Monday, February 16, 2009

Immigration Economics
Joe El Rady

Pro immigration groups contend that California’s vast supply of cheap immigrant labor vastly improves economic well being while anti immigration groups argue that it depresses native wages. The macroeconomic principles and consequences, however, prove far more complex and nuanced than the simplistic arguments advanced by either side and echoed in the general discourse.

The main source of economic gain from immigration lies in its ability to allow the California economy to employ domestic labor more productively, specializing in the production of goods in which the Golden State proves relatively more efficient (labor specialization).

Everyone in California gains from immigrants’ specialization. For example, were it not for cheap labor, homeowners would mow their own lawns and clean their own homes instead of dedicating their time to more gainful activities. Similarly, immigrant nannies allow mothers to participate in the labor force. The economy benefits from higher productivity of the more skilled homeowners and mothers and from the extra income received by the immigrants.

Regardless of whether or not the entire economy gains, however, losers and winners emerge among different groups of Californians. Furthermore, winners and losers emerge among states.

Within California itself, the gains accrue to the owners of productive factors that complement immigrant labor such as: domestic higher-skilled workers; and, the owners of capital. The consumers of goods and services produced by immigrant labor also benefit. Less skilled Californians lose from today’s composition of cheap immigrant labor as they compete with immigrants and thus find their wages diminished. Thus, cheap immigrant labor accrues benefits to wealthier natives while diminishing lower-skilled wage rates, thus, harming less wealthy natives.

Immigration also comprises a wealth transfer from other states to California. Primarily, the critical mass of immigrants in California’s labor market attracts capital. Firms view California’s labor market as an opportunity to pay lower wages; and thus, owners and entrepreneurs either relocate to or establish in the state. The entrepreneurs and capital moving to California leave other states while disenfranchised native low-skill laborers leave California, a fact supported by California Department of Finance statistics. This concentrates the benefits of immigration in California while diffusing its consequences elsewhere.

Second, while the conventional political wisdom holds that immigrants take jobs natives do not want; it may be more accurate to assert that immigrants take jobs that natives do not want at the going wage rate. Natives, may, for example, pick strawberries if the job were to pay $19 per hour. There is no guarantee, however, that owners would offer such a wage as they have no guarantee that their customers would pay the resulting retail price. Thus, industries would likely shrink without immigrant labor.

Moreover, several functions and even whole industries, such as the garment industry in Los Angeles, might have been outsourced to developing nations were it not for cheap immigrant labor that keeps those jobs in California and thus keeps those wages circulating and multiplying through the California economy.

The opposite also holds true. When an economy imports goods, it imports the labor hours used to produce those goods. For example, every time a box of Indonesian made t-shirts is unloaded at San Pedro, the economy is essentially importing, for example, 3 hours of low-skilled labor. Thus, trade increases the effective labor supply even without immigration as importation of goods is equivalent to immigration of particular workers. The main and ultimately important difference, however, rests in the fact that the foreign workers do not pay taxes in the United States and do not spend their incomes in the US economy.

Nevertheless, a sobering situation looms on the horizon. While immigration has benefited the California economy, immigration is not without costs. While many economists and politicians agree that immigration’s benefits outweigh its welfare costs, many ignore the potentially disastrous fiscal policy it has bred in reaction. The welfare reform legislation enacted in 1996 provides states wide discretion in setting benefit levels. Fortunately, this provides cost savings to states; unfortunately, it provides incentives for immigrant receiving states to race to the bottom in order to reduce the fiscal burden of immigration.

Propositions 13 and 187 embody this ethos as white voters, comprising 70% of the state’s electorate, refuse to pay for public services for the non-white majority. Thus, the California of the 1950s and 60s that built quality schools, modern highways, and a university system unparalleled for its time has given way to a state with low taxes and public services below the national average.

This ethos threatens to create a two-class California similar to the countries of origin of the immigrants. This comprises the true economic and fiscal effect of immigration, and thus, its future. How we as Californians choose to deal with this aspect of immigration policy and not the rancor and demagoguery of federal legislation and proposed wall construction, will decide the economic future and well-being of our Golden State.