1. Immigration and the U.S. Economy Where do we go from here? Pia Orrenius, Ph.D. Federal Reserve Bank of Dallas The Houston Economics Club October 18, 2007 Disclaimer: the views expressed herein are those of the presenter; they do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

2. Overview Immigration and –Population, labor force growth –Cyclical, regional effects –U.S. workers –Taxpayers –Policy

3. U.S. immigration, population, and labor force growth

4. The foreign-born population is larger than ever before Source: Census Bureau

5. And foreign-born share of population headed toward historic peak Source: Census Bureau

6. Three out of ten foreign-born are undocumented Source: Pew Hispanic Center (2005)

7. Illegal inflows rival legal Source: Jeffrey Passel and Roberto Suro, Pew Hispanic Center (2005)

8. Increasingly bimodal education distribution of foreign-born workers Percent Source: Ottaviano & Peri, 2005

9. Percent Foreign-born share of employment growth by selected jobs 2003-2006 Source: BLS

10. Share of workers who are undocumented by occupation Overall share 4.9 Percent Source: Pew Hispanic Center (2005)

11. Projected foreign-born contribution to labor force growth significant as baby boomers retire Source: PEW Hispanic Center

12. Foreign-born share of labor force growth by census division

13. U.S. immigration, the business cycle and regional growth

14. Percent Source: Pew Hispanic Center (2005) Immigrants work more Labor Force Participation: Men

15. Percent Correction: male immigrants work more Labor Force Participation: Women Source: Pew Hispanic Center (2005)

16. Unemployment rate of foreign-born, native-born very similar Source: BLS

17. Immigrants are more mobile, responsive to economic growth More likely come in good times, leave in bad times –Flexibility allows for faster economic growth, more efficient use of resources –Lower unemployment Some immigrant groups are even more mobile once here –Move to where the jobs are Fewer regional discrepancies in growth –Lower unemployment, regional convergence

18. Skilled flows pro-cyclical Source: Department of Homeland Security H1-B petitions approved for initial employment Peak Post-recession

19. “Real-time” immigration pro-cyclical Apprehensions along southwest border Source: DHS

20. Apprehensions fall as demand in construction weakens Source: DHS; BLS

21. Among less-educated, undocumented immigrants more mobile than natives Percent Source: Bean et al, 2007

22. Among Mexican immigrants, illegals more mobile than legals Percent Source: Bean et al, 2007

23. Percent Among Chinese immigrants, illegals more mobile than legals Source: Bean et al, 2007

24. U.S. immigration and the effect on natives

25. Effects of immigration on natives Immigration has effects similar to trade –Greater specialization, efficiency –More choice, innovation –GDP rises, GDP per capita rises Who benefits? –Immigrants Bulk of GDP increase goes to them Natives get $30 to $60 billion –Consumers Prices of certain goods and services fall –Capitalists (investors, producers, homeowners)

26. Effects of immigration on natives Who loses? –Wage effects Low-skilled native workers Prior immigrants –Fiscal effects Taxpayers

27. Source: BLS Wages of less-skilled workers in long-run stagnation Real median weekly earnings by education level High school diploma, no college

28. Source: BLS Wages of less-skilled workers in long-run stagnation Real median weekly earnings by education level High school diploma, no college

29. Wage Effects of Immigration Models with large adverse effects (Borjas 2003) –Assume perfect substitutability, no change in K –3% drop in native earnings on average –9% drop for natives who are low-skilled Other models (Ottaviano & Peri 2006) –Allow imperfect substitutability, change in K

30. Native-born labor force change, by education Source: 1996-2006; BLS, Haver Analytics Thousands

31. Native and foreign-born labor force change, by education Source: 1996-2006; BLS, Haver Analytics Thousands

32. Wage Effects of Immigration Models with large adverse effects (Borjas 2003) –Assume perfect substitutability, no change in K –3% drop in native earnings on average –9% drop for natives who are low-skilled Other models (Ottaviano & Peri 2006) –Allow imperfect substitutability, change in K –2% rise in native earnings on average –1% drop for low-skilled natives –Big declines for prior immigrants

33. Fiscal impact of immigration Fiscal impact –Tax contributions minus transfer payments and cost of public services received –Net present value Tax contributions include –Payroll, income, sales, property taxes Majority of illegal immigrants have payroll taxes withheld Public transfers and services include –Education, health care, welfare (EITC, TANF), police and fire Estimates –Gold standard: National Research Council (1997) –Recent work: Robert Rector’s piece for Heritage Household-level analysis

34. NRC: Immigrants have positive fiscal impact when including their descendants Level of Education 1996 Dollars, NPV Source: National Research Council, The New Americans (1997)

35. NRC: But immigrants have a negative fiscal impact in their lifetime 1996 Dollars, NPV Source: National Research Council, The New Americans (1997)

36. Immigrant households rely more on public assistance Percent Household participation in public assistance programs Source: Center for Immigration Studies, March 2005 Current Population Survey

37. U.S. immigration policy

38. Walls on the Southern border are not new…

39. Where do we go from here? More enforcement –No-match program, Real ID Act, worksite raids –Local, state law enforcement cooperation w feds

40. Worksite enforcement jumps in ‘06, ‘07 Source: DHS

41. Where do we go from here? More enforcement –No-match program, Real ID Act, worksite raids –Local, state law enforcement cooperation w feds Less chance of reform –Issues need to be addressed H-2B, H-1B visas, green card quotas outdated, insufficient Existing illegal immigrants, inflows –Piecemeal reform? Ag Jobs DREAM Act

42. No-match letter program: new safe harbor guidelines could have big impact SSA sends no-match letters to employers with workers whose SS numbers don’t match their names Under new rules, employers have to fire workers with unresolved no-matches within 90 days If caught, employers assumed to have ‘constructive knowledge’ and may face stiff penalties –Massive interior enforcement policy, could impact millions of workers if enforced –Currently under preliminary injunction in U.S. District Court If implemented, no-match could substantially grow the shadow economy

43. Shadow economy small in U.S. Percent of GDP Source: Schneider (2000)

44. …partly due to relatively low tax burden Percent of GDP Cumulative tax rate % Source: Schneider (2000)

45. Conclusion Foreign-born important role in economic growth Benefits of immigration extensive Labor market impacts limited; fiscal impact sizable More enforcement without reform will grow the shadow economy; worsen fiscal effects

47. Where undocumented immigrants live Source: Pew Hispanic Center (2005)

48. Share undocumented immigrant workers by industry Overall Proportion 4.9 Source: Pew Hispanic Center (2005) Priv. House holds Food mfg. Ag.Furniture mfg. Const.TextilesFood Svcs. Admin & Support HotelsOther mfg. Percent

49. Source: BLS (2006) Foreign-born share of employment by sector

50. Job-based green cards remain in short supply Source: Department of Homeland Security, Department of State

51. Fiscal and wage impact of immigration: Take-Aways Fiscal impact depends on education level and time horizon –High school graduates or below impose net costs –Almost all costs are made up for by descendants Wage impact is among prior immigrants, less so natives –Market-driven selection of immigrants is key Complement native labor –Flexibility is important in allowing K, L to adjust Mitigates adverse effects

52. By JOEL MILLMAN September 18, 2006