigrants have no effect on the supply curve of skilled workers.  However, immigrants demand the services of skilled workers such as teachers and doctors, thus driving up their wages. 

Finally, unskilled immigrants drive down the prices paid by people who consume the goods or services they produce.  For example, the price of food falls when immigrants harvest the food or work in restaurants.  Likewise, employers can gain from immigration because the wage they pay falls and the demand for their product rises.  However, if markets are perfectly competition, employers’ gains will be ephemeral, since economic profits are driven to zero in the long-run with or without immigration (Chapter 9)

Some foes of immigration believe that immigration pushes the supply of labor curve out considerably, while not shifting the demand curve much.  Some fans of immigration believe that it pushes the demand curve for such labor out almost as much or more than the supply curve.  Relatively unskilled immigrants certainly have a relatively large effect on the demand curve in the skilled-labor market.  Because they do not work in that market, immigrants have no effect on the supply curve of skilled workers.  However, immigrants demand the services of skilled workers such as teachers and doctors, thus driving up their wages. 

Finally, unskilled immigrants drive down the prices paid by people who consume the goods or services they produce.  For example, the price of food falls when immigrants harvest the food or work in restaurants.  Likewise, employers can gain from immigration because the wage they pay falls and the demand for their product rises.  However, if markets are perfectly competition, employers’ gains will be ephemeral, since economic profits are driven to zero in the long-run with or without immigration.

 

George Borjas, 1999, Heaven’s Door: Immigration Policy and the American Economy, Princeton: Princeton University Press

Raymond L. Cohn, 2001, "Immigration to the United States." EH.Net Encyclopedia, edited by Robert Whaples, ww.eh.net/encyclopedia/contents/cohn.immigration.us.php

Federation for American Immigration Reform, “Immigration and Job Displacement,” October 2002, www.fairus.org/news/NewsPrint.cfm?ID=1210&c=15; “Our Border Brigades,” Wall Street Journal, January 27, 2004.