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The economics of illegal immigration

It can contribute to the economy, but it disproportionately affects low-skilled native workers


Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

US President Donald Trump’s first steps to tighten American border policy have, unsurprisingly, courted controversy. His executive order clamping down on immigration from seven predominantly Muslim nations is aimed at bolstering national security. The issue that had dominated his campaign trail and much of the first week of his presidency—stopping illegal immigration from Mexico—is a different matter. The driving impulse here, even if obfuscated by unfortunate rhetoric and a border wall solution that is essentially a boondoggle, is economic. That impulse is more complicated than it may initially seem.

The US state of Arizona makes a good starting point. A border state with a high number of illegal immigrants, it started cracking down in 2004. A study carried out by Moody’s Analytics for The Wall Street Journal, distinguishing between the effects of the recession following the financial crisis and that of the crackdown, estimated that the outflow of illegal immigrants from the state had lowered its gross domestic product by an average of 2% between 2008 and 2015.

While the lack of precise data and the consequent risk of confusing correlation with causation should be kept in mind, it isn’t too much of a stretch to say that the crackdown will eventually cost American workers as a lower growth trajectory results in fewer jobs. This is exacerbated by the fact that the replacement rate of American and legal immigrant workers in the jobs vacated by illegal immigrants is low—less than 10%, according to Moody’s. US Bureau of Labor Statistics seem to bear this out, showing a worker shortage as the Arizona economy recovered following the crisis.

Yet, it isn’t as cut and dried a case as these numbers suggest. Those bureau statistics show that wages for American low-skilled workers rose significantly between 2010 and 2014. In short, while clamping down on illegal immigration hurt overall growth and thus the employment prospects for American workers—and is likely to do so in the medium-to-long term too as employers go in for automation to deal with worker shortages and rising wages—it also had a redistributive effect.

Economist Gordon Hanson’s The Economic Logic Of Illegal Immigration highlights these trade-offs on a national scale. He contends, provocatively, that illegal immigration is more responsive to economic growth than legal immigration. The former exists outside the legal framework and can thus respond swiftly to business cycles. In contrast, the latter must be filtered through layers of bureaucracy and is thus relatively unresponsive to the economy’s immediate needs, lagging the business cycle by as much as two-three years. The compromise, as Harvard economist George Borjas has pointed out, is that low-skilled American workers are disproportionately affected when it comes to employment prospects and wage levels. And while the prices of labour-intensive goods also tend to drop because of the productivity yields of illegal immigration, nominal wage decreases will always be more politically visible than real wage decreases.

The other trade-off, as Hanson notes, is that the strain illegal immigration places on the state and tax-paying citizens varies from region to region. It is dependent on a range of factors such as the size of the immigrant’s family and the social safety net the state provides. While the strain illegal immigrants place on the education, medical and law-enforcement systems might be balanced out by the taxes they pay and the value they bring to the economy on a national scale, there might be specific states such as New Jersey where they cause a net loss to the exchequer.

And there’s the main takeaway from the illegal immigration debate in the US. Its effect on the larger economy is a wash, according to most economists—neither beneficial, nor harmful to any significant degree—but it changes the proportion in which the pie is distributed. This effect is pronounced in states that have a lower proportion of highly educated people and thus more citizens competing for low-skill jobs with illegal immigrants. Witness India’s north-east and east, for instance. Bangladeshi immigrants have contributed to a rise in agricultural productivity—but the large section of the native population working in the informal economy and thus competing with them, as well as the state’s poor ability to collect taxes, means that they have imposed a considerable cost.

In a 2009 testimony before the Senate judiciary subcommittee on immigration, refugees and border security, Alan Greenspan said, “There is little doubt that… illegal immigration has made a significant contribution to the growth of our economy… Some evidence suggests that unskilled illegal immigrants… marginally suppress wage levels of native-born Americans without a high-school diploma…. However, the estimated wage suppression and fiscal costs are relatively small, and economists generally view the overall economic benefits of this workforce as significantly outweighing the costs.”

This cavalier dismissal of the trade-offs and the costs imposed on citizens in lower socio-economic brackets—not to mention of non-economic concerns such as cultural—is at the heart of the rise of populism and populist politicians, whether in the US or in Europe. The issue requires debate shorn of demagoguery from both left and right—a rare commodity in present political climes.

Is illegal immigration an economic benefit or drain? Tell us at views@livemint.com

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