State and Local Officials Conference Call with Gordon H. Hanson

IRINA A. FASKIANOS:  Good afternoon and welcome to the Council on Foreign Relations State and Local Officials Conference Call Series.  As many of you know our goal is to provide a nonpartisan forum for discussion of pressing international issues that affect priorities and agendas of state and local governments. 

We are pleased to have with us today Gordon Hanson to talk about a special report that he just issued, the Council special report entitled The Economic Logic of Illegal Immigration: Pitfalls of Reforming U.S. Entry Policies.  He is the director of the Center on Pacific Economies at the Graduate School of International Relations and Pacific Studies, and professor of economics at University of California San Diego.  He’s also a research associate at the National Bureau of Economic Research, coeditor of the Journal of Development Economics, and the author of several books including Why Does Immigration Divide America?

Gordon, thanks very much for being with us today.  We have sent a copy of your report to folks on the call as well as the link.  It would be great though if you could give us an overview of the findings and recommendations and it’s, obviously this is a timely conversation given the immigration bill that is presently being debated in Congress.

GORDON HANSON:  Sure, thanks.  Thanks very much for setting this up.  I’m delighted to talk to folks about what is now a burning issue in Washington and also in many state capitals.

So what I’d like to do is just very quickly give an overview of the main aspects of my report touching on three issues and then open this up to a broader discussion.  So three things I’d like to discuss very quickly are, one, just understanding the role of illegal immigrants in the U.S. economy; two, what are the economic impacts of illegal immigration on the U.S. economy; and then three, how would the proposed changes in U.S. immigration policy affect the role that immigrants play economically?

So first on the role of illegal immigrants, I think there are many who like to portray illegal immigration as an example of the way in which the U.S. immigration policy, U.S. immigration system is broken, but I think it’s important to keep in mind that there is a very clear economic logic to the role that illegal immigrants play in our economy. 

Illegal immigrants provide important labor services to U.S. employers.  They are valuable to employers because they represent a very dynamic labor force.  They give U.S. employers access to the type of workers they want, low skilled in many cases, when they want them.  That is, illegal immigration is very responsive to changes in U.S. business cycle conditions, and where they want them.  What we’ve seen in the last decade or so is how mobile illegal immigrants are in terms of responding to the U.S. housing boom, in terms of responding what’s happening in agriculture, demand for services in various parts of the country.

So keeping that in mind, any reform which works strongly against that logic is going to be creating some economic tension that we need to think about in terms of what will be the ultimate impact of a reform.

So moving on to the second topic, impacts, there’s been a fair amount of work on what are the economic consequences of immigration and the U.S. economy.  It’s a little hard to single out illegal immigrants because there are no data sources that identify people’s legal status in the country.  But what we can do is focus on low skilled labor markets and recent arrivals for individuals from Mexico and Central America which other data suggests are in their strong majority, individuals who are unauthorized. 

The impact of that immigration is seen in the labor market where it has contributed to lower wages for low skilled U.S. workers and in particular, by low skilled i mean people with less than a high school education, and younger workers in particular with, and a second impact being on public finances.  Those of you who are from high immigration states this is not news.  But increasing arrivals of immigrations put strains on public education and they can also put strains on the provision of public healthcare.

Now that said, so that’s the increased demand for services from illegal immigration.  That said, immigrants are contributing to U.S. taxes through payments they make to the social security system, which they do by virtue of having presented social security cards to their employers, and many voluntarily pay income taxes in order to establish a track record that gives them later the opportunity to apply for home loans, apply for car loans and try and establish themselves as more permanent residents of the United States.

Taking all of that together, our best guess is that the net fiscal impact of illegal immigration is negative but very small, so on the order of $10 billion a year, and so this is just, this is a fraction of a percent of U.S. GDP.

That economic impact is important to keep in mind when we’re thinking about spending large sums of money on greater enforcement activities.  It could very well be that those greater enforcement activities are not warranted in terms of their costs given the small fiscal impacts of illegal immigration on the U.S. economy.

One caveat here, I’m talking about the economic impacts exclusively, not on the impacts on national security, not on what illegal immigration does in the long run to civil society, the rule of law.  Those are important considerations that we certainly don’t want to discount in thinking about the consequences of illegal immigration.

So let me conclude now by turning to the third topic that I addressed in this report, which is one of great topical importance, and that is, how would changes in U.S. immigration policy that have been reformed affect the role that illegal immigrants play in the economy?

One important aspect of the reform that’s been proposed would in some sense sanction the system we already have in place.  That is, by providing visas to existing illegal immigrants we’d essentially be completing the implicit contract that we’ve set up with these individuals.  We’ve said, you come here and you work and you don’t make a nuisance of yourself, you’re going to be allowed to stay.  And that amnesty, if you want to call it that, the provision of visas to illegal immigrants, would be sort of completing that process.

Now, we’ve already seen the labor market impacts of that immigration because those immigrants are already here.  We’ve already seen the fiscal impacts, so in the short run at least, legalization isn’t going to dramatically change the economic consequences of the illegal immigration that has already occurred.  Down the line it would have bigger fiscal impacts because once these individuals are citizens, they’re able to gain access to public assistance, to public healthcare, and to other social services.  But that’s, you know, that’s probably fifteen years from now and so the fiscal impacts of legalization are pretty far down the road.

The other big aspect to reform that affects illegal immigration has to do with the creation of larger numbers of temporary work visas.  Now the numbers that are put out there, 400,000 visas per year, sound big, but one thing you have to keep in mind is that those visas are temporary.  So that after two years, those individuals are required to return home. Now they can apply again, but there’s not, they have to compete for a new fixed amount of visas that are in circulation. 

So by having 400,000 visas that last, that have a two year duration, what are you doing?  Well, you’re increasing the number or temporary work visas in the long run situation by 800,000.  That might seem like a lot.  One of the things we’ve got to keep in mind is that on net we’ve been bringing around 400,000 new illegal immigrants into the economy every year for the past decade and a half.  So those temporary work visas would only absorb about two year’s worth of the new supply of illegal immigrants coming in to the economy. That creates, that will ultimately create tension in the system, because if we increase enforcement as has been proposed and we have a limited supply of work visas available, it’s going to mean that that demand for illegal labor keeps on growing.  And so that would put pressure on something to change, either for there to be an increased number of work visas made available or for there to be yet further increases in  border enforcement down the line.  If neither of those things happen, I think what we would ultimately see is a return to higher levels of illegal immigration.  Not right away, but five, six, seven years down the line.

So I tried to give you just a quick overview of what I do in this study in terms of understanding the role that illegal immigrants play in the economy, what the economic impact of illegal immigration is, and what policy reform might do.

I’m happy now to open it up to your questions and comments.

OPERATOR:  At this time we will open the floor for questions.  If you would like to ask a question, please press the star key followed by the one key on your touchtone phone now.  Questions will be taken in the order in which they are received.

QUESTIONER A:  Hello Professor, great presentation.  Quick question: in your analysis of the impact of constraining the flow rates of illegal immigration, do you expect wage rates to increase?

GORDON HANSON:  Not right away but if we were to, if we were to restrict, if enforcement worked - that is this 370 miles of new fence that’s being proposed, increasing border patrol personnel to 28,000 people - if that worked in helping stem the inflow and it was coupled with a serious and effective electronic verification system for employees, then, and you’re going to limit the number of work visas available to 400,000 a year, then we would see upward pressure on wages for low skilled workers within four or five years.

QUESTIONER A:  Wow, it would take that long?

GORDON HANSON:  Well, because you’ve got to realize that those, the work visas that would be offered would absorb the first several years of demand.

QUESTIONER A:  Right, got it.  Thank you.

IRINA A. FASKIANOS:  Thanks, next question.

OPERATOR:  Thank you.  Just a reminder, if you’d like to ask a question, please press star one on your touchtone phone now.

IRINA A. FASKIANOS:  Gordon, while we’re waiting for questions to queue up, I do have one from [a constituent who couldn’t be on the call].  He couldn’t be with us today but he wanted to ask:

Unclaimed social security taxes appear to have the affect of offsetting the net fiscal drain of low wage immigrants.  Can’t the same case be made for unclaimed state and federal tax refunds?

And if he throws conservative estimate of his numbers into the calculations there is a net fiscal gain to the government, not a fiscal burden.  Is that a fair claim to make?

GORDON HANSON:  Well, you know, we’re talking about unmeasured tax contributions.  So I think what we can say with certainty is that the net fiscal impact of illegal immigration is small, so on the order of a few billion dollars, and in the grand scheme of things in terms of a federal and state budget combined, that is a very small number. 

So is that a small positive number or a small negative number?  I don’t, we, I don’t think we have good enough data to say, but we can say that the overall impact is not large.  So what that means is that to date, illegal immigration has not been breaking the bank.  Now that’s at the national level.  You look at specific localities where there’s been high levels of immigration and that has created pressure on public schools, it’s created pressure on the provision of public healthcare, and it had an important impact on public finances of state and local communities that have been at the front lines of immigration.

IRINA A. FASKIANOS:  Great, next question or comment.

OPERATOR:  Thank you.  Once again, if you’d like to ask a question, please press star one on your touchtone phone.

QUESTIONER B:  Yes, hello.  As I understand your study you are looking at a lot of the pull factors in the United States around the economy and labor market.  Have you looked at the push factors, in Mexico in particular, about concerning changing demographics or potential changes in the economy there and how that might influence the labor pool?

GORDON HANSON:  Yes I have. Not in this study but in ongoing work we’re doing at UC San Diego, and here there’s a very interesting story that emerges. And it’s one in which what we’ve seen in the last two decades is the most intense period in terms of push factors in Mexico for immigration that the country has really witnessed in its history. And those, the increase and the strength of those push factors is due to two things.

One is changes in population growth in Mexico relative to what’s happened in the U.S.  You look at the U.S. baby boom, you know, that those workers began entering the labor force in the 1960s and the 1970s such that by the 1980s when the baby bust generation started entering the labor force, we had declining numbers of new workers looking for jobs each year.  Now that year, around 1980, coincides with when Mexico ’s baby boom is just entering the labor force and looking for jobs.  So we have this big increase in labor force growth in Mexico and a decline in labor force growth in the United States.  So that’s one big push for moving people from Mexico to the U.S.

Reinforcing that is the fact that around, beginning in 1982 Mexico entered two decades of macroeconomic instability in which there were three major currency crises in the country.  During those currency crises the peso collapses, you have macroeconomic instability, you have deep plunges in GDP, low levels of employment growth, which serves to help push labor abroad.  So that macroeconomic instability in Mexico came at the worst possible time in terms of, in terms of growth in the country’s labor force and magnified the impact of differences in population growth in the two countries, pushing lots of people into the U.S. searching for work.

Now the good news in all of this is that there’s a sense in which we‘ve lived through the most intense part of that transition process.  And looking ahead, Mexico’s labor force is going to be growing much more slowly in the next two decades than it has in the previous two decades. So if we can kind of get through this rough patch, we’re going to be in a situation where the pressure for migration for the country could be much lower.  What that relies on in the end is Mexico generating some economic growth.  It’s done okay the last four or five years but, you know, another crisis in the economy and we could see another surge in migrants coming across the border.

IRINA A. FASKIANOS:  Gordon, to that end do you want to address the interplay between border security and immigration policy and how, you know, what the relationship should be and how we should be focused on it.

GORDON HANSON:  Well, you know, I think as has become pretty apparent, our policy in the last ten years or so has been to focus enforcement efforts on the border without having much of a presence in the interior at all.  And in terms of enforcement presence on the border, it’s really been concentrated in border cities in San Diego, in Calexico, in south of Tucson, El Paso, and Brownsville .  Those cities have been where the biggest border patrol presence has been, where we’ve built fences and electronic sensors and so forth and we’ve dramatically reduced illegal immigration in urban areas.

What that has done is pushed migrants into rural areas, into desert and mountain regions to Eastern California and Arizona.  So the proposal now is to build more fencing along the border, put more border patrol agents in play, but you’re talking about patrolling an area that is really rough terrain.  And short of fully militarizing the border, it’s going to be difficult for border enforcement to do the whole job.  What that means is that if you really want to rely on enforcement to stop illegal immigration, it’s got to be coupled with some sort of presence in the U.S. workplace.  And that’s exactly what’s being proposed in the current legislation, having electronic verification of employee eligibility. 

Now all looks fine on paper, but the proposal is to get this system up and running which would be able to check the eligibility of all 146 million American workers.  That’s in less than two years.  We have no evidence to suggest that the Department of Homeland Security is going to be capable of that, of a accomplishing such a monumental administrative challenge.  What that means is that in the near term, we’ve got spotty border enforcement, we’ve got spotty interior enforcement, and our ability to restrict illegal immigration is far from perfect.

IRINA A. FASKIANOS:  Great, next question.  I just want to encourage people to share with us the things that you are doing in your states and in your cities on this issue, so [Operator], next question or comment.

OPERATOR:  Thank you. 

QUESTIONER C:  Yes, good afternoon Professor.  I guess I have several questions but the one that I really want to ask is, when you have upward pressure on wages, and we did talk about you know in the future that wages would increase under this kind of proposal, if you don’t have true economic gains in Mexico that offset this pressure, you’re still going to have the pressure of illegal immigration.  It’s really— is it not really a case of economics strictly, of people wanting to improve themselves and taking the risk that they’ve got to take to do that?

GORDON HANSON:  Well, you know, I’m an economist so I see the migration process as primarily being one about economics.  But one thing to keep in mind is that it takes a lot to get people to leave their home and move to, and move to a new country.  You know, right now the, if you’re a young male worker with sort of the average level of education in Mexico and that’s, you know, a little under nine years of education, you’re going to earning somewhere between $2 and $2.50 an hour, adjusted to reflect purchasing power in the United States.  If you cross the border, you’re going to be able to earn something on the order of, you know, $8 or $8.50 an hour.  So that’s a $6 increase in your hourly wage.  So obviously the draw for migration is huge. 

One thing to keep in mind is that draw is not new.  It’s been there for a long time.  I think what’s really changed in the last two decades is, one, as I mentioned, you’ve got many more people looking for work in Mexico but, two, they looked ahead and said, you know, my economic future in Mexico just looks sort of bleak given the two decades of instability and crisis that the country has gone through.  If Mexico is able to have a solid decade of growth and stability and you’re restoring people’s faith in the future, in their future in Mexico, then I think you can have big income differences between the two countries without the high levels of migration that we’ve seen so far.  So a lot of this comes down to Mexico’s capacity to generate economic growth. And there, you know, the signs are mixed.  Mexico has done a lot to help its economy mature but it’s a fragile democracy in which there is a great deal of political conflict over the sort of reforms that need to be enacted to push the country forward. And it’s facing competition from China and India and other low wage economies.  So the, Mexico ’s got a chance to pull it together but it is by no means smooth sailing from here forward.

IRINA A. FASKIANOS:  Did you want to ask a follow-up on that?

QUESTIONER C:  I did. I had a follow-up question too.

IRINA A. FASKIANOS:  Fine.

QUESTIONER C:  My follow-up question then would be, and I agree with the economic issues of Mexico, but my follow-up question would be, you know, maximizing enforcement in terms of validating whether all 146 million American workers, you know, have the right to work and have the proper documents, would that not have some impact on driving more of this labor force underground?

GORDON HANSON:  I think it certainly would.  You know, right now we kind of have we have this fiction in the U.S. economy of many of the illegal immigrants showing up at work pretending to be legal workers in that they present social security cards, they present green cards.  Now those documents are fake but in kind of perpetuating that fiction, they pay social security taxes and there is a sense in which they feel that they’re acquiring some, you know, some quasi legal status in the United States as, you know, exemplified by the fact that how many of these individuals, as many as two million of those seven million illegal immigrant workers have acquired tax identification numbers and are paying income taxes. 

With that electronic verification, that fiction will come to an end and you’re going to have this very clear separation between legal and illegal labor.  Now what that’ll mean is there’s certain industries in which it’s no longer feasible to hire illegal labor.  If you’re a large firm, particularly a large manufacturing firm, a large hotel chain, a large restaurant chain, it’s going to be very risky for you to hire large numbers of illegal immigrants.  But what about construction subcontractors, what about in agricultural fields, what about child care and yard care and other sort of domestic services?  There what we’re going to see is this, you know, an underground economy which is much more underground than it has been to date.

IRINA A. FASKIANOS:  Great, next question comment.

OPERATOR:  Thank you.

QUESTIONER D:  Thank you for your presentation, Professor.  You mentioned, you referred to the fiscal impact of legalizing the workers being a cost, but down the road, like within fifteen years, and I was wondering how you substantiate that because the notion that I have coming from New York City where we have about half a million roughly undocumented New Yorkers, is that they, as immigrants become legalized they, rather than being a cost, boost the economy and bring multiple benefits to the economy.

GORDON HANSON:  Well, you know, legalization does two things.  One, is by giving people a sense of permanence in the United States, you’re raising their incentive to acquire skills, to get training, to make investments that are specific to their being part of the U.S. economy and perhaps with particular employers.  So that raises their productivity and raises their income potential.  But at the same time, you know, something we’ve got to remember is that two-thirds of illegal immigrants have less than a high school education.  You know, their education level is around, you know, somewhere between eight and ten years for many of these individuals.  And so even with greater training and skill acquisition and so forth, you’re talking about folks whose income earning potential is quite low.  You know it’s hard to imagine that the typical end of legalized illegal immigrants is going to earn much over $25,000 a year.  Well at that level, you know, they aren’t making much in terms of tax contributions, and one they’re legalized, then they have opportunity to call on public expenditure in the form of public assistance, in terms of subsidized healthcare and so forth.

Again that’s not until they’re legalized and that legalization process is going to take a substantial amount of time.  By that time workers are also going to be older and more experienced, their income potential will be a bit higher.

  IRINA A. FASKIANOS:  Next question.

OPERATOR:  As a reminder, if you’d like to ask a question, please press star one on your touchtone phone now.

IRINA A. FASKIANOS:  Gordon, as we are waiting for more questions, how do you think this will play out in, among the presidential candidates?

GORDON HANSON:  Well I’ve talked to a couple, two of the campaigns which I won’t mention, one on either side of the aisle.  And as far as I can tell the candidates are just trying to stay as far away from the issue as possible with the one exception of John McCain who, you know, has some stake in the immigration debate because he was, you know, originally a sponsor on one of the Senate bills and now with Senator Kyl, in some sense, kind of stepping in to take his place. 

I don’t think anyone wants to put their neck out on this because what we have is, you know, what the Senate is aiming for is a grand bargain, is a comprehensive reform of immigration policy.  But in any comprehensive reform you’ve got something for everybody to hate and so it’s just too risky for any candidate to put much at stake regarding immigration reform.

IRINA A. FASKIANOS:  Great, [Operator], any more questions?

OPERATOR:  No ma’am.  There are no questions in the queue at this time.  Actually we do have a question.

IRINA A. FASKIANOS:  Okay.

QUESTIONER B:  I thought I’d take advantage of asking one more.  Part of the new bill concerns the shift from family-based to employment-based immigration over a number of years.  Given your analysis that the flexibility needs to be maintained in the labor market, do you see any real advantages in shifting to the employment based increases?

GORDON HANSON:  No, I think there is some sense in that proposal.  You know, the thing about family reunification is either you can talk about humanitarian motivations for immigration policy but putting that aside and saying, okay what’s in it economically for the United States?  When you’re admitting people on the basis of family ties, there’s no guarantee that they’re going to be, those incoming individuals are going to be good match for the needs of the U.S. economy. 

What we see right now in the U.S. is, in some sense, shortages that, labor shortages at the extremes of the skill distribution, at the very high end and at the very low end.  That’s where workers are, in some sense, most needed.  And so a system that moves us towards kind of having less immigration at the middle and more immigration at the extremes in terms of people, skills, and education would be a better economic fit, granted that economics is not the only motivation behind immigration.

IRINA A. FASKIANOS:  Terrific. Well I think we will end on that note. 

Gordon, thank you very much for your valuable insights today, we appreciate your taking the time to do this and to everybody else for joining us and for giving, contributing your comments and questions.

We would always welcome your feedback on other topics that you would like us to tackle in this conference call series and ways that we can best connect with you and your colleagues. Our email address is [email protected]. 

And just to highlight upcoming events, our next State and Local Officials Conference Call will be on Tuesday, June 19, with Charles Ferguson, the Council’s senior fellow for science and technology, on nuclear energy.  And then tomorrow, which is Wednesday, May 23, we are webcasting on our website, cfr.org, a discussion with presidential candidate John Edwards as part of our C2008 series. Again the session will be from 1:00 to 2:00 p.m. Eastern Time and you can log on through our website, cfr.org, to hear that conversation.

So thank you all and Gordon, thank you again for this and for your terrific work on this Council Special Report.

GORDON HANSON:  Thank you very much.