What do you get when you mix two shots of globalization, one shot of isolationist ideology, a dash of xenophobia, and some outdated economic logic about labor markets? Answer: a woozy and misguided political cocktail of an immigration reform bill. While many in Washington work to strike the delicate balance between a desire to "enforce our borders" and uphold "immigrant traditions," many economists are starting to wish for an economically sober designated driver in the debate.
If constraining the influx of foreign labor into the United States is a good idea, why isn’t Congress also proposing an absolute limit on the number of barrels of foreign oil as a way to ‘protect’ the U.S. economy?
This new cocktail is a variant of an earlier concoction—Outsourcing on the rocks, if you like—that created dizzying concern among voters prior to the last presidential election. When the one sober voice at the time, White House economist Greg Mankiw, attempted to present college-level economics analysis of the issue by noting that outsourcing—a form of global trade in services—has positive long-term economic benefit, he ended up being forced to issue a written apology!
Outsourcing came up in the 2004 tax debate, too. While Republicans promoted changes intended to help U.S. businesses compete more effectively in foreign markets, many Democrats claimed that tax breaks for U.S. multinationals would just aid them in their quest to move jobs abroad. The belief that allowing U.S. corporations the right to defer U.S. tax on income earned abroad encourages jobs to move abroad remains popular on the campaign trail today.
Politicians on both sides of the aisle appear to have again fallen off the wagon as they engage in debate over how many high-skilled H1-B visas to offer engineers, computer scientists and other high skilled workers and how best to limit the influx of low skilled workers. The debate has lost track of the fact that our prosperity does not depend on restricting opportunities to foreign workers—either abroad or here in the United States.
Are foreigners taking our jobs? Putting aside the brass political scare tactics employed in the outsourcing debate and the xenophobic undertones of much of the current discussions of immigration, the economic evidence says no. Foreign workers—whether they are in Mexico, India or China; or if they are in Texas, Los Angeles or New York City—have not hurt the U.S. economy or caused any significant net reduction in U.S. employment.
The “threat” from foreign labor, if there is one, will be best mitigated by improving the productivity and education of U.S. workers.
There is a rapidly developing academic literature on the impact of U.S. firms’ hiring abroad on their hiring in the United States. Research by academic economists and economists at federal agencies indicates that an increase in employment by U.S. corporations abroad does not lead to fewer jobs in the United States and is likely in fact to lead to more jobs. Ralph Kozlow summarizes a paper by professors Desai, Foley and Hines (2005) in simple terms: “employment and production at U.S. parent companies and their foreign affiliates tend to be complements rather than substitutes.” In fact, Desai, Foley and Hines find that a 10 percent increase in foreign wages paid is associated with a 4 percent increase in domestic wages paid.
While the rhetoric of foreigners stealing U.S. jobs is common in Washington, emerging economic evidence points in the other direction. A recent working paper by UC Davis Professor Giovanni Peri looks at the impact of foreign born workers on the employment levels of native born workers in California:
We find that between 1960 and 2004 immigration did not produce a negative migratory response from natives [to other states]. To the contrary, as immigrants were imperfect substitutes for natives with similar education and age we find that they stimulated, rather than harmed, the demand and wages of most U.S. native workers.
Similarly, work by UC Berkeley labor economist Professor David Card looked at wages of low-skill foreign and native workers in major U.S. cities and found that relative wages of native-born highs school drop-outs were not affected by the amount of low-skilled foreign labor in the city. “Overall,” Card writes, “evidence that immigrants have harmed the opportunities of less educated natives is scant.”
Contrast the debate in Washington over energy independence with the debate over immigration. Fearful of “foreign-born” oil, many in Washington have worked to create federal mandates and generous tax incentives for domestically produced alternative energy. While most attention seems focused on bio-fuels, significant tax incentives for wind, solar, geothermal and other energy sources promulgate as well.
If constraining the influx of foreign labor into the United States is a good idea for protecting U.S. workers, why isn’t Congress also proposing an absolute limit on the number of barrels of foreign oil as a way to “protect” the U.S. economy and promote energy independence? The answer is obvious and while current efforts at weaning the U.S. off its dependence on foreign oil are heavy handed and likely not cost effective, they are at least focused on developing improved technologies and resources domestically. If only the immigration debate shared this focus.
Foreign workers—whether they are in Mexico, India or China; or if they are in Texas, Los Angeles or New York City—have not hurt the U.S. economy or caused any significant net reduction in U.S. employment.
The “threat” from foreign labor, if there is one, will be best mitigated by improving the productivity and education of U.S. workers. Raising high school graduation rates and working to ensure that a high school diploma means that students have appropriate skills for the workplace will mean that native-born workers will be less likely to be in head to head competition for jobs with low-skilled foreign born workers. Similarly, U.S. colleges need the rigor and discipline to ensure that our graduates have the necessary critical thinking skills and practical science knowledge to compete effectively with highly educated workers from abroad.
Would every single American benefit from more foreign workers in America? Of course not. But the prosperity of the U.S. economy is due in part to the flexibility of its labor market, one that constantly adjusts to changes in technology, business models, consumer preferences and global economic growth. Every week hundreds of thousands of workers lose their jobs through no fault of their own. While a policy that dramatically increases visas for foreign workers may cause displacement for some workers in some industries, the magnitude of that displacement will be small relative to the naturally occurring labor market turnover and normal dynamics in the US economy. Job loss (gross, not net) averages near 2.4 million a month and net job gain has averaged 160,000 monthly in the last year. Brookings Institution economist Charles Schultze, in a paper that explores the relationship between increased outsourcing and domestic hirings and firings, estimates the maximum number of jobs adversely affected by outsourcing from 1999-2001 was 16,250 per month or 0.2 percent of private employment.
If an objective of immigration reform is increased economic growth in the United States, the focus of debate should not be on a “balance” between how many foreigners to let in and how many foreigners to kick out but rather on maximizing legal cross-border labor flows while ensuring a reasonable means for enforcing U.S. laws. Unfortunately, the current legislation being debated in the U.S. Senate creates a huge employee verification system that will raise real compliance burdens on all employers and the government. Current legislation requires that within 18 months of enactment all employers must verify all new hires—foreign-born and native-born—through a federal employment verification system to be administered by the Department of Homeland Security. Within three years, all workers in the U.S. (approximately 140 million) will need to be verified through this system. The burden from this program will obviously be higher on smaller employers and employers with high rates of job turnover. Because no such system can operate perfectly, it is reasonable to believe that tens of thousands of Americans will be wrongly refused their initial federal authorization and will be required to contest the finding and appeal to government for review.
If lawmakers are committed to reducing employment of illegal workers in a low cost and efficient manner, a simple solution is available. Under current law, employers report the social security numbers for their workers to the Social Security Administration. By ensuring that law-enforcement officials at the Department of Homeland Security have access to name and location data on employers with high numbers of false or "mismatched" Social Security numbers, targeted audits could locate illegal workers and their employers. An operational and efficient audit system combined with enforcement of current law will serve as a powerful deterrent to hiring illegals.
The good news is that in addition to the burdensome, federal, 100% verification system for all workers in the current legislation, a data-sharing provision like the one outlined above is contained in the Senate bill as well. Unfortunately, the Senate has progressed, through an amendment offered by Senator Kennedy, from a reasonable data-sharing provision focused on worst offenders to a more cumbersome expansion that will flood DHS with far more data than they could possible use. Nevertheless, better data-sharing among agencies is a sufficient tool to enforce our laws, particularly if the data-sharing is targeted appropriately to the biggest offenders.
The truth is we shouldn't fear foreign workers any more than we fear foreign electronics or foreign wine. In fact, we should fear them much less, as foreign-born workers (both here and abroad) are consumers of American goods. As their incomes rise, they will consume even more American goods. Growing the U.S. economy by growing the global economy, which leads to both increased exports and efficiency gains through increased trade, can be a powerful tool for raising American living standards. The current immigration debate is too focused on issues of terrorism, amnesty, and building fences and not focused enough on buttressing a core strength of the U.S. economy—a tireless pool of labor with roots from around the world united by a desire to work hard and get ahead.
When the action moves from the Senate to the House of Representatives, the debate could sink from social hall gathering to frat party. If the White House doesn’t get serious about advocating the economics of immigration, we could be left with a serious hang over.
Alex M. Brill is a Research Fellow at the American Enterprise Institute and Economic Policy Advisor to Buchanan, Ingersoll & Rooney, P.C. He was Chief Economist and Senior Advisor on the House Committee on Ways and Means, where he worked from 2002-2007.
