The Thorny Economics of Illegal Immigration

Arizona’s economy took a hit when many illegal immigrants left, but benefits also materialized

By BOB DAVIS

Updated Feb. 9, 2016 10:49 a.m. ET

558 COMMENTS

MARICOPA, Ariz.—After Arizona passed a series of tough anti-immigration laws, Rob Knorr couldn’t find enough Mexican field hands to pick his jalapeño peppers. He sharply reduced his acreage and invested $2 million developing a machine to remove pepper stems. His goal was to cut the number of laborers he needed by 90% and to hire higher-paid U.S. machinists instead.

“We used to have many migrant families. They aren’t coming back,” says Mr. Knorr, who owns RK Farms LLC, an hour’s drive from Phoenix.

Few issues in the presidential campaign are more explosive than whether and how much to crack down on illegal immigration, which some Republican candidates in particular blame for America’s economic woes. Arizona is a test case of what happens to an economy when such migrants leave, and it illustrates the economic tensions fueling the immigration debate.

Economists of opposing political views agree the state’s economy took a hit when large numbers of illegal immigrants left for Mexico and other border states, following a broad crackdown. But they also say the reduced competition for low-skilled jobs was a boon for some native-born construction and agricultural workers who got jobs or raises, and that the departures also saved the state money on education and health care. Whether those gains are worth the economic pain is the crux of the debate. …

Between 2007 and 2012, Arizona’s population of undocumented workers dropped by 40%—by far the biggest percentage decline of any state—according to the Pew Research Center, a nonpartisan think tank whose numbers are cited by pro and anti-immigration groups.

I am agnostic about all estimates of the size of the illegal alien population. I simply don’t know how to estimate these numbers reliably, and I’m not persuaded Pew does either.

Moreover, the size of the anchor baby population is the real concern, but that seldom gets counted when the number of “undocumented workers” (many of whom don’t work) is guesstimated.

California, the biggest border state, lost just 12.5% of its illegal immigrants during that time period. Since 2012, Arizona’s illegal-immigrant population hasn’t grown much, if at all, according to state economists and employers and preliminary data from Pew. Since 2007, about 200,000 undocumented immigrants have left the state, which has a population of 6.7 million.

The cost of illegal immigration has been a big political issue in Arizona for years. But pinning down exactly how much it costs the state, and how much is collected from illegal immigrants through taxation, is surprisingly hard to do. The state doesn’t count it. Estimates vary widely, depending in part on debatable issues such as whether to include the cost of educating U.S.-born children of illegal immigrants.

Why not?

Moody’s Analytics looked at Arizona’s economic output for The Wall Street Journal, with an eye toward distinguishing between the effects of the mass departures of illegal immigrants and the recession that hit the state hard beginning in 2008. It concluded that the departures alone had reduced Arizona’s gross domestic product by an average of 2% a year between 2008 and 2015. Because of the departures, total employment in the state was 2.5% lower, on average, than it otherwise would have been between 2008 and 2015, according to Moody’s.

According to Michael Lewis’s The Big Short, Arizona was one of the four “Sand States” (along with Nevada, California, and Florida, to use the collective noun devised by Wall Street wits), where the Housing Bubble of 2003-2006 was centered. Is it just a coincidence that the vast majority of price declines in the value of housing before unemployment rose nationally in response to the popping of the bubble were in the four Sand States?

A huge question is: how much did immigration, current or recent, contribute to the Housing Bubble, which happened to be centered in four states with huge Hispanic immigration numbers and limited land for development? My impression from a wide variety of data sources, such as federal Home Mortgage Disclosure Act data and about a dozen studies of default rates by ethnicity, was that the Sand State Housing Bubble was based in significant measure on the circular reasoning that importing lots of cheap illegal aliens to build houses for people trying to get their kids away from having to go to school with the children of illegal aliens was a sustainable economic proposition.

But that’s not a popular opinion.

The recession, of course, also hurt the state’s economy. Mr. Hanson, the immigration economist, said the economic downturn led many migrants to leave.

Sure, but if the Sand State Housing Bubble of 2003-2006 was in sizable measure also an Immigration Bubble, then the Housing Bubble is what had previously caused many migrants to come. Yes, this is circular reasoning, but circular reason is one big way you get bubbles.

Economic activity produced by immigrants—what economists call the “immigration surplus”—shrank because there were fewer immigrants around to buy clothing and groceries, to work and to start businesses.

These days, construction, landscaping and agriculture industries, long dependent on migrants, complain of worker shortages. While competition for some jobs eased, there were fewer job openings overall for U.S.-born workers or legal immigrants.

According to the Moody’s analysis, low-skilled U.S. natives and legal Hispanic immigrants since 2008 picked up less than 10% of the jobs once held by undocumented immigrants. In a separate analysis, economists Sarah Bohn and Magnus Lofstrom of the Public Policy Institute of California and Steven Raphael of the University of California at Berkeley conclude that employment declined for low-skilled white native workers in Arizona during 2008 and 2009, the height of the out-migration. One bright spot: the median income of low-skilled whites who did manage to get jobs rose about 6% during that period, the economists estimate.

Arizona’s population of illegal immigrants grew nearly fivefold between 1990 and 2005, to about 450,000, according to Pew Research. Starting around 2004, the state approved a series of measures, either by ballot initiatives or legislation, aimed at discouraging illegal immigration. Undocumented immigrants in Arizona, about 85% of whom came from Mexico, are barred from receiving government benefits, including nonemergency hospital care. They can’t receive punitive damages in civil lawsuits. Many can’t get drivers’ licenses and aren’t eligible for in-state tuition rates. Arizona developed a national reputation for tough enforcement of the rules.

Some current Republican presidential contenders also take a tough line on immigration. GOP front-runner Donald Trump backs a “deportation force” to send home those here illegally, and he wants to build a wall on the Mexican border to keep out others. Texas Sen. Ted Cruz also wants a wall and would end Obama administration measures that have halted deportations of many undocumented workers.

On the Democratic side, former Secretary of State Hillary Clinton and Vermont Sen. Bernie Sanders would allow illegal immigrants already here to become citizens, and would continue the Obama administration policies.

Arizona’s immigration flow started to reverse in 2008 after the state became the first to require all employers to use the federal government’s E-Verify system, which searches Social Security records to check whether hires are authorized to work in the U.S. That law coincided with the collapse of the construction industry and the recession.

The first subprime lender failures (e.g., New Century Financial in Orange County, CA) were in the late winter of 2007. It would be interesting to determine if democratic action in Arizona had any effect on the financial markets opinion of the viability of subprime lenders like New Century.

In summary, if you are measuring Arizona’s economic performance, if you use 2007 as your baseline, you start with numbers inflated by the Great Housing/Immigration Bubble.

The combination persuaded many illegal immigrants to leave for neighboring states or Mexico.

In 2010, as the state economy began to recover, the Legislature stepped up pressure. Under a new law, SB 1070, police could use traffic stops to check immigration status. Another section of the law, later struck down by the Supreme Court, made it illegal for day laborers to stand on city streets and sign up for work on construction crews.

“It was like, ‘Where did everybody go?’ ” says Teresa Acuna, a Phoenix real-estate agent who works in Latino neighborhoods. Real-estate agent Patti Gorski says her sales records show that prices of homes owned by Spanish-speaking customers fell by 63% between 2007 and 2010, compared with a 44% drop for English-speaking customers, a difference she attributes partly to financial pressure on owners who had been renting homes to immigrants who departed.

Over the years, I’ve posted quite a few academic studies of default rates by ethnicity, all showing that Hispanics had much higher foreclosure rates.

… On the other side of the economic ledger, government spending on immigrants fell. State and local officials don’t track total spending on undocumented migrants or how many of their children attend public schools. But the number of students enrolled in intensive English courses in Arizona public schools fell from 150,000 in 2008 to 70,000 in 2012 and has remained constant since. Schooling 80,000 fewer students would save the state roughly $350 million a year, by one measure.

During that same period, annual emergency-room spending on noncitizens fell 37% to $106 million, from $167 million. And between 2010 and 2014, the annual cost to state prisons of incarcerating noncitizens convicted of felonies fell 11% to $180 million, from $202 million.

“The economic factor is huge in terms of what it saves Arizona taxpayers,” primarily on reduced education costs, says Russell Pearce, who as a state senator sponsored SB 1070.

Worker shortage

As the Arizona economy recovered, a worker shortage began surfacing in industries relying on immigrants, documented or not. Wages rose about 15% for Arizona farmworkers and about 10% for construction between 2010 and 2014, according to the Bureau of Labor Statistics. Some employers say their need for workers has increased since then, leading them to boost wages more rapidly and crimping their ability to expand.

Before the immigration crackdown, Precise Drywall Inc., of Phoenix, would deploy 50 people for jobs building luxury homes.

What percentage of these “luxury homes” buyers defaulted on their mortgages?

“I could pull out phone books where I had 300 or 400 guys’ numbers” to fill out crews, recalls company President Jeremy Barbosa. No longer. Many immigrants left and haven’t returned, while other workers moved on to other industries. …

The labor shortage has caused some wages to rise. Carlos Avelar, a placement officer at Phoenix Job Corps, a federal job-training center, says graduates now often mull two or three jobs offers from construction firms and occasionally start at $14.65 an hour instead of $10.

At DTR Landscape Development LLC, the firm’s president, Dick Roberts, says he has increased his starting wage by 60% to $14.50 an hour because he is having trouble finding reliable workers.

Is it really all that terrible that Americans with no academic skills can now scrape out a living by the sweat of their brows?

[Comment at Unz.com.]