The Senate Judiciary Committee Tuesday voted out an immigration bill directly contrary to that passed by the House of Representatives last year; it provided amnesty through a guest worker program for illegal immigrants, but included few significant enforcement measures either on the border or on employers. Since a “reconciliation” of two bills pointing in opposite directions is likely to be a huge mess, with consensus only on attaching extra billions in pork barrel spending, I thought it worth examining which direction the United States should take.
Immigration advocates, even those on the political right, have a nasty habit of referring to their opponents as “racists” or “political primitives.” While I’m happy to be called a racist in a good cause (if they hate you, they’re paying attention, right?) I can understand that Bear’s Lair’s more delicate minded readers may not be. So this column will stick to economics, and will avoid the complex sociology of the world’s diverse ethnic and religious tribalisms.
In the Whiggish free market economic model worldwide free movement of labor, like free movement of goods, maximizes Gross World Product. Workers trapped in Third World countries move to the rich West, increase their living standards, yet are still able to find employment at wage levels well below those otherwise prevailing in the West. The West gets poorer and the Third World gets emptier, but Gross World Product is nevertheless increased. Easier world communications, both verbally through the Internet, and physically through low cost air travel improve the efficiency of this arbitrage and are therefore a Good Thing.
Like most Whiggish views of the world, this one is simplified to the point of falsehood. For one thing, the world is not organized on the basis of a single world government. Anyone who has dealt with supranational bureaucracies and observed their habits knows that any movement towards a single world government would be a nightmare, not an ideal. The theoretical benefit of a single world government in reducing trade frictions would be far more than outweighed by the direct and indirect costs of the unaccountable bureaucracy such a government would create. Just as Robert Mundell postulated an “optimal currency area” beyond which a single currency would be counterproductive, so too there is an “optimal government area” beyond which the costs of government outweigh its benefits. For many of us, that optimal government area may be a Cotswold village, but it certainly isn’t the world.
Once you accept the fact that the world is made of disparate nation states, each with its own government, then it follows that each nation state’s government should seek to restrict low skill immigration from much poorer areas, because its responsibility is to its own people, not to outsiders. A completely free market in terms of immigration and trade would cause the world to become more equal before it became richer, thus impoverishing rich country electorates (even without considering damaging second order effects.) Whiggish economists may grind their teeth all they like, but rational rich country governments will attempt to avoid this, and rightly so.
Regardless of its effect on GWP, low skill immigration from poor countries is only attractive to employers if it drives down wages. For jobs in which employees are not substitutable, and skills and local know-how are important, immigration has only a modest effect on wages. Its severely depressing effect is concentrated in areas where skill levels are low and substitutability high. Thus the market for Chief Executive Officers and U.S. Senators is not significantly affected by free immigration from the Third World, while that for landscapers and construction workers is transformed. If immigration is freed up completely (or restrictions are not enforced) then wage rates for low skill operations are driven down close to those in the world’s lowest cost source of labor, probably today Congo or Zimbabwe, environments so unpleasant that workers will pay to escape them, so that their shadow wage rate is in effect negative.
Employers and the pro-immigration crowd will point out that this is the purpose of free immigration; it increases the competitiveness of the host country and reduces costs for its citizens. For labor that produced internationally traded goods, this would be the case – the goods made with the cheap labor could be exported, and industries using such labor rendered more competitive in the international market. However, such industries can reduce their costs even further by outsourcing production. In such cases labor costs can be reduced to those in the Third World country, and industry can be freed from bearing the costs of transporting labor from that country to the United States (for economies of scale and frictional reasons, it will almost always be more cost-efficient to export a production operation to say India rather than importing Indian production workers one at a time to the United States.)
Since outsourcing is more efficient than immigration for export industries, it will have a net positive effect on the economy compared with immigration, and a less negative one on the domestic jobs market. Either way, domestic labor isn’t going to get those jobs, but if outsourcing is chosen over immigration at least the immigrants won’t be in situ competing with domestic labor for other un-outsourced jobs.
Internationally traded industries are thus not the largest employers of illegal immigrant labor, a fact the U.S. Chamber of Commerce is notably slow to point out. General Motors, Boeing and Microsoft, the nation’s great exporters, do not employ illegal immigrants much; their use of immigrant labor is confined to high skill immigrants with every i dotted and t crossed on their immigration documents. Agriculture uses a lot of immigrant labor, but U.S. agribusiness exerts huge political pressure to ensure that agricultural products aren’t as internationally traded as they should be.
The biggest users of illegal immigrant labor are in agriculture (protected from competition) and in retailing, construction, hospitality and personal services, in all of which because of their nature there is no practical possibility of outsourcing, or of importing the item from overseas. The international competitiveness of the United States is thus largely unaffected by the cheap labor illegal immigrants provide. Instead, that labor’s effects are concentrated within the U.S. economy, driving down costs in construction, personal services and retailing (though not in agriculture, where costs would be even lower if free imports from abroad were allowed) and driving down wages at the low skill end of the income distribution. The effect of illegal immigration is thus a large subsidy to society as a whole, particularly its wealthier members, from the domestic pool of unskilled and semi-skilled labor.
Since unskilled workers are on average poorer than users of personal services and recipients of dividends from employing companies, the net economic welfare effect of illegal immigration is thus substantially negative (because the law of diminishing marginal returns applies to money as to everything else, an extra $1,000 is worth more to a pauper than to a millionaire.) More construction takes place than would otherwise be the case, more personal services are provided (remember when the middle classes used to mow their own lawns?) and retail sales are increased. However the marginal operations in each sector – those which rely on cheap illegal immigrant labor to survive — are destroyers of value; the economy would be better off without them.
The welfare system further increases the costs of immigration to society. Since welfare allows domestic low skill labor to survive without working, society ends up paying for the same service twice, once to the illegal immigrant who provides it and once to the domestic worker who would have provided it but finds welfare more remunerative and pleasant. Further, cut-throat competition is introduced to the job market for unskilled workers, those least capable of dealing with it and most likely to develop social pathologies such as crime and drug addiction if they are unable to achieve their modest goal of a stable, employed existence. The second order costs to society are further increased in the case of illegal immigration, which like Prohibition and draconian drug laws introduces a scofflaw culture into the economic system which is hugely damaging to its integrity.
High skill immigration from the Third World has a different effect; it drains the Third World of educational resources, by siphoning off its best graduates. Again, the economics of this are more complex than in the Whig model. High skill graduates are the principal top managers and formers of new “growth” businesses; hence a Third World country with few such graduates is condemned to be primarily a supplier of contract labor to the rich, without significant bargaining power in the unequal transactions that result. Whereas the Third World graduate migrant increases U.S. welfare only marginally, by lowering the wage rates of scientists and other skilled personnel, he reduces the relatively small pool of high skilled labor in his home country by much more proportionately than he increases the U.S. pool, and so has a correspondingly greater effect on his home economy. In such a situation, the return to the Third World country from providing graduate education is artificially depressed, and investment in education correspondingly disfavored.
Finally, in some sectors such as finance there is the effect of cross-border migration on markets themselves. Markets work best when the participants trust each other, and can enter into contracts on a “my word is my bond” basis. Such trust is most easily created in an environment where everyone knows each other, or at least went to the same schools. That’s why the London merchant banks were so effective for over 200 years. Their replacement by stateless finance behemoths will prove in the long run to have been disastrous to the world economy, hugely increasing both the costs of the financial sector and the level of unnecessary churning in the corporate sector. Mass international migration, even at high skill levels, prevents the close communication that oils the wheels of commerce and leads to a blizzard of American-style legal documents, as participants attempt to codify what everyone had previously understood.
A certain amount of mutual migration is beneficial, it cross-pollinates civilizations, bringing Indian restaurants to Peoria and hamburgers to Delhi, or the intellectual equivalent thereof. Nevertheless at some point excessive international migration between countries that differ greatly in wealth, instead of being beneficial to the world economy becomes damaging to it; it impoverishes the rich country’s working class, it de-funds Third World education systems and it hinders the close communication and trust that makes markets work best.
The benefits of international migration are real; as for most economic goods they decline gently with volume, so that the 1 millionth migrant is worth substantially less than the first. However the simplistic linear first-order “free movement of labor” view, propagated so energetically by the George W. Bush administration and others with an axe to grind, ignores cost externalities. Unlike the benefits of international migration, the cost externalities are highly non-linear; they are modest at low levels of international migration, but become prohibitive once low skill immigration drives down domestic low skill wage rates significantly, or high skill migration makes a significant dent in the top quality graduate pool of the migrants’ home countries. Both those conditions are more than fulfilled at current levels of immigration into the United States, which consequently must be both controlled and reduced.
There – Bear’s Lair’s views on immigration – all without mentioning ethnic and cultural factors at all!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.