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The Economics of the Melting Pot

No issue on the congressional docket this year will incite more passion and controversy than immigration policy. Polls show Americans …

No issue on the congressional docket this year will incite more passion and controversy than immigration policy. Polls show Americans ranking immigration reform as one of the five most pressing issues for the nation-but there’s widespread disagreement about what to do about the millions of foreigners who seek to come to these shores. There’s also a great debate about whether the immigrants who do come are an economic blessing or a curse. First, a few background facts.

There are now roughly 35 million immigrants living in the U.S. Most are here as lawful immigrants, though there are also 10 million to 12 million here illegally. About twothirds of the foreign-born living in the U.S., or about 25 million, have arrived since 1980. The only time more people came in such a short period of time was during the Ellis Island years of the early 1900s.

These numbers explain why the issue has become such a political flash point. Clearly, immigrants have had an enormous impact on the face of our population and culture. The percentage of foreign-born Americans has roughly doubled, from 6.2 percent in 1980 to more than 12 percent now.

The impact on the American workforce has been even more pronounced. The Labor Department reports that more than half (54 percent) of all new entrants in the labor force over the past decade have been immigrants.

Another study by the Center for Immigration Studies finds, incredibly, that immigrants have filled 91 percent of the net new jobs in the U.S. economy from 2000-2005 because young native workers are entering the work force at only a slightly faster pace than their parents are leaving the work force.

Most-but certainly not all-economic studies indicate that these 25 million newcomers since 1980 have been a net benefit to the economy.

High-level immigration has corresponded with a period of sustained economic growth and rising income levels for most Americans. The overall U.S. economy has been generally prosperous, doubling in size in real terms-the equivalent of creating three new states the size of California. The nation’s net worth has soared from $15 trillion to $54 trillion over this period.

What is most unexpected has been the capacity of the U.S. economy to absorb these newcomers without a big bounce in unemployment of the native born. The U.S. unemployment rate has fallen steadily from an 8 percent average in the early 1980s to a 5 percent average in recent years- despite the addition of some 20 million new immigrants added to the labor force.

“The U.S., which admits the most immigrants by far of any nation in the world, has the second lowest unemployment rate of all developed countries,” notes Richard Vedder, an economist at Ohio University and a specialist on immigration policy.

Vedder statistically examined the impact of immigration on the U.S. unemployment rate over time and on the varying unemployment rates in the 50 states. In both cases, he found no evidence of an unemployment effect from immigration-even in cases where new immigrant arrivals constituted more than a 10 percent increase in the work force.

One economist who believes that immigrants impose net costs on our society is George Borjas of Harvard.

Borjas’s research suggests that the negative effect of immigration is a result of the increased competition for jobs at the bottom end of the income scale. His studies, based on examining immigrant job competition in cities, suggest that at the low end of the scale the rivalry between immigrants and natives for jobs depresses wages by as much as 10 percent. Borjas believes this exacerbates the wage and income gap between the rich and the poor in the U.S. The crux of the problem, according to Borjas and other critics of U.S. immigration policy, is that we are not attracting the high-skilled and high-educated workers we used to get from Europe in the past. Borjas concludes: “The skill composition of the immigrant flow entering the U.S. has deteriorated significantly in the past two or three decades; this decay in immigration skills justifies a reassessment of the economic benefits and costs of immigration.”

Yes, but there is countervailing good news about the economic performance of immigrants too. The new immigrants appear to be climbing the economic ladder of success in America today much like those of the past. I recently examined the Census Bureau data from 1970 to 2005 and found a pattern of steady financial progress for the immigrants. Immigrants who have arrived since 2000 have median household earnings of $31,930, or about 30 percent below the U.S. average of $44,389. But those who have been here for an average of 10 years have earnings of $38,395. Those here more than 25 years have average earnings of just over $50,000. Immigrant groups catch up to native earnings after about 20 years in this country. Sure, some ethnic groups perform better than others. The average family income of Asians is higher than of whites today. By contrast, the typical Mexican comes to the U.S. with low levels of skills and education and starts with wages that are about 40 percent below those of natives. They make up about 10 to 15 percent of this ground over time, but as a group, they permanently lag behind natives.

So what are the largest economic advantages derived from accepting immigrants? One is the working age profile of immigrants. Our nation is aging, but young immigrants keep coming to mitigate that demographic change in our economy. The average age of a native American is 36, but the average age of an immigrant is 25. Some 75 percent of immigrants arrive in their prime working years and are thus paying income and payroll taxes. Perhaps best of all, only 3 percent of immigrants who come here are over the age of 65, versus 12 percent and growing for the U.S. population as a whole. Immigration is America‘s demographic safety valve.

Startup Source

One more point is worth emphasizing, especially in a magazine like this one: Immigrants are highly entrepreneurial. Of course, most immigrant businesses, such as the corner grocery or the neighborhood landscaping service, are not highly successful. Yet many of the largest and most profitable businesses in America were started by immigrants. Immigrants are now at the helm of some of the nation’s leading and rapidly growing technology businesses: Russian-born Sergey Brin co-founded Google, Taiwanese-born Jerry Yang co-founded Yahoo! and serves as its chief, and French-born Pierre Omidyar founded eBay.

The table on page 36 shows the income and employment generated by 10 highly successful immigrant firms. Those 10 firms alone generated almost $90 billion in revenues and employed 234,000 workers in 2005.

So there is truth to both sides of the immigration debate in Washington. Our immigration policy imposes costs but confers benefits on us as well. It may be that the millions of lower skilled immigrants harm Americans at the bottom of the income scale-the most vulnerable in our society. On the other hand, even lowskilled immigrants may fill niches in our labor force that have helped make America the dynamic economy that it is today-with 40 million new jobs created in 30 years.

Oddly enough, all of the attention in Washington focuses on what to do about illegal immigration-build a fence, increase penalties on employers, allow more temporary workers, deport the undocumented, etc. But the bigger issue is how do we get the immigrants we need the most? Businesses complain that the low ceiling on H1B visas for high-skilled immigrants with special talents in short supply here erodes their competitiveness. There can be little doubt that a visa system that gives preference to those whose talents are most valuable to our economy-wherever they come from-would be in America‘s strategic interest. But the good news is that even the “huddled masses” appear to be contributing, and the notion of America as a melting pot still works.


Stephen Moore is an economics writer for The Wall Street Journal editorial page.

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