May 24, 2010

National Data, By Edwin S. Rubenstein

Flash: Immigrants Raise Native Wages, (Aka, How to Lie With Statistics)

For most Americans, the central issue in the immigration debate is how foreign workers affect the economic opportunities of natives. Economics 101 teaches that an increase in the supply of labor will reduce the price (wage) of labor. But while new immigrants account for most of U.S. labor force growth in recent years, they also buy goods and services, creating more jobs. The tug of war between lower wages and higher economic growth is key to understanding immigration’s impact on native workers.

The consensus among academic economists is that immigration’s major impact is distributional: it lowers the wages of natives who compete directly with immigrants in the work force and raises the income of upper income natives who derive a disproportionate share of income from capital gains, stock options, and other unearned income derived from higher profits.

Several assaults on this consensus have been mounted by liberal think tanks, who seem passionately attached to immigration for unspecified reasons. The latest, a study by the Economic Policy Institute, concludes that native workers gain ground from immigration.

“A key result from this work is that the estimated effect of immigration from 1994 to 2007 was to raise the wages of U.S.-born workers, relative to foreign-born workers, by 0.4% (or $3.68 per week), and to lower the wages of foreign-born workers, relative to U.S.-born workers, by 4.6% (or $33.11 per week). In other words, any negative effects of new immigration over this period were felt largely by the workers who are the most substitutable for new immigrants—that is, earlier immigrants.” Immigration and Wages—Methodological advancements confirm modest gains for native workers, Heidi Shierholz February 4, 2010 (Emphases in original)

Particularly puzzling is the conclusion regarding the native workers thought to be most vulnerable:

“For workers with less than a high school education, the relative wage effect of immigration was similar to the overall effect. U.S.-born workers with less than a high school education saw a relative 0.3% increase in wages (or $1.58 per week), while foreign-born workers with less than a high school education saw a relative 3.7% decrease in wages (or $15.71 per week). In other words, immigration among workers with less than a high school degree served to lower the relative wages of other immigrant workers with less than a high school degree, not native workers with less than a high school degree.”

EPI bottom line: “Our analysis finds little evidence that immigration negatively impacts native-born workers.”

If immigration increases the labor supply, how can it not fail to lower wages?

One theoretical possibility—immigrants and natives of similar educational and experience levels are not easily substituted for one another in employment:

“This may arise, for example, among workers with low levels of education if native workers are more likely to be concentrated in jobs that require strong English skills and immigrant workers are more likely to be more concentrated in jobs that do not (for example, waitstaff versus line cooks).”

Perhaps. But it’s hard to see why low-wage immigrants can’t be easily substituted for natives in construction, manufacturing, and agriculture jobs where they comprise a disproportionately large share of the workforce.

It’s an interesting question why a liberal think tank would be so pleased to claim that immigration is busting down immigrant wages, even if it’s leaving native-born wages substantially untouched. But it’s not true anyway.

Harvard economist George Borjas recently critiqued a study that reached conclusions as implausible as EPI’s. Drilling down into the data, Borjas found that workers classified as “high school dropouts” included students still in high school who only worked part time. There are proportionately many more such student workers in native households than among immigrants. This skews the results.

While student workers earn less, their hours worked are sensitive to the increased demand that comes from immigration. A McDonalds server, for example, could see weekly earnings jump by 50%—from $50 to $75—in areas experiencing a large foreign influx. Meanwhile his dad—a true high school dropout—might suffer a decline in earnings, say from $2,000 to $1,800 per month, a 10% decline resulting from immigrant competition.

In percentage terms, the average income received by workers in this family is higher due to immigration. But this, of course, is a statistical sleight of hand: the family is worse off.

After removing student workers from the data, Borjas finds strong evidence of immigration’s economic downside:

“Under conventional classifications of workers by education and experience, the data fail to reject the hypothesis that immigrants and natives are perfect substitutes. Even allowing for long-run adjustments in the capital stock, immigration appears likely to lower the wages of those native workers most affected by immigration-induced supply shifts.” [Imperfect Substitution Between Immigrants And Natives: A Reappraisal, George J. Borjas, et al, March 2008 (PDF)]

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