Tuesday, April 18, 2006

Borjas in WSJ on immigration and wages

The WSJ editorial board is moderating its advocacy of open-borders. Recently they finally admitted that the phrase "Jobs Americans won't do" must be suffixed with "at current wages". Today the WSJ runs a piece (subscription required) by George Borjas that is ambivalent on the economic value of immigration (in the eyes of the general public, although the typical WSJ reader is probably going to see wealth transfer from laborers to capital/business owners in a relatively positive light):
Immigrants cluster in a small number of cities. A third live in three metropolitan areas (New York, Los Angeles and Chicago). In the past, the stereotypical study exploited this clustering by correlating wages and immigration across cities. A negative correlation, indicating that wages are lower in cities penetrated by immigrants, would suggest that immigrants reduce the wage of competing workers. In fact, the estimated correlations bunched around zero, creating the impression that immigrants had little impact.

This inference is not correct for two reasons. First, immigrants are not randomly distributed across cities. If, as seems sensible, high-wage areas attract immigrants, there would be a spurious positive correlation between immigration and wages. This positive correlation could easily swamp any negative wage effect that immigrants might have had.

Natives also respond to immigration. Employers in Michigan, for example, see that Southern California cities flooded by low-skill immigrants pay lower wages to laborers. The employers will want to relocate to those cities to increase their profits. The flow of jobs to the immigrant-hit areas cushions the adverse effect of immigration on the Southern California wage, while slightly worsening conditions in Michigan. Similarly, laborers living in California, who now face stiffer competition, might leave the state to search for better opportunities. These flows of jobs and workers diffuse the impact of immigration across the national economy and tend to equalize economic conditions across localities.

From this, Borjas posits that immigration is better measured on the national level. That's sensible enough for wages, although there are lots of analyses to be done on the local level to show that immigration harms the well-being of the native working and underclasses (e.g. home ownership rates, affordability, school test scores, etc.

Sticking with the data at the national level and looking at how immigrant jobs effect natives with similar skill-levels, Borjas finds that from 1980 to 2000 immigration lowered the wages of high school drop-outs 5% over the long-term (its effects were more detrimental in the short-run). For other groups, immigrants had a marginal effect on wages (people who had completed high school but not college benefited slightly; natives with college degrees suffered slightly). He concludes that immigration has resulted in a wealth transfer from labor to capital owners, with a question mark on the total economic utility realized in the US.

It makes sense that low-end earners suffer more from immigration than high-end earners, at least on the service side of the economy. Globalization means that Microsoft, Pfizer, or KPMG seek out professionals wherever they reside. If KPMG needs to hire ten accountants to run numbers for managerial accounting consultation, it can pull them from anywhere in the world. If the five chosen who do not happen to be American natives are living in the US or in India at the time of hire is not going to significantly effect the compensation offered to the five natives who are picked. Having the five Indians in the US likely actually boosts the pay for natives because the Indians become more costly to hire than if they were in Bangalore.

Menial service jobs, however, are much more geographically contingent. Dishwashers, maids, and yard workers have to be in close proximity to the entity they are doing the work for. If the non-native laborers are in Mexico City, they can't cut lawns in Los Angeles. Angelinos desiring lawncare will have to look locally. Thus the wages of native yard workers will be directly effected by the location of non-native yard workers.

In other words, higher-end work can increasingly be done irrespective of the worker's physical location. American-born programmers (or researchers, writers, etc) compete with Indian-born programmers whether the Indians live in the US or in India. Low-end service work depends more on where the workers are. American-born yard workers (or burger flippers, janitors, construction workers, etc) only compete with Mexican-born yard workers if the Mexicans are in the US.

This is why I am less concerned by an increase in highly-skilled immigrants than by low-skilled immigrants. The US standard of living is a competitive advantage America can leverage to attract brains. Better to have a Japanese-born researcher (who brings few social problems like crime, disease, school deterioration, etc) become a US citizen to create wealth inside the country than have a multinational pay him in Japan. Or at least the first scenario is preferable to bringing in unskilled labor that is going to suddenly compete with unskilled natives and depress wages, consume services that natives pay for, and bring other pathologies. Whether or not the first scenario is preferable to no immigration at all is a tough one. But encouraging the second situation certainly makes no sense to me.

(Immigration)

5 comments:

Jimmy Appleseed said...

Crush41,

Your analysis as usual is quite thorough and strong overall, but I have to quibble with one thing you say. You claim that high-skilled immigration to the US is a net-plus while low-skilled is a net detriment. I agree with the low-skilled part, but as for the high-skilled part, I don't agree with some of the examples you cite.

Especially with the example of the Indian programmers, there's a crucial detail you're leaving out. When they're brought into the US on H-1 visas (or jobs are outsourced to them) to work at lower pay than the natives-- who are often laid off as a result or suffer wage depression-- this makes it much more difficult to attract Americans into fields like engineering or computer science, which require many, many years of patient hard work and application, opportunity costs (delays earning advanced degrees, not having a job), and so on. Bright, promising young American students subsequently decide, and with good reason, that a major in comp sci or engineering is a terrible investment of their time and energy, and avoid these fields like crazy. This is a hidden cost of what we might term "high-skill/low-wage immigration" (or outsourcing) that often isn't well-understood.

I've seen this firsthand, when I was working as an advisor to some college students a few years ago. We used to have hundreds of students going into engineering and comp sci, and now that number is down into the dozens and continuing to shrink every year. I got concerned about this and queried some students who had been pondering a major in these fields, but subsequently switched to things like finance or public policy. The answer was that the students-- many of them valedictorians and top SAT-scorers, and incredibly high achievers in other ways as well, the people we need to be going into engineering and the sciences-- looked at the jobs outlook and decided they'd simply be too expendable, too easily replaced by a low-cost alternative shuttled in from India on an H-1. They didn't want to invest almost a decade of educational training, and potentially hundreds of thousands of dollars in student debt into a career where they knew that rewards would be so hard to come by, and they could be so easily replaced.

In summary here, we're absolutely killing our status in the US as the world's technological powerhouse with this policy. We can't maintain our lead if we basically murder our domestic pipeline. I'm sorry, but I don't buy into the arguments that we could simply replace our losses here with imports from abroad-- students from China, India, Korea, Western Europe and Russia now have so many better opportunities at home (where they can stay among their own people and culture), that they don't want to migrate to a perceived sinking ship over here. Even those who come here these days, in direct contrast to the situation decades ago, almost invariably return home after a few years of training and maybe some work in a company. (Those H-1B visas are ultimately transferring assets abroad when those folks return home-- even if their wages here are low compared to Americans laden with educational debt, they're well above the mean in South Asia.) The one region of the world that's still sending us good engineers who want to stay, is the Muslim Middle East, though that's changing too since some countries (like the UAE) are becoming richer, and also because of terrorism fears over here.

In short, we have to cultivate our own garden here, and we can't rely on others to do it for us. So long as we continue to systematically dismantle our own engineering and computer science competitiveness, we'll keep slipping further down the ladder. High-skilled immigration can also be damaging to our country depending on the specifics of the policy. For students to go into engineering en masse and stay with it long term-- especially in the US system, where educational debtload can be so crushing-- we have to be telling prospective engineers, "you are valued to us," not "you are expendable and easily replaced."

crush41 said...

Jimmy,

I favor a merit immigration system, but would like to see financial incentives enacted via the federal tax code to encourage middle-class to affluent natives to have more children. I understand the sentiment and sympathize with you.

My concern with your analysis is that the national market for many high-skilled service jobs is not bounded. A decrease in high skilled immigration (and I wish we'd scrap the H1-B system in tandem with the institution of a merit system and create incentives to encourage citizenship) does little for the prospects of high-skilled natives. The Brahmin the young American is competing against is increasingly going to have a shot at the job whether he is here or in Bangalore. It's not like construction, where limiting the supply of labor within the US will have a significant impact on wages (and desirability for natives). That is what Borjas' numbers show, anyway.

There are things we can do.

-End anti-merit immigration. This clearly can be done--political will is the only obstacle. It will raise the standard of living in terms of PPP, pollution levels, crime/security, housing affordability, etc. The dilutive effect on cultural/ethnic homogeneity will be improved even with a few hundred thousand more merited immigrants granted residency.

-Allow R&D to be expensed immediately for tax purposes, contingent upon it being performed here. Lower corporate tax rates for high value-adding technology industries (a national sales tax system would boost US location desirability considerably, as the tax burden shifts from capital investment to consummables). Ireland provides a good model.

-Subsidize education in the engineering and science degree fields. Scholarships for students over some threshold ACT/SAT score should be offered grants if they enroll in these programs. Stipends should be contingent, of course, upon performance (which is how the Federal Government runs the ROTC scholarship program). Put the $12.5 billion in Pell Grants toward these students to ease the financial costs of school--the ROI will be much higher than it is for students who are not qualified to be in a university and who realize only marginal gains from it.

I do not think the future is as bleak as you fear. These numbers do not strike me as discouraging. Engineering still has a 20% premium on it (although business degrees have gotten a boost from Sarbox red-tape; another thing to be cut increase the relative desirability of tech fields).

What do you propose doing? I'd prefer keeping high-tech hubs like Silicon Valley in the US even if a quarter of the cubes are filled by immigrants from Western Europe and Asia.

JSBolton said...

If we had a very strict merit policy in immigration, with small numbers overall, you wouldn't get any middle-class H1B types, who drive down salaries or conditions in tech fields. With a merit system which is general, you get maybe tens of thousands of engineering and science types, while the rest would be liberal arts or lawyer or pragmatic business administrative types of rare high IQ. The key factor is that merit systems are language dependent, which pushes the mix towards liberal arts.
Today language abilities are allowed to be undistinguished, even among those recruited for the elite graduate programs from abroad.
This is a huge break from the past, to refer to immigration policies as antimerit; it imples that there is something other than the need of the prospective immigrant, which should be determinative.

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