Is immigration still good for the U.S. economy?

Is immigration still good for the U.S. economy?

10/07/2013 | FxM – Evan Brock Gray

This question is posed at an interesting time for the United States. For one, this editorial is being written on the 4th of July, the day Americans celebrate their country´s 237th birthday this year while enjoying barbeques and fireworks on a warm summer´s evening and reflecting on the nation´s past. Secondly, and more specifically, the U.S. Senate has just passed a vote to overhaul current immigration policy and the House of Representatives is going to be taking up the issue after their holiday break. So let´s take a look at this politically and economically charged issue to see whether allowing more regulated immigration, legalizing undocumented immigrants and increasing border security (the three main areas of the new bill) will be good for the U.S. economy.

In terms of costs, the “The Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744)” starts off sprinting. At least another 700 miles of fencing along the U.S.-Mexican border will have to be installed and some 20,000 new Border Patrol agents will have to be recruited, trained and stationed. You can say that will mean 20,000+ new mid-skill level jobs but the cost estimate for this and other “boarder security enhancement” projects comes to around $40 billion. Also, with millions of new immigrants and their families coming into the U.S. over the next decade or two, huge amounts of money would have to be put towards schools and affordable housing (this might be welcomed in some states and cause headaches in others) and there is an estimated increase of $262 billion in direct spending, especially on healthcare and welfare program costs.

Also, what would happen with so many more people joining the U.S. labor market (by about 9 million people by 2033)? Newly arrived or legalized immigrants have a higher propensity to work, actively seek out jobs and change from one job to the next -thereby making the labor market more dynamic- than do other people in similar categories in the U.S. job market. Also, according to both Mark Zuckerberg (Facebook) and Reid Hoffman (LinkedIn), high-skilled immigrants tend to be entrepreneurs and therefore increase innovation and boost knowledge economy; both key components of the U.S.´s global competitive advantage.

Employment rates would go up in the long-run with the expanding job market and also in the medium-run since demand would increase for goods and services in both traditional and new sectors. Yet short-term imbalances over the first few years while getting the more than 11 million immigrants already living in the U.S. into labor demand and supply equilibrium will be trying. In general, some many more people working will excellent for the U.S. financial situation: more people working means more taxes are collected which, in turn, will help to reduce the U.S.´s chronic budget deficits.

What will happen to wages in different job-skill classes is also interesting to look at. Low-skill jobs and high-skill jobs would see downward pressure on their wages because these are the two types of immigrants sought most by the U.S.: laborers in the agriculture and low-level service industries and professionals dedicated to science and engineering fields. By 2025, average wages would start to increase as both labor productivity (output / labor inputs) and capital productivity (output / capital inputs) increase in the long-run. Capital resources would become scarcer with an increasing labor force so investment in capital would increase over the next decade due to this expectation. Total factor productivity (TFP = output / (capital productivity x labor productivity)) would increase by 0.7% by 2023 and by 1% by 2033, which is important because as TFP goes up, so do wages, interest rates (good for savers and investors) and GDP. By the way, under the S. 744 immigration bill, GDP is projected to increase by 3.3% ($517 billion) in 2023 and by 5.4% ($846 billion) in 2033.

In the end, there are costs and there are benefits to increasing immigration in the U.S. The Congressional Budget Committee (CBO) made an important study (where the previously mentioned data can be found) on the effects of the provisions included in S. 744 and, on the whole, found there would be a net benefit to the U.S. economy, especially in the medium and long-run. However, the expanding U.S. lower-middle class may not ever feel the immigration overhaul´s positive effects. Just as the job market started to look better, here come millions of job seekers to ramp up the competition, and they´ve come to stay and start families. But that might be a blessing in disguise: the start of the 20th century was marked by an immigration boom and was followed by a century of incredible economic modernization and social inclusion. Nowadays, with a baby-boomer generation getting very close to retirement and a fertility rate falling below the “replacement level” of 2.1 children per mother, what is really going to be difficult is to maintain a robust economy and a healthy workforce with a dwindling Social Security fund at the same time. So, we might want to start the 21st century the same way we started our beloved 20th…

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