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Making sense of immigration

Roger Lowenstein's article about the economic impact of immigration in last Sunday's NY Times Magazine has gotten much well-deserved praise. Blogotopia has also been abuzz about the topic for awhile now; Greg Mankiw writes about it here and Kevin Drum here. The one paragraph summary of Lowenstein's one-article summary of 20 years of economic research: basic supply and demand analysis suggests that an increase in the supply of labor through immigration should reduce wages, especially among those in the low-skill labor market (since the immigration everyone's talking about is low-skill workers from Mexico and Central America). But researchers have not found big effects. David Card estimates the effects are small to non-existent. The National Academy of Sciences surveys the literature and finds that the net effect of immigration in the U.S. is to reduce wages of low-skilled workers by 1-2 percent. The other extreme is represented by George Borjas, who gets an estimate of 5 percent. With the exception of Borjas, most economists are remarkably united behind the proposition that immigration of unskilled workers is for the best. It raises living standards for the immigrants by a lot, benefits the U.S. economy as a whole, and has rather small negative effects on low-skill U.S. workers.

All right, I've got two things to say here. First, Lowenstein and the economists he quotes seem to not understand why the effects they estimate are so small. Theory says the effects should be large; so why can't we find it in the data? Well, maybe my little macroeconomic brain is oversimplifying the issues here, but the answer seems quite straightforward. Two answers, actually. One: immigration increases the demand for capital goods (in economic terms, a larger labor supply increases the marginal product of capital; in layman's terms, all those Mexican workers need equipment to work with). In the long run, employers supply each Mexican worker with the same amount of equipment that U.S. workers were getting before, so in the long run the productivity of workers returns to its original level, so wages are restored as well. In other words, capital deepening shifts the labor demand curve to the right by an equal amount as shift in labor supply. Two: we already live in a world where unskilled labor in the U.S. is competing for jobs with unskilled labor in Mexico. If U.S. chicken pluckers demand a raise from $7 per hour to $8 per hour, Tyson will relocate its factory to the other side of the border. Hence U.S. unskilled workers in the U.S. and Mexico are already part of the same labor market regardless of where they are physically located. It makes no difference whether all the Mexicans stay in Mexico or relocate to the U.S. (or, for that matter, whether U.S. low-skilled workers stay in the U.S. or migrate to Mexico). The cause of stagnation in wages for low-skilled workers is trade, not immigration.

My second comment concerns what to do about immigration of low-skilled workers. I agree with the mainstream view that the net benefits to immigration are positive, though I may be a bit more concerned with the impact on low-skilled U.S. workers. My sympathies and my reasoning are on the side of more immigration, not less. But I would urge my fellow economists to look at the immigration issue from a different perspective. Much is written about how immigration is a sign of the success of the U.S. economy - it's remarkable how our economy attracts so many workers from abroad, how we are able to create jobs for the millions who come here. But we can also see immigration as the result of a spectacular failure in Mexico and Central America. Why are those countries unable to produce the jobs that their citizens demand? And the answer has to do with decades of failed policies on the part of Mexico and Central America, sure, but also on the part of the U.S. NAFTA and Mexico's own "neoliberal" reforms, in particular, have exposed the rural population of Mexico to competition from subsidized U.S. agricultural producers and subjected them to the whims of giant retailers like WalMart that have penetrated the Mexican economy. The result is a crisis in rural Mexico and mass migration to the U.S. Can U.S. economists get behind a plan to reform NAFTA and promote policies to better the lives of the rural population in Mexico and Central America, both for its own sake and as a solution to the "problem" of immigration in the U.S.? I would think that there would be especially strong support (and I wish I saw more of it on economists' blogs) for the elimination of agricultural subsidies in the U.S., the source of so much misery in Mexico and Central America as well as the most egregiously inefficient economic policy currently in effect in the U.S.

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