Immigration and the economy: A changing debate

December 17, 2008

There's a consensus among economists and policy analysts that immigrant labor benefits the economy on whole -- and dramatically so. And while the beneficial role of immigrant labor in the economy may be muted now, as demand for labor is relatively weak, speakers at the recent "Immigration and the Economy" forum suggested that the negative effects of curbing immigration may well be felt more acutely when the economy rebounds.

Participants in the forum -- which was co-sponsored by the W. P. Carey School of Business, The University of Arizona, Thomas R. Brown Foundations and The Communications Institute -- agreed that the "character" of immigration has changed since the U.S. government began cracking down on illegal immigration, especially in U.S.-Mexico border states like Arizona. That has altered the way immigration effects the economy, participants said -- and likely not for the better.

Immigration benefits the economy

Bill Beach, director of the Center for Data Analysis at The Heritage Foundation, said that "if we want a stronger U.S. economy, we need to have the right flow of labor into the U.S. 50 percent of the growth in the labor force in the last 20 years has come from immigrant sources."

W. P. Carey School economics professor Kent Hill said that there are "winners and losers," economically-speaking, from immigration. The "winners," Hill said, include the businesses that employ lower-cost immigrant workers and shoppers who benefit from lower prices. "Losers" include those American workers who compete with immigrants for jobs.

"But it's not a wash," Hill said. "Immigration has a net positive effect on the U.S. economy."

One of the benefits of immigrant labor is its price-reducing effect, said Magnus Lofstrom, research fellow at the Public Policy Institute of California. He said that labor-intensive services, for example, are less expensive because of the availability of immigrant labor. And because of the lower cost of household services like housekeeping and child care, Lofstrom said, American women may have a greater opportunity to enter the workforce than they otherwise would.

 "If low-skill immigrants are filling gaps in the labor market, they're making possible economic activity that wouldn't otherwise happen," said Judith Gans, manager of the Immigration Policy Program at the University of Arizona. "In other words, the pie is bigger."

"And there are real indirect fiscal consequences from that bigger pie," Gans said, in the form of increased tax revenue, for example, as businesses grow and the wages of high-skill workers rise. "Those fiscal consequences in Arizona are positive on net, particularly because Arizona relies so heavily on sales taxes."

Beach agreed that undocumented, low-skill immigrant workers make a big difference for the U.S. economy. "If we ‘paused' immigration for one year, the effects would include $171 billion in lost GDP; 1 million people who are working in the U.S. legally would lose their jobs; there would be a $60 billion reduction in after-tax income for U.S. workers; and tax revenues at all levels would decrease significantly."

In Arizona, the negative impact of a decline in immigration could be even larger than for the nation as a whole, Beach said.

State representative-elect Russ Jones is already seeing the tax revenue decline that's a result of tighter border security -- which has cut down on legal border crossings, too. "Legal border crossings at the Port of San Luis have declined to pre-2001 levels," he said. That has significant negative impacts on the border communities, which are now seeing declining sales tax revenue as fewer people come to the U.S. to shop," Jones said.

Gans also cited the importance of immigrant labor in particular areas of Arizona's economy. "We know that particular industries -- construction, leisure & hospitality and agriculture -- rely heavily on immigrant labor," Gans said. "Roughly 43 percent of Arizona's gross state product in 2004 was generated by industries that rely heavily on immigrant labor," she said.

But immigration creates costs, too

But while forum panelists agreed that the net economic impact of immigration is positive, there are of course costs associated with immigration, too.

Some of the costs that aren't typically discussed, Lofstrom said, include a slightly negative effect on educational attainment for native-born children that's the result of competition for resources.

In addition, Lofstrom said, the availability of low-cost immigrant labor may remove the incentive for employers to adopt new technologies (the availability of low-cost labor allows firms to continue producing goods in a labor-intensive way rather than turning to new technologies to replace labor-intensive processes).

As a border-county policymaker, Santa Cruz County supervisor Manuel Ruiz offered a unique perspective on the costs of immigration. "There are of course costs associated with illegal border crossings," he said, citing autopsy and investigative costs when immigrants die (21 people died crossing the border into Santa Cruz County in 2007, Ruiz said).

There are also incarceration, prosecution and defense costs associated with prosecuting immigrants who commit crimes (drug smugglers, for example). And, Ruiz said, the hospital in Santa Cruz County spent approximately $1 million in 2007 treating undocumented immigrants who were unable to pay.

Forum participants suggested that increased border protection and laws like Arizona's employer sanctions law might force immigrant workers into an "underground economy." That, in itself, could have potential costs, said state representative Ben Miranda.

Miranda said the new trend toward an underground, or cash, economy will have a dramatic effect on health care, making it less likely that people will seek treatment before relatively routine problems become emergencies that require expensive care.

Another "cost we're not looking at," Miranda said, is the lack of parental involvement in children's education when immigrant parents are constantly fearful of prosecution.

Fiscal impacts change as more families immigrate

Debating the economic impact is one thing, forum panelists said. Judging the fiscal impacts (on state revenues and expenditures, for example), is quite another. "The fiscal impact is the fly in the ointment," Hill said. "That's where the debate really lies."

The fiscal impacts of immigration have changed, Hill said, because the character of immigration has changed.

Jones said that since the U.S. government has increased border enforcement, in the years since September 11th, more women and children have crossed the border to join male workers -- who no longer want to risk crossing back and forth from work in the U.S. to family in Central and Southern America.

Now that more immigrant families are living in the U.S. -- rather than just male workers -- there is more demand for education, health care and other social services.

But there's also evidence, Lofstrom said, that immigrant workers who put down roots in the U.S. have more positive fiscal effects than those who don't. "The longer these individuals are here, the more likely they are to positively contribute to the economy and to have a net positive fiscal effect," Lofstrom said.

Gans said that the net fiscal impacts of immigration are very hard to measure because it's difficult to capture the costs associated with immigrants' consumption of services like health care and education. She said that undocumented immigrants have less access to services and that foreign-born people consume less health care than native-born people.

Overall, Gans said, low-skill workers -- regardless of their immigration status -- consume more in services than they pay in taxes.

Setting immigration policy where demand and supply meet

With widespread agreement -- among economists and policy analysts, at least -- that the benefits of immigrant workers on whole outweigh the costs, the key to immigration reform, panelists suggested, is to design a system flexible enough to retain those benefits. Any redesigned Visa program, whereby immigrants can enter the U.S. to work, Beach said, must be flexible so that "demand for labor sets the supply for labor."

"The fundamental heart of the problem is that we don't bring enough immigrants into the U.S. legally," said Randy Capps, senior policy analyst at the Migration Policy Institute. He said that a task force set up to look at the immigration issue identified three ways to solve that fundamental problem -- to bring more workers into the United States legally.

"First, we should have a larger temporary worker program -- for agricultural and other seasonal employment. Second, we should also have a somewhat larger permanent program that's more job-focused. Third, in between, we should have a provisional program to allow people who come into the U.S. provisionally who work and abide by certain rules to be eligible for permanent residency," Capps said.

And, he said, each of the three programs should be flexible -- the number of people admitted into the country under each program should change based on economic conditions.

Lofstrom agreed that in order to successfully address the immigration issue, policymakers have to look at employers. "It is labor demand that brings the vast majority of undocumented workers to the United States," he said. "The immigration issue needs to be addressed from that perspective."

Judging the impact of Arizona's employer sanctions law

The employer perspective is one that, many argue, wasn't considered when Arizona lawmakers passed the Legal Arizona Workers Act, more commonly referred to as the "employer sanctions law," which went into effect on January 1, 2008.

Gans, who recently released a report, "Arizona's Economy and the Legal Arizona Workers Act," said that "it's too soon to tell" what the effects of the new law are or might be. She said that effects of the law may be muddled by the effects of the economic slowdown. A slower economy "softens the impacts the law would have," she said.

Gans said that in surveys 65-75 percent of small businesses have reported "no impact" from the law. "But as the economy improves and labor markets tighten, we may well see an increase in the number of businesses reporting negative impacts from the law," Gans said.

Dennis Hoffman, director of the Seidman Research Institute at the W. P. Carey School, questioned the unintended consequences that might be associated with the law. "In the Arizona economy, when things are bad, they're really bad, but when they're good, they skyrocket -- partly because of the ready supply of labor. But will that supply of labor be there going forward?"

With the U.S. economy in a state of perpetual crisis -- and the tunnel ahead still quite dark -- immigration policy reform is probably far from lawmakers' minds. But the issue may be more important for Arizona's economy -- especially in an upturn when labor demand is high again -- than those lawmakers realize.

Bottom line

  • There are "winners and losers," economically-speaking, from immigration. The "winners" include businesses that employ lower-cost immigrant workers and shoppers who benefit from lower prices. "Losers" include those American workers who compete with immigrants for jobs. But the effect of immigration on net is positive.
  • A one-year pause in immigration would reduce GDP by $171 billion, cause 1 million legal U.S. workers to lose their jobs, reduce American workers' after-tax income by $60 billion and decrease tax revenues at all levels of government.
  • Roughly 43 percent of Arizona's gross state product in 2004 was generated by industries that rely heavily on immigrant labor.
  • The costs associated with immigration include a slightly negative effect on educational attainment for native-born children; a possible reduction in businesses' adoption of new technologies; law enforcement and health care costs associated with illegal border crossings; and potential costs associated with an increase in "underground" economic activity.