1. Chapter 23
This chapter describes the extent of legal and illegal immigration into the United States. We discuss why economists view economic immigration as personal human capital investment. We also attempt to explain how immigration affects average wages, resource allocation, domestic output, and group income shares. We relate how illegal immigration affects employment and discuss its impacts on state and local government budgets.
Immigration

2. Number of Immigrants Economic immigrants Legal immigrants
Migration averaged 1 million per year
Quotas, refugees, and H1-B provision
One-third of population growth
One-half of labor force growth
This country was founded largely by immigrants and their descendants, yet when the subject of immigration comes up, the conversation can become very heated. The issues of immigration are many; the focus of this discussion will be economic. We start with some facts. H1-B allows for 65,000 skilled workers in “specialty occupations” to enter and work continuously for 6 years. In 2009, 65% of legal immigrants were family sponsored.
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3. Number of Immigrants
This graph from the book shows the number of legal immigrants into the United States between 1980 and We can see that there was a large spike in the number of illegal immigrants in the early 1990s.
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4. Number of Immigrants Illegal immigrants Estimated from Census data
250,000 per year on average
High proportion from Mexico and Central America
Total of 11.1 million residing in the U.S. in 2012; 58% from Mexico
We don’t know the exact number of illegal immigrants in the United States. The Census Bureau, through a residual approach process, takes the current number of all immigrants and subtracts the sum of past annual inflows of legal immigrants to make its estimate.
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5. Decision to Migrate Take advantage of superior economic opportunities
Escape political or religious oppression
Reunite with family members
There are many reasons why people immigrate to the United States (legally or illegally). Our interest continues to focus on economic immigration. Listed on this slide are some of the main drivers of economic immigration.
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6. Decision to Migrate Earnings opportunities
Increase value of human capital
Moving costs
Distance
Follow beaten path
Age
Other factors
One of the primary reasons that people immigrate to the United States is the opportunity to earn more money, sometimes by doing the same job that they were doing in their own country. Often times along with the possibility of earning a higher income, immigrants have a higher standard of living. Moving to another country can often entail large costs, but the individual weighs those costs against the benefits of higher income, a higher standard of living, and investment in human capital. The younger the individual and the closer together the countries, the more likely the individual will immigrate. This is one of the reasons that so many individuals immigrate from Mexico to the U.S.
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7. Economic Effects Personal gains Economic benefits exceed costs
Other issues
Uncertainty and imperfect information
Backflows
Skill transferability
Self-selection
Immigration may create large economic benefits for some, but it can also create some losers. The facts show that in general, the benefits of immigration exceed the cost; however, not all immigrants to the United States succeed. Because the decision to immigrate is often made with uncertainty and based on what is true for the average person, this can often times lead to backflows – migration back to the home country. These returns might be the result of lower earnings than expected or missing family and friends. Sometimes a person’s skills don’t transfer as well to the new country, making it difficult to find a new job, but sometimes the migrants themselves are self-selected to be determined, motivated individuals, which can sometimes offset the lack of skill transferability.
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8. Impacts on Wages, Efficiency, Output
Understand economic outcomes
Assumptions
U.S. and Mexico
Labor demand greater in U.S.
No long-term unemployment
Labor quality the same
Migration is legal and has no cost
Wage differentials key factor
Although the personal outcomes of immigration are easy to understand, the broader economic outcomes are not. A simple economic model of migration will help us understand some of the key cause-effect relationships and identify broader economic outcomes.
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9. Impacts on Wages, Efficiency, Output
Wage rates will equalize
In the U.S.:
Wage rate falls
Employment and output rise
In Mexico:
Wage rate rises
Employment and output fall
In the migration model, ultimately the wage rates between the countries will end up being equal. With higher wages in the U.S., workers from Mexico will continue to find benefits to moving to the U.S. As they continue to enter the U.S., it will cause wages to fall, but employment and output will rise. On the other hand, as workers leave Mexico, wage rates will rise, but employment and output will fall.
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10. Impacts on Wages, Efficiency, Output
Overall effects:
World output rises
Efficiency gains
Other effects
Brain drains
U.S. natives lose wage income
U.S. businesses gain income
As labor more freely moves from one place to another, there is a more efficient allocation of labor – a better match between the skills of the labor and the productive requirements. As a result of a more efficient allocation of labor, world output rises. The global economy gains. As a result of immigration into the U.S., the U.S. gains because the output rises, but Mexico’s output falls. As a result of these changes in output, the U.S. encourages high amounts of immigration while other countries may try to prevent people from leaving their country. Countries often find that it is attractive to prevent highly educated individuals from leaving their country, referred to as a brain drain.
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11. Complications and Modifications
Migration costs not zero
Remittances redistribute income
Backflows: temporary migration
Immigrant workers as complementary resources vs. substitute resources
Expansion of capital in some industries
Full employment vs. unemployment
Negative self-selection
The analysis that we just went through is subject to complications. Flow of labor isn’t as easy as the model indicates because the costs of migration can be quite high and may be a hindrance for at least some individuals who will choose not to migrate because of these costs.
When migration is temporary and/or the immigrants send payments back home, then this will change the distribution of benefits between the countries. Not everyone’s wages in the U.S. will fall because some immigrant workers are complements rather than substitutes. Although initially native workers may lose earnings, it may only be temporary or not occur at all. This is because, as firms have lowered their costs, they have a greater means to increase their capital, which will then increase the demand for labor and wages. The unemployed workers moving to the U.S. may reflect negative self-selection, in which movers are less capable and perhaps less motivated than similarly educated people who did not migrate.
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12. Fiscal Impacts Fiscal burden > taxes paid Wages will not equalize
Research findings are mixed
The model suggests that immigration will contribute to a higher GDP, but in the U.S. many immigrants use the welfare system proportionately more than natives. It was even argued that the welfare system in the U.S. was a major attraction for immigrants. Despite changes to the welfare system, immigrants still pose a cost to the government by enrolling kids in schools, emergency health care, and the criminal justice system. Evidence is mixed about the overall effects of migration on U.S. incomes.
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13. Illegal Immigration Employment effects Two extreme views
Fixed number of jobs in economy
Immigrant employment decreases domestic employment 1-for-1
Immigrant work undesirable
No domestic workers displaced
Compensating wage differential
The illegal immigration debate continues with passions running high on both sides. The two extreme views discussed here on illegal immigration are often expressed in dealing with the subject of employment.
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14. LO

15. Startling Slowdown in Illegal Immigration
Number of illegal immigrants in the U.S. tripled between 1990 and 2007
That number fell 8% in 2009 because of deceased job prospects during the recession
Illegal immigration population leveled off 2010 and 2011 at 11.1 million
Falling birthrates
Better local job opportunities
Government policies
Stronger border enforcement
The number of illegal immigrants living in the U.S more than tripled between 1990 and 2007, increasing from 3.5 million in 1990 to 12.0 million in During the recession, the number of illegal immigrants in the U.S. fell by nearly 8% to 11.1 million in The decline occurred because the backflow of illegal immigrants returning to their home countries exceeded the inflow of illegal immigrants entering the U.S., because of decreased job prospects for illegal immigrants.
The illegal immigrant population remained steady at 11.1 million in 2010 and First, the rapid decline in birthrates in the countries that have sent the most illegal immigrants to the U.S. is part of the reason for the leveling-off. Second, economic growth has increased in most of the countries that sent the most illegal immigrants to the U.S. Third, government policies have also played a role. The North American Free Trade Agreement (NAFTA) spurred the creation of a larger manufacturing sector in Mexico. Fourth, U.S. immigration-enforcement activities have increased. A fence was built along several hundred miles of the U.S.-Mexican border and border patrols were strengthened, too.
These factors lead many economists to conclude that illegal immigration is more likely to decrease than increase in coming years.

16. Optimal Immigration
Immigration can either benefit or harm a nation, depending on several factors
Immigration should be expanded until its MB = MC
The level of immigration is set through quotas, special provisions, border enforcement and immigration laws
The immigration issues go well beyond economics; there are also political and cultural issues. Economic analysis suggests that immigration can either harm a nation, depending on the number of immigrants; their education, skills, and work ethic; and the rate at which they can be absorbed into the economy without disruption.
From an economic perspective, immigration should be expanded until its marginal benefit equals its marginal cost. This framework recognizes there can be too few immigrants, just as there could be too many. It also recognizes that some immigrants benefit more to the U.S. economy than others; and some impose more costs, on taxpayers, than others.
A nation sets the level of legal immigration through quotas and special provisions. It also sets the size of illegal immigration through how effectively it secures its borders and enforces its immigration laws.
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