National Data | The Smoking Bottom Line: Immigration Boosting Profits, Cutting Wages

Data released last week show that corporate profits in the fourth quarter of 2005 claimed the largest share of GDP in forty years. Not since the third quarter of 1966 have profits taken a larger chunk of the economy.

More alarming (for labor) is the abrupt acceleration in profit's share during the Bush years:


Since the third quarter of 2001 the share of GDP going to corporate profits has soared from 7.0 percent to 11.6 percent, while the share going to labor compensation declined by 2.4 percentage points.

The last few years should have been good ones for labor. Since February 2004 more than 4 million jobs have been created. Output per worker increased by 3.5 percent in 2004 and 2.7 percent last year. Yet the balance of power continued shifting from labor to capital. Not only did profits spike as a share of GDP, but real median income actually declined in 2003 and 2004 (the latest available year.)

Optimists insist that, in the long run, profits can only grow as fast as GDP. If this is true, then labor's declining income share is unsustainable, and will eventually "self correct." That's what we've seen historically.

But the foreign-born share of the labor force—15 percent in 2005—is also unprecedented. Since 2001 illegals have accounted for most of immigrant labor force growth.

Cheap immigrant labor induces only a nugatory increase in total native income. Its biggest impact, according to Harvard economist George Borjas, is to redistribute income from native workers to employers.

Recent data seem to confirm this. The construction industry is booming, home builders are racking up record profits, yet average construction wages have fallen between 15 percent and 35 percent across the country—the result of cheap immigrant labor.

Similarly, the service industriesrestaurants, hotels, motels, cleaning companies, etc. – are major employers of immigrant labor. These industries are booming, creating wealth for executives and shareholders. But average real wages of service industry workers have declined since 2001.

Is rising income inequality unsustainable? Henry Ford certainly thought so. His decision to pay autoworkers $5 per day was predicated, in part, on the fear that ever declining labor shares would eventually shrink the market for autos.

But that was in 1914. We were a "closed economy" in which production and demand were overwhelmingly domestic. What was good for Ford workers was good for Ford, and vice-versa.

Arguably, the world today is run by a global elite who have more in common with each other than with the middle classes who happen to share their nationality and work in their factories.

For most of the twentieth century the income distribution traced a long U-shape, with inequality declining from 1930 to about 1970 and increasing in subsequent decades. Recently, even liberal economists have discerned the role immigration plays in these trends:

"Claudia Goldin and Robert Margo have called the flattening of the income distribution during 1930-70 the 'Great Compression,' and they attribute it to at least three events that fit neatly into this U-shaped pattern, all of which influence the effective labor supply curve and the bargaining power of labor: the rise and fall of unionization, the decline and recovery of immigration, and the decline and recovery of international trade and the share of imports." [Ian Dew-Becker, Robert J. Gordon, "Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, 2:2005.]

The very mention of immigration is significant. Mainstream economists rarely list it as a likely suspect, focusing instead on the increased demand for skilled workers as explanation for increased income inequality. But are we to believe that such skills were irrelevant during the 1930 to 1970 period? Dew-Becker and Gordon write:

"It is possible that the heyday of unionized, assembly-line manufacturing provided an abundance of repetitive jobs for high-school dropouts, but the fact that these jobs paid relatively well depended perhaps more on the strength of unions and the relative absence of immigration and imports."

For American workers, the signs are not good—until immigration policy changes.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.