Economics of Immigration: The NAS Report

"More than 40 million people living in the United States were born in other countries, and almost an equal number have at least one foreign-born parent. Together, the first generation (foreign-born) and second generation (children of the foreign-born) comprise almost one in four Americans. It comes as little surprise, then, that many U.S. residents view immigration as a major policy issue facing the nation. Not only does immigration affect the environment in which everyone lives, learns, and works, but it also interacts with nearly every policy area of concern, from jobs and the economy, education, and health care, to federal, state, and local government budgets."

That's the beginning of the just-released 500+ page report from the National Academy of Sciences on "The Economic and Fiscal Consequences of Immigration," edited by Francine D. Blau and Christopher Mackie. A prepublication copy of the report (essentially, uncorrected proofs) can be downloaded for free here. The conventional approach, followed in this report, is to divide up the effects of immigration into two areas; effects on native jobs and wages, and effects on government budgets and services. But before getting to those issues, I found some of the basic findings about immigration over the last couple of decades to be intriguing. Quoting from the summary:

• The number of immigrants living in the United States increased by more than 70 percent—from 24.5 million (about 9 percent of the population) in 1995 to 42.3 million (about 13 percent of the population) in 2014; the native-born population increased by about 20 percent during the same period.
• Annual flows of lawful permanent residents have increased. During the 1980s, just under 600,000 immigrants were admitted legally (received green cards) each year; after the 1990 Immigration Act took effect, legal admissions increased to just under 800,000 per year; since 2001, legal admissions have averaged just over 1 million per year.
• Estimates of the number of unauthorized immigrants in the United States roughly doubled from about 5.7 million in 1995 to about 11.1 million in 2014. Gross inflows, which had reached more than 800,000 annually by the first 5 years of the 21st century, decreased dramatically after 2007; partly as a result, the unauthorized immigrant population shrank by about 1 million over the next 2 years. Since 2009, the unauthorized immigrant population has remained essentially constant, with 300,000-400,000 new unauthorized immigrants arriving each year and about the same number leaving.
• The foreign-born population has changed from being relatively old to being relatively young. In 1970 the peak concentration of immigrants was in their 60s; in 2012 the peak was in their 40s.
• Educational attainment has increased steadily over recent decades for both recent immigrants and natives, although the former still have about 0.8 years less of schooling on average than do the latter. Such averages, however, obscure that the foreign born are overrepresented both among those with less than a high school education and among those with more than a 4-year college education, particularly among computer, science, and engineering workers with advanced degrees. The foreign and native born populations have roughly the same share of college graduates.
• As time spent in the United States lengthens, immigrants’ wages increase relative to those of natives and the initial wage gap narrows. However, this process of economic integration appears to have slowed somewhat in recent decades; the rate of relative wage growth and English language acquisition among the foreign-born is now slightly slower than it was for earlier immigrant waves. The children of immigrants continue to pick up English language skills very quickly.
• Geographic settlement patterns have changed since the 1990s, with immigrants increasingly moving to states and communities that historically had few immigrants. Nonetheless, the majority of the foreign-born population continues to reside in large metropolitan centers in traditional gateway states.

The conventional wisdom on the economic effects of immigration is that the effect on jobs is minimal. The number of jobs in a developed economy expands over time as the population expands--whether the growth in population is from native-born workers or from immigration.  Unemployment rates rise and fall with recessions and upswings, but there is no long-term trend to higher unemployment rates over time. On how immigrants affect the total number of jobs for native workers, the NAS report puts it this way:

"The literature on employment impacts finds little evidence that immigration significantly affects the overall employment levels of native-born workers. However, recent research finds that immigration reduces the number of hours worked by native teens (but not their employment rate)."

However, immigration can potentially have an effect on the distribution of wages, potentially substituting for some kinds of native workers and thus holding down their wages, but also potentially complementing other native workers and leading to higher wages for them. The wage effects of immigration is a tough topic for research. For example, imagine that immigrants tend to go to areas where wages are higher and jobs are more plentiful. If this plausible assumption holds true, then there will be a positive correlation in which areas with more immigrants will also tend to have better jobs and wages, but that correlation certainly doesn't prove causality. In addition, low-skilled and high-skilled immigrants will be substitutes and complements for different kinds of workers. In some places and jobs, immigrants may even be competing more with earlier immigrants, rather than with native workers.  Given these complexities, on how immigrants affect wages for native workers, the NAS report is necessarily more equivocal:

"When measured over a period of 10 years or more, the impact of immigration on the wages of natives overall is very small. However, estimates for subgroups span a comparatively wider range, indicating a revised and somewhat more detailed understanding of the wage impact of immigration since the 1990s. To the extent that negative wage effects are found, prior immigrants—who are often the closest substitutes for new immigrants—are most likely to experience them, followed by native-born high school dropouts, who share job qualifications similar to the large share of low-skilled workers among immigrants to the United States. ...

"Until recently, the impact of high-skilled immigrants on native wages and employment received less attention than that of their low-skilled counterparts. Interest in studying high-skill groups has gained momentum as the H1-B and other visa programs have contributed to a rapid rise in the inflow of professional foreign-born workers (about a quarter of a million persons per year during the last decade). Several studies have found a positive impact of skilled immigration on the wages and employment of both college-educated and noncollege educated natives. Such findings are consistent with the view that skilled immigrants are often complementary to native-born workers, especially those who are skilled; that spillovers of wage-enhancing knowledge and skills occur as a result of interactions among workers; and that skilled immigrants innovate sufficiently to raise overall productivity. However, other studies examining the earnings or productivity prevailing in narrowly defined fields find that high-skill immigration can have adverse effects on the wages or productivity of natives working in those fields."

The NAS report also notes some other economic effects of immigration:

"The contributions of immigrants to the labor force reduce the prices of some goods and services, which benefits consumers in a range of sectors including child care, food preparation, house cleaning and repair, and construction. Moreover, new arrivals and their descendants are a source of demand in key sectors such as housing, which benefits residential real estate markets. ... Importantly, immigration is integral to the nation’s economic growth. Immigration supplies workers who have helped the United States avoid the problems facing stagnant economies created by unfavorable demographics—in particular, an aging (and, in the case of Japan, a shrinking) workforce. Moreover, the infusion by high-skill immigration of human capital has boosted the nation’s capacity for innovation, entrepreneurship, and technological change."

On the issue of how immigration affects government budgets and services, the research takes a variety of perspectives. For example, a single immigrant with a job, no children and law-abiding, tends to pay more in taxes (including sales taxes and income tax withholding) than consumed in government services. A high-skilled immigrant will earn more income and pay higher taxes than a low-skilled immigrant. An immigrant with children in public schools will consume more services. An low-skilled immigration with a lower income level who works long enough to be eligible for Social Security and Medicare will consume more in services. In thinking about how immigration affects government budgets and services, it makes a difference if one takes a short-run perspective of a year, or the typically accumulation of taxes paid and government services over a lifetime.  These lifetime patterns will vary among first-, second-, and third-generation immigrants. Thinking about the costs of government services means that you need to think of immigrants as consuming a share of publicly provide goods like, say, national defense.

With such complexities duly noted, the NAS report lays out some overall conclusions. For example, a standard finding is that over a lifetime, immigration has a positive fiscal effect for the federal government but a negative effect for state and local government.

"Viewed over a long time horizon (75 years in our estimates), the fiscal impacts of immigrants are generally positive at the federal level and negative at the state and local levels. State and local governments bear the burden of providing education benefits to young immigrants and to the children of immigrants, but their methods of taxation recoup relatively little of the later contributions from the resulting educated taxpayers. Federal benefits, in contrast, are largely provided to the elderly, so the relative youthfulness of arriving immigrants means that they tend to be beneficial to federal finances in the short term. In addition, federal taxes are more strongly progressive, drawing more contributions from the most highly educated. The panel’s historical analysis indicates that inequality between levels of government in the fiscal gains or losses associated with immigration appears to have widened since 1994. The fact that states bear much of the fiscal burden of immigration may incentivize state-level policies to exclude immigrants and raises questions of equity between the federal government and states. ...

"For the 2011-2013 period, the net cost to state and local budgets of first generation adults (including those generated by their dependent children) is, on average, about $1,600 each. In contrast, second and third-plus generation adults (again, with the costs of their dependents rolled in) create a net positive of about $1,700 and $1,300 each, respectively, to state and local budgets. These estimates imply that the total annual fiscal impact of first generation adults and their dependents, averaged across 2011-13, is a cost of $57.4 billion, while second and third-plus generation adults create a benefit of $30.5 billion and $223.8 billion, respectively. By the second generation, descendants of immigrants are a net positive for the states as a whole, in large part because they have fewer children on average than do first generation adults and contribute more in tax revenues than they cost in terms of program expenditures."

A different way to slice this data is to look compare first-, second-, and third-generation immigrants at different ages.

"Cross-sectional data from 1994-2013 reveal that, at any given age, the net fiscal contribution of adults in the first generation (and not including costs or benefits generated by their dependents) was on average consistently less favorable than that of the second and third-plus generations. Relative to the native-born, the foreign-born contributed less in taxes during working ages because they earned less. However, this pattern reverses at around age 60, beyond which the third-plus generation has
consistently been more expensive to government on a per capita basis than either the first or second generation; this is attributable to the third-plus generation’s greater use of social security benefits."

Another finding is that because immigrant over the last few decades have become better-educated, their fiscal effect has also improved.

"Today’s immigrants have more education than earlier immigrants and, as a result, are more positive contributors to government finances. ...  Whether this education trend will continue remains uncertain, but the historical record suggests that the total net fiscal impact of immigrants across all levels of government has become more positive over time."

My overall sense is that immigration is overall a positive force for the US economy, and I support a allowing steady stream of legal immigration over time--especially high-skilled migrants who have already spent time in the United States being trained at US colleges and universities, or working in US-based firms. But I would also say that the positive economic effects of immigration are not enormous, and can be negative for certain subgroups. Moreover, I suspect that while our social controversies over immigration may often be phrased in economic terms, a lot of the heat and energy in these controversies arises from perceptions about non-economic consequences of immigration.