December 15, 2005
No Virginia, There
is No Immigration Santa Claus
The latest revisionism regarding the economic impact of
immigration comes to us courtesy of the National Center
for Policy Analysis (NCPA), a Dallas-based libertarian
think tank. Its Daily Policy Digest (well worth
signing up for) cites a highly theoretical study by Giovanni Peri of UC Davis and Gianmarco
Ottaviano of the University of Bologna that claims that
“immigration actually increases domestic wages.”
Er…more workers,
higher wages?
What happened to supply and demand?
This amazing effect can allegedly be detected, according
to the authors, because “the average wage and
the value of housing for U.S. residents, were positively
associated across metropolitan areas with inflows of
foreign-born workers.” [Rethinking the Gains from
Immigration: Theory and Evidence from the U.S.
by Gianmarco I.P. Ottaviano and Giovanni Peri, August
2005
PDF]
In other words, you find higher-earning Americans in
cities where there are also lots of immigrants.
Cities with heavy immigrant inflows may indeed exhibit
higher native wages. But this happy correlation need not
necessarily apply to the national economy. Some
native-born workers will respond to the immigrant
influx by moving to other, less
immigrant-intensive, cities—pushing wages there
down. Conversely, native-born business owners will
move to immigrant gateways to exploit the
cheap labor. The cross flows of labor and capital
will forestall wage declines in immigrant gateways, but
reduce wages in the
hinterland.
Similarly, if immigrants settle in
boom towns there would be a strong correlation—but
no causation—between immigration,
housing prices, and wages.
The pitfalls of extrapolating from local labor market
trends to immigration’s national impact have been
exhaustively enumerated by
George Borjas. Pen and Ottaviano mention Borjas but
don’t address his point.
The Peri-Ottaviano model relies heavily on capital
investment to yield the economic gains it projects for
immigration. This benefit allegedly occurs because
businesses make additional capital investments in
response to the expanded supply of workers:
“For example,
companies open new
restaurants, add new factory lines or
build more houses. As business expands, hiring
foreign born workers to do one job may also require
hiring more native-born workers with complementary
skills.” [Immigration
Boosts Wages Daily Policy Digest NCPA, December
07, 2005]
Yes, immigrants must eat. They must have housing. And
such capital investments inevitably increase GDP. But
all capital investments are not created equal. Those
that are undertaken in response to increases in the
foreign born labor force are of the “capital
widening” variety. They are good for GDP, good for
owners of capital, but do nothing to increase income
of ordinary American workers. Only increases in capital
per worker—what economists call “capital
deepening”—increases worker productivity,
thereby enabling employers to pay higher wages without
raising prices.
If the supply of foreign workers were to dry up (by,
say, enforcing the immigration laws), two things would
happen: wages of
unskilled natives would increase, and employers
would look for ways to substitute capital for these
suddenly more expensive native workers. Labor scarcity
would lead to
labor saving technology—capital deepening—and the
resulting increase in labor productivity would push up
wages of unskilled natives.
Capital deepening has transformed some industries.
Automated switches have replaced most
telephone operators. Cars are increasingly produced
by robots guided by few workers rather than labor
intensive assembly lines. Thanks to serve-yourself gas
pumps, we have
fewer attendants but more gas stations.
In too many industries, however,
cheap immigrant labor has stifled such innovations.
Southern California’s apparel industry “has fallen
behind both domestic and international competitors, even
some of its lowest-labor-cost competitors, in applying
the array of
production and communications technologies available
to the industry (such as computer assisted design and
electronic data interchange.)” [Mark Krikorian,
Jobs Americans Won’t Do, CIS. January 7, 2004.]
The harvesting of
fruit and vegetables in California’s Central Valley
has become among the most
labor-intensive activities in North America—and that
won’t
change if the
Western Growers Association has anything to do with
it.
Similarly, pre-fab, modular home building innovations
have been put on hold, thanks to a construction labor
pool that
ranges from 31 percent foreign born (ordinary
laborers) to 45 percent foreign born (plaster and
stucco masons).
Not surprisingly, the headline-grabbing increases in GDP
mask an
ever widening income gap between haves and have-nots
of every race and ethnicity. [Table 1.] Just compare
growth in average income received by the top and bottom
fifth of U.S. households over the 1983 to 2003 period:
