User’s Guide to the NAS Report, 5: The Bottom Line

Immigrants have both a labor market impact and a fiscal impact. Do the economic gains generated by working immigrants outweigh the fiscal burden that immigrants impose? The NAS report (probably wisely) avoids putting two and two together, but the report contains all the necessary ingredients to let us do it ourselves. So let’s take a crack at it.

There is a fiscal burden. Across all levels of governments, the annual burden ranges from a minimum of $43 billion to a maximum of $299 billion, depending on what is assumed (Table 8-2 of the report shows all eight scenarios). As I noted earlier, the estimates of the long-run impact, which incorporates the taxes and expenditures of the immigrant and descendants over a 75-year period, are useless and easily manipulated to produce whatever large positive number or large negative number one wants.

Now let’s find out what the report says about the “immigration surplus,” the increase in wealth accruing to the native population as a result of immigration. As immigrants enter the labor market and reduce the wage of natives, they increase profits for the employers. Plus the immigrants themselves produce additional output, generating even more profits. In the end, the aggregate wealth of natives–both workers and firms–rises, and there is a redistribution of wealth from workers to firms. The report presents its estimate of the immigration surplus in Chapter 4:

Immigrant labor accounts for 16.5 percent of the total number of hours worked in the United States, which…implies that the current stock of immigrants lowered wages by 5.2 percent and generated an immigration surplus of $54.2 billion, representing a 0.31 percent overall increase in income that accrues to the native population.

This short paragraph contains a lot of important information. First, the immigration surplus is relatively small, about $54 billion. Unfortunately the report does not give a transparent estimate of the size of the wealth transfer from workers to firms, reporting instead that, on average, wages went down by  5.2 percent. It would be better if they had reported the number of dollars involved in that transfer. That number, it turns out, would be about $500 billion. (A geeky footnote at the end of this post explains how you can get that number). So, yes, immigrants created an additional $54 billion worth of new wealth, but a byproduct of that creation was a wealth transfer of half-a-trillion dollars.

The report cautions that this is an estimate of the short-run economic gains, based on the assumption that the economy has not yet adjusted to the entry of immigrants. Obviously, the 42 million immigrants now in the country entered over a period of many years. And economic theory implies that, over time, as capital adjusts, the immigration surplus dwindles down to almost nothing. As the report puts it:

Over the course of decades…capital has had plenty of time to adjust, and so these estimates can at best be described as upper limits that exaggerate the real impact of immigration on native wages and overall incomes.

 I would add another huge caveat to the $54 billion estimate of the surplus. It ignores all the externalities that immigrants create along the way. The externalities are both good–the entry of extremely high-skill immigrants surely accelerates innovation, makes us more productive, and has a beneficial impact on economic growth. And bad–the entry of some high-skill immigrants, such as those who enrolled in flight schools and learned to fly planes and then flew them on September 11, 2001, can make us all much worse off. The panel did not even try to quantify the value of all the many positive and negative externalities (and, in fact, neither has anybody else). So, in the end, all we really have to go on is an estimated surplus of $54 billion in the short run.

If we then take the report’s estimates of the surplus and the fiscal burden at face value, it is self-evident that:

The impact of immigration on the aggregate wealth of natives is, at best, a wash.

Instead, the impact of immigration is distributional. Those who compete with immigrants are effectively sending billions and billions of dollars annually to those who use immigrants.

To reiterate, the impact of externalities can radically change this conclusion (in either direction). But note that even if beneficial externalities dominated, they would have to be awfully important–they would need to quintuple the current estimate of the immigration surplus from $54 billion to $270 billion–to offset the high-end estimates of the fiscal burden.

For the geeky reader:

This is how to calculate that $500 billion transfer in the back of an envelope. The calculation of the immigration surplus reported in Chapter 4 of the NAS report assumes that GDP is $17.5 trillion; that 65% of GDP goes to workers; and that 16.5% percent of the workforce is foreign-born. The report also says that “the current stock of immigrants lowered wages by 5.2 percent.”

Because only 65% of GDP goes to workers, that means that the total earnings of all workers is $11.4 trillion (or 0.65 × 17.5). But because only 16.5% of workers are foreign-born, the fraction of total earnings that goes to native workers is $9.5 trillion (or 0.835 × 11.4). The NAS report says that native earnings fell by 5.2 percent, so that the wage transfer from native workers to employers is $494 billion (or 0.052 × 9.5).