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:
All this, and globalization too.
Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.
