Goldman Sach's Report on Immigration (2008)

8/9/2019 Goldman Sach's Report on Immigration (2008)

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Global Economics Paper No. 168

GS GLOBAL ECONOMIC WEBSITEEconomic Research from the GS Institutional Portal

at https://portal.gs.com

Important disclosures appear at the back of this document.

Thanks to our GS colleagues Jan Hatzius, Ed McKelvey,

Erik Nielsen, Jim ONeill, and Thomas Stolper for helpful

comments and suggestions.

Andrew Tilton, Kent Michels,Alec Phillips, Alberto Ramos

May 27, 2008

Immigration and the North

American Economy

! Immigration to the United States has surged over the past decade

with most of the increase outside legal channels. Immigrants

boosted US labor force growth by about half a percentage point per

year over the past decade.

! Though immigrants appear to have a very limited impact on US

wage levels, most immigrants themselves realize a large economic

gainwith further benefits accruing to the second generation.

! Remittances from citizens working in the United States are an

important source of capital for Mexico and other countries of origin

of migrant workers.

! Current US immigration policy is ineffectivetoo tight for skilled

workers, and often irrelevant for undocumented workers. With

compromise stalled, immigration policy is likely to tighten gradually

as enforcement increases.

! Along with a weaker domestic labor market, tighter borders are

likely to reduce the level of both legal and illegal immigration over

the next few yearsslowing the growth of the US labor supply and

hence of US economic output.


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Goldman Sachs Economic Research Global Economics Paper No. 168

Issue No: 168 May 27, 2008

Table of Contents

Highlights 1

I.The Next Great Wave of Immigration 2

Forces Driving Immigration 3

II.Characteristics of the Immigrant Labor Force 5

Skilled Immigrants 5

Unskilled Workers 5

The Second Generation 6

Box 1: Estimating the Scale of Immigration 8

III.The Impact of Immigration on the North American Economy 9

Labor Supply 9

Wages and the Income Distribution 11

Fiscal Implications of Immigration 12

Impact on Mexico and Other Emigrant Nations 14

IV.The Ideal Immigration SystemAnd the American One 18

Box 2: The US Immigration System 20

V.Making Immigration Work 21

Makings of a Compromise 21

The New Third Rail of American Politics 23

Progress is Unlikely Before 2009 24

VI. Conclusion: An Opportunity on Hold 25


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Issue No: 168 1 May 27, 2008

! Immigrants are a vital part of the American economy and of thecountrys historical identity. The United States prides itself on being amelting pot for people from all over the world, and accepts hundreds ofthousands of new legal permanent residents each year.

! A surge in immigration over the past decade has pushed the foreign-born

population to nearly 40 million and boosted the growth rate of the USlabor force. New immigrants accounted for about half of the growth inthe US labor force over the past decade, boosting GDP growth byroughly of a percentage point per year.

! The net economic benefit of immigration is large and goes beyond asimple increase in the size of the labor force. Immigrants themselvestypically gain enormously from migration, and their US-born children doeven better. Remittances from migrants to relatives back home also

benefit their countries of origin. Immigrants appear to have a fairly smallimpact on the level and distribution of wages, and largely offsettingeffects for the federal budget (positive) and state and local budgets(negative).

! Despite the basic openness of the United States and the benefits ofimmigration, a surge in unauthorized migrants over the past fewdecadesparticularly from Mexicohas evolved into a public policycrisis. The majority of recent immigrants are in the country illegally,even as some legal (albeit temporary) work permits go unused.Immigration flows are larger than ever, but the skilled labor market isextraordinarily tight and annual quotas for permits for skilled work visasare exhausted within a few days. In short, current US immigration policyis unrealistic and inefficient.

! Politicians of all stripes are dissatisfied with the current situation, butdisparate views of the desirability of immigrationexacerbated in somecases by an insufficient understanding of the facts of immigration and itsimpact on the economyimpede legislative progress. Voters and

politicians differ on whether to focus on legal or illegal immigration, therelative importance of skill-based versus family preferences forimmigrants, and the utility of temporary worker programs. Aside fromrecent efforts to step up enforcement, progress on immigration reformwill have to wait until the next administrationand possibly longer.

! The rate of immigration to the United States has already begun to slow,reflecting the political stalemate, increased enforcement efforts againstunauthorized migrants, and economic weakness. Each of these factorsappears likely to persist over the next year or two. Meanwhile, a weakerdomestic labor market will discourage immigration, particularly ofundocumented workers. Lower immigration flows will reduce labor

force growth and consequently the potential growth rate of GDP incoming years.

! Over the long term, the United States is likely to remain an attractivedestination for migrants from around the world, especially those from

poorer countries in the Americas. Given a slowdown in native-bornpopulation growth, and assuming some degree of openness to immigrantsremains, immigrants are likely to account for the majority of US

population growth through 2050up to four-fifths by some estimates.

Highlights


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Issue No: 168 2 May 27, 2008

I. The Next Great Wave of Immigration

Give me your tired, your poor, your huddled masses, yearning to breathefree

-- Inscription for the Statue of Liberty (Emma Lazarus)

To many, these noble sentiments capture a fundamental part of the identity ofthe United Statesan openness to people from around the world who seek a

better life. Many of the early American colonists were political or religiousrefugees themselves. Despite controversy over border security andunauthorized immigration, the United States remains exceptionally open toimmigrants, accepting nearly a million people a year as new legal permanentresidents.

The United States is currently experiencing the third great wave ofimmigration in its history (Exhibit 1). The first, from the mid- to late-19

th

century, was predominantly composed of Northern Europeans. More thanfour-fifths of immigrants entering the United States between 1840 and 1870listed the United Kingdom, Ireland, or Germany as their last place ofresidence. Ethnically and religiously, these immigrants matched the native

population fairly well. The second, cresting around the turn of the centuryand continuing through the 1920s, was dominated by Eastern and SouthernEuropeans with different cultural and religious identities.

The third wave of immigration, which began to gather strength in the 1970s,has been dominated by immigrants from Latin America and Asia. Whileabout 40% of those who immigrated to the US prior to 1970 came fromEurope, only about 10% of those who immigrated to the US since 1970 camefrom Europe.

Exhibit 1: Third Great Wave of American Immigration

0

20

40

60

80

100

1820s

1830s

1840s

1850s

1860s

1870s

1880s

1890s

1900s

1910s

1920s

1930s

1940s

1950s

1960s

1970s

1980s

1990s

0

20

40

60

80

100

Germany, UK, and Ireland

Eastern and Southern Europe

Asia and Central America

*Legal permanent residents.

Source: Department of Homeland Security.

Percent of New LPRs*

Last Country of Residency:

Percent of New LPRs

A distinguishing characteristic of this third wave of immigration is a surge inunauthorized migrants. According to the Pew Hispanic Center, the inflow ofunauthorized immigrants has outnumbered legal immigrants over the pastdecade (Exhibit 2). At an estimated 12 million, the number of unauthorizedresidents in 2006 constituted about 30% of the countrys total immigrant

population. The vast majority of these immigrants come from Mexico.

The United States is experiencingthe third great wave of immigrationin its history. This surge has beendominated by immigrants from

Latin America and Asia.


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Issue No: 168 3 May 27, 2008

Exhibit 2: Undocumented Immigration Overtakes Legal Inflows

0

100

200

300

400

500

600

700

800

900

1980-1989 1990-1994 1995-1999 2000-2004

0

100

200

300

400

500

600

700

800

900Legal Immigrants

Unauthorized Immigrants

Mexican Share

Thousands

Source: Pew Hispanic Center.

Thousands

In large part because of these flows, the immigrant population in the UnitedStates has skyrocketed in recent decades, with the share of the US population

born outside the country approaching the record set in 1890 (see Exhibit 3).Between 1990 and 2005 alone, the foreign-born population of the UnitedStates increased by more than 75%, according to figures from the US Census.The size of this wave of immigration, and the large proportion of illegalmigrants, have put traditional American notions of openness to the test.

Exhibit 3: Immigrant Population Has Exploded in Recent Decades

-4

0

4

8

12

16

1850s

1860s

1870s

1880s

1890s

1900s

1910s

1920s

1930s

1940s

1950s

1960s

1970s

1980s

1990s

2000s*

-4

0

4

8

12

16

Net Increase in Immigrant

Population (right)

Immigrant Share of

Population (left)

Percent

*Projection based on 2000-2005 increase in the immigrant population.

Source: Census Bureau.

Percent

Forces Driving Immigration

Emigration is by nature an exceedingly complex phenomenon, and dependson a wide variety of economic, political, and cultural variables. Both supply-side and demand-side changes help to explain the third wave ofimmigration. On the supply side, several factors have led to a shift in thecomposition of immgrants:

A distinguishing characteristic othis third wave of immigration is a

surge in unauthorized migrants.

The immigrant population in theUnited States has been

skyrocketing in recent decades,with the share of the US populationborn outside the countryapproaching an all-time record.


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Issue No: 168 4 May 27, 2008

1. Liberalization of immigration laws. Over the past century, USimmigration law has gradually shed preferences for white, NorthernEuropean immigrants. In 1943, Congress repealed the Chinese ExclusionAct, which had effectively halted immigration from that country since 1882.The Immigration and Nationality Act amendments of 1965 abolished ceilingson the level of immigration from many countries that had been established in1924. (The primary goal of the bill was to stem the flow of immigrants fromSouthern and Eastern Europe to preserve the ethnic mix of the US

population.) Although the 1965 act retained an annual quota of 170,000visas for the Eastern Hemisphere, unlimited family reunification visasallowed for a bigger inflow.

2. Changes in relative living standards. Europes rapid economic recoveryfollowing the Second World War decreased the incentive for emigration.Meanwhile, Latin Americas lost decade of the 1980s, compounded inMexicos case by the peso devaluation of 1994 and subsequent economiccrisis, meant stagnating incomes and a widening gap with US wage levels.Factory wages in Mexico were roughly a quarter of US levels in 1980, buthave been barely one-tenth as high over most of the last twenty years.

3. Declining cost of immigration. Economically and psychologically, the

costs for Latin American and particularly Mexican workers to migrate to theUnited States have declined significantly. As immigrants establishedthemselves in the United States through temporary worker programs orunauthorized immigration, they provided aid to relatives and friends. Arecent study by Mexicos central bank found that 80% of migrants alreadyhad family members in the United States, and 95% of those with familymembers lived with them immediately after migration.

1Geographically,

the development of the maquiladora industry drew workers towards Mexicosnorthern border, providing a sort of way station for migrants.

In addition to these supply factors, changes in the profile of labor demandhave also contributed to the surge in immigration:

1. Technological innovation. At the high end of the labor market,technological innovation has increased the returns on education, particularlyfor specialized engineering and technical skills. In turn, this has spawned ahuge demand for highly skilled labor in the sciences, drawing in highlyeducated foreigners through programs like the H-1B visa program.

2

2. A better-educated US population. A gradual increase in the educationalattainment of the US population has meant a shift in the labor supply awayfrom low-wage occupations, particularly in the services.

3. Development of the Sun Belt states. The rapid growth of the Sun Beltstates after World War II and their geographic proximity to the Mexican

border may also have been a contributing factor. Well over a third of

immigrants live in California and Texas.3

1 Central Bank of Mexico (2007),Las Remesas Familiares en Mxico.2 Although many low-skill service sector jobs remain unaffected by

technological progress, the middle tier of the labor market has seen a relativeerosion in labor demand, as automation substitutes for many rote activitiesrequiring moderate education. See for example The Polarization of the USLabor Market, David Autor, Lawrence Katz, and Melissa Kearney, NBERWorking Paper No 11986. January 2006.

3 Center for Immigration Studies analysis of the March 2005 Current PopulationSurvey.

Several factors have contributed tothe faster growth and changedcomposition of immigration flows,including the gradual eliminationof racial preferences in USimmigration laws, changes inrelative living standards, and thedeclining cost of immigration.


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Issue No: 168 5 May 27, 2008

II. Characteristics of the Immigrant Labor Force

From an economic perspective, the most relevant characteristic of working-age immigrants is the skill set they bring to the labor market. Lumping allimmigrants together into skilled and unskilled categories is crude butinformative. By our definition, skilled immigrants are those with a collegedegree and a legal work permit (without which even a highly skilledimmigrant would have trouble obtaining a job in which he or she could apply

those skills).

Skilled immigrants

We estimate that skilled workers account for just over one-third of recentinflows to the United States. Three separate statistics lead to this conclusion.First, about 35% of adult immigrants who arrived in the United States since2000 had a bachelors degree or advanced degree. Second, about 20% of

post-2000 immigrants are in management, professional, and relatedoccupations; another 13% are in sales and office occupations.

4Third,

approximately 30% of current foreign-born households where the head of thehousehold entered the United States in 2000 or later have incomes above$50,000 per year; though wages are not an indication of skill they are clearlycorrelated with education and skill level. Skilled workers came largely fromAsia, with Europeans playing an important supporting role.

The most common avenue for skilled immigration is the H-1B visa for skilledtemporary workers, which is valid for three years and renewable once. Theannual quota for H-1B visas, which Congress changes from time to time, iscurrently 65,000, plus 20,000 additional visas for temporary workers withadvanced degrees and exemptions for certain sectors (e.g. nonprofitorganizations). All told, 115,000-130,000 H1-B visas (including renewals)have been issued per year in recent years. Skilled workers can also gain entrythrough temporary intercompany transfers (the L-1 visa), which allow

foreign employees to work for up to three years in the United States.

Workers on some but not all temporary visas can apply for permanentresidency in the United Statesthe so-called green card. Priority is givento applicants with desirable labor market skills. In 2005, 22% of new legal

permanent residents obtained their green cards via employment-basedpreferences.

Unskilled workers

The bulk of immigration, perhaps two-thirds, consists of individuals withlimited job skills or education. Unskilled immigrants come disproportionately

from Latin America and especially Mexico, but are by no means limited tothis region.

In theory, unskilled immigrants coming to the United States to work shouldbe entering through the temporary work (H-2) visa program. This has twocategories: the H-2A visa for seasonal agricultural workers and the H-2B visafor temporary nonagricultural workers. The intent is to provide a legalmechanism for a seasonal inflow of labor where American labor supply at

prevailing wages may be lacking.

4 Census Bureau, March 2004 Current Population Survey.

We estimate that skilled workersaccount for just over one-thirdof recent inflows to the UnitedStates.

The bulk of immigration, perhapstwo-thirds, consists of individualswith limited job skills or education,who come disproportionately from

Latin America.


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Issue No: 168 6 May 27, 2008

In practice, the H-2A visa is pratically irrelevant. In combination, a heavyadministrative burden and a limited time horizon deter all but a fewimmigrants and employers from taking advantage of this program. The

burden of securing such a visa falls on the employer, who must be able todemonstrate that his need is one time, seasonal, peak load or intermittent,that the job is for less than one year, and that there there are no qualified andwilling unemployed US workers available to meet the need. The H-2B visa

has similar problems, though its 66,000 cap is generally reached and it ishighly utilized by Mexicans.

Another legal route, often overlooked as an employment channel, is thefamily preference visa system. The United States sets aside visas for familymembers of citizens and legal permanent residents, including not only parentsand children but also siblings and spouses. This enables chain migration,whereby one family member receives legal status through a work-based visa

program (or through a past amnesty for undocumented immigrants), thenserves as a gateway for his or her family members to migrate to the UnitedStates. Roughly 30% of new immigrants, and perhaps 60% of new legal

permanent residents, enter through family-based preferences.

Temporary visas and family preferences aside, the vast majority of unskilledimmigrants entering the country in recent years are coming in illegally.Between 2000 and 2005 probably just over half of total immigrant inflowswere outside legal channels.

5Mexico accounts for a large share of these

inflows, given its proximity to the United States and the disparity in wagelevels between the two countries. Undocumented immigrants appear to havea very high labor force participation rate, as their main purpose is typically tofind work, and they often support dependents back in their home countriesthrough remittances.

The second generation

The reputation of the United States as a melting pot suggests a rapidassimilation of immigrants into the population. Happily, this stereotype hassome support in the data. In combination, a strong immigrant work ethic andthe opportunities in Americas schools and labor market have reduceddisparities in educational attainment and income between immigrants and thenative-born population rapidly.

Exhibit 4 illustrates that first-generation immigrants generally are less well-educated than the native-born population. But recent data suggest thatsecond-generation immigrants (the native-born children of foreign-born

parents) actually are slightly bettereducated on average than the children ofnative-born parents (the so-called third-and-higher generation immigrants).

Wage disparities also close quickly. As of 2004, second generationimmigrants had a higher median income than the rest of the non-immigrantpopulation.

The changing composition of immigrant flows will test the integrity of themelting pot. The increased share of undocumented immigrants from LatinAmerica has resulted in a lower-skilled pool of immigrants than before (see

5 A significant minority (perhaps as much as half) of unauthorized workersentered the United States legally but overstayed their visas. Unfortunately,there is little solid information to gauge more precisely the extent to which thisoccurs.

Between 2000 and 2005 probablyust over half of total immigrant

inflows were outside legal

channels.

Although new immigrants have lesseducation on average than native-born Americans, recent data

suggest that second-generation

immigrants actually are slightlybettereducated on average than thechildren of native-born parents.


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Issue No: 168 7 May 27, 2008

the leftmost column in Exhibit 4). Therefore, a large number of second-generation immigrants from Latin America will have to get substantiallymore education than their parents in order for this cohort to catch up to thenative-born population. Whether these new immigrants can do so is aquestion that will take decades to answer; for the remainder of this paper, wefocus on the impact of first-generation immigrants on the North Americaneconomy.

Exhibit 4: Immigrants Start With Less Education but Catch Up

0

20

40

60

80

100

1st Generation

(Mexico*)

1st Generation

(All)

2nd Generation Rest of Pop.

0

20

40

60

80

100

Bachelor's degree or more

High school graduate

High school dropout

*Includes immigrants from Central America.

Source: Census Bureau. Current Population

Survey, March 2004.

11.5%61.2% 13.9%

Percent Percent

32.8%


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Issue No: 168 8 May 27, 2008

Box 1: Estimating the Scale of ImmigrationIn this paper, we use estimates of 37 million for the total foreign-born population in the United States in 2006 (about one-eighth of

the total population), of which about 12 million are in the countryillegally. Current flows of immigrants appear to be about 600,000legal immigrants and 700,000 undocumented immigrants annually.Below we explain the genesis of these estimates.1

Estimating the scale of United States immigration is tricky forseveral reasons. First and most obviously, not all immigrantsenter the country through legal channels, so from the start alarge share of immigrants are not registered via any formalsystem. Second, even for those who enter legally, the UnitedStates Immigration and Naturalization Service (INS) may notalways be informed about departures from the country, creatingsome uncertainty about what fraction of legal foreign entrantsare still in the country, or what fraction of visitors overstay theirvisa. Third, many unauthorized immigrants obviously have anincentive to avoid detection, and therefore may be under- or mis-represented in official population counts.

Nevertheless, a variety of sources give a fairly consistent readon the net inflow of immigrants, and of the total number currentlyin the country. We begin with the latter.

Stock of immigrants. The best source of data on immmigrantscurrently in the country is the Census Departments CurrentPopulation Survey (CPS). To supplement its once-a-decade duty

to count the entire US population, the Census updates overallpopulation estimates on an annual basis based on data on births,deaths, and international migration.

This survey, conducted in March, asks many questions onincome and work experience, and includes an expanded sampleof Hispanics. This information allows researchers to subdivide

the US population in a variety of ways, including by country ofbirth. The total number of immigrants in the country, or theforeign-born population, was estimated at about 37 million inMarch 2006, or approximately 12% of the US population.

The most straightforward way to arrive at an estimate of the

unauthorized immigrant population is the residual methodsubtracting all known legal immigrants from the total foreign-bornpopulation. Widely cited estimates from Jeffrey Passel of thePew Hispanic Center take this approach.2 Information from theDepartment of Homeland Security and elsewhere is used todetermine the total number of legal residents:

Naturalized citizens (11.5 million in 2005) Legal permanent residents (10.5 million) Legal temporary residents (1.3 million) Refugees/asylum seekers (2.6 million)

Remaining foreign-born persons are considered unauthorized.(The final estimate is revised upward to adjust for the likelyundercounting of unauthorized immigrants in the CPS.)3

Although this is the most comprehensive and straightforwardapproach, other sources provide cross-checks on the number ofunauthorized foreign residents. For example, the Social SecurityAdministration maintains an Earnings Suspense File thatcollects contributions made under Social Security numbers(SSNs) that are unassigned or do not correspond to the propername or birthdate. Testimony from the GovernmentAccountability Office indicates that these reports comedisproportionately from just a few industry sectors of theeconomy, particularly restaurants and constructiontwo of the

top industries in which unauthorized migrants are employed.

Roughly 9 million W-2 tax forms had SSNs of questionableprovenance in 2002.

4Nearly $20 billion per year of wages were

recorded in the earnings suspense file during the 1990s. This tripled to $56 billion in 2002 (see exhibit 8 on page 13).Considering that not all undocumented immigrants are oncompany payrollsfor example, domestic workers in privatehouseholdsthis number seems quite consistent with the Passelestimates of the unauthorized immigrant population. Earningsassociated with these SSNs are rising roughly in line withestimates of the unauthorized populationsee Exhibit 8 on page12.

Flow of immigrants. Flows of immigrants are even more difficult to determine than the total number currently in the country. TheCensus Bureau estimates a net inflow of 1 to 1.3 millionimmigrants per year in recent years (including both legal andillegal immigrants), based on changes in the foreign-bornpopulation discussed above. Approximately 600,000 new arrivalsper year entered via legal channels, suggesting at least a similarnumber entering without authorization.

5

Although these estimates infer the inflow of unauthorizedimmigrants from the difference between legal flows and the totalchange in the foreign-born population, other data sources allowfor some triangulation. Two examples include border securityrecords and remittance flows.

The Department of Homeland Security maintains data on borderapprehensions the number of would-be migrants detained byUS officials. Although this figure is obviously sensitive to theintensity of enforcement and depends on the frequency withwhich workers cross the border to Mexico during the year, theflows turn out to be quite correlated with US business cyclefluctuations and other estimates of the immigrant inflow.

Likewise, remittance flows to Mexico, the largest source ofunauthorized migrants, show a pattern consistent with estimatesof recent Mexican immigrants currently working in the UnitedStates. We discuss remittance flows in more detail on pp. 14-17.

1These estimates are the work of the Pew Hispanic Center, whichregularly analyzes government data on the foreign-born population.

2The Size and Characteristics of the Unauthorized Migrant

Population in the U.S. (Pew Hispanic Center, 2006), p. 4.3 Passel suggests that 1-1.5 million of these unauthorized immigrants

may be known to DHS and have full legal statuses pending but arenot yet fully legal.

4Illegal Immigrants are Bolstering Social Security with Billions,

New York Times, 5 April 2005.5

Jeffrey Passel, Unauthorized Migrants: Numbers andCharacteristics(Pew Hispanic Center, 2005), p. 6.


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Issue No: 168 9 May 27, 2008

III. The Impact of Immigration on the United States Economy

Immigration affects the US economy in several ways. First and foremost, itaffects labor supply, especially in lower-skilled occupations. The correlation

between the US business cycle and the size of undocumented inflows impliesthat the US labor supply is getting help when it is most needed. Second,immigration affects wages and the income distribution. Although moststudies suggest that its impact on wages is quite small, the skill distribution of

migrants is somewhat different than the labor force as a whole. This hasprobably contributed to the increased disparity of the US income distributionin recent years. Third, immigration has important fiscal effects, providing anextra source of tax revenue for the federal government and helping to ease thedemographic transition slightly, but placing a greater burden on the state andlocal governments that provide most of the social and educational servicesused by immigrants. Finally, immigration has important economic benefitsfor the countries of origin, notably Mexico and other small Central Americanand Caribbean nations.

Labor Supply

Immigration boosts the US labor supply. Estimates from the CensusBureaus Current Population Survey show the number of foreign-bornworkers in the United States rising from 15.6 million in 1997 to 24.0 millionin 2007. This increase was nearly as large as the increase in entire native-

born labor force; without it (and assuming no offsets in the behavior of nativeworkers), annual labor force growth would have been roughly 0.7% per yearrather than the observed 1.3% per year, with corresponding consequences foroverall economic growth.

Immigrants are much more likely than natives to have very low levels ofschooling. As noted in the preceding section, in 2004 about one-third ofimmigrants over 25 years old lacked a high school education, versus only

12% of native Americans (Exhibit 4 on p. 7). At the same time, immigrantsare just as likely as natives to have a high level of schooling: roughly thesame percentage of immigrants and natives hold bachelors degrees, and aslightly larger share of immigrants have advanced degrees. Natives thereforehave disproportionate represention in the middle of the skill distribution, withabout 60% of native workers holding a high school degree, perhaps withsome college education, and only 40% of immigrants at a similar level.

The upshot is that immigration has increased the relative supply ofuneducated, unskilled workers, while it has kept the relative supply ofcollege graduates roughly the same (the relative supply of highly educatedworkers has increased slightly as a result of immigration). Immigrant workerstherefore tend to be concentrated in blue-collar occupations, as shown in

Exhibit 5. In a recent survey, the Bank of Mexico found that 23% ofMexicans working in the United States were employed in ad-hoc manuallabor, 19% in the construction industry, and 17% in agriculture.

6Low-paying

service industries also disproportionately employ immigrants.

The extent of immigrant involvement in low-wage manufacturing and serviceoccupations is such that many businesses rely on this labor source. Usinginformation from the March 2005 Current Population Survey, the Center forImmigration Studies found that the likely number of unauthorized workers

6 Banco de Mxico (2007),Las Remesas Familiares en Mxico.

ew immigrants contributed morethan half a percentage point perear to labor force growth over theast decade.

Immigration has increased therelative supply of unskilledworkers.


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Issue No: 168 1 0 May 27, 2008

probably exceeded the number of potential native-born workers in severalareas (Exhibit 6).

7

Although it may not be true that immigrants do jobs Americans wont do, itappears that immigrants do many jobs for which Americans are in shortsupply at given wage rates and employment conditions.

Exhibit 5: Immigrants Concentrated in Blue-Collar Occupations

0 1 2 3 4 5 6 7 8

Mexican/Central A merican Immigrants

All Immigrants

Farming, Fishing

& Forestry

Source: Census Current Population Survey, March 2004.Ratio

Share of Immigrants in Occupation Relative

to Share of Natives in Occupation

Construction,

Extract. & Maint.

Production,

Trans. & Moving

Service

Sales and Office

Management &Professional

Immigrants

Overrepresented

Exhibit 6: Several Sectors Rely Heavily on Immigrant Labor

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Farm,

Fish, etc.

Const. &

Extract.

Blding.

Maint.

Food

Prep.

Product. Trans. &

Moving

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4Unemployed Natives

Unauthorized Immigrant Workers

Source: Center for Immigration Studies Analysis of March 2005 CPS.

Millions Millions

Of course, immigration hasin absolute termsincreased the supply of allcategories of workers. And it is here where the impact of immigration may

be most significant. Immigration flows, particularly unauthorized flows, arehighly sensitive to the economic cycle (Exhibit 7). As a result, they makelabor supply more elastic and help to alleviate labor constraints and inflation

pressures. However, this relationship may have weakened somewhat recently

7 Although the Center for Immigration Studies generally favors strict controlson immigration, the data they use in some of their analysis can actually beinterpreted to support the idea that unauthorized workers are needed.

any businesses in low-wagemanufacturing and serviceoccupations rely on immigrantlabor.


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Issue No: 168 1 1 May 27, 2008

judging from a recent decline in border apprehensions. They fell sharplyover the 2006-2007 period, presumably due to stepped-up security efforts thatalso deterred border crossings. To the extent this trend continues without

broader reform, undocumented workers would be more hesitant to leave thecountry during periods of economic weakness, while new workers wouldhave more difficulty entering when demand for labor rises.

Exhibit 7: Economic Forces Drive Illegal Immigration

0.8

1.0

1.2

1.4

1.6

1.8

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

3.0

4.0

5.0

6.0

7.0

8.0

Southw est Border

Apprehensions (left)

Unemployment Rate

(right)

Millions Percent

Source: Bureau of Labor Statistics. Department of Homeland Security.

Wages and the Income Distribution

The fact that immigration has increased the labor supply suggests thatallelse equalit will decrease the wages of native workers, especially unskilledworkers. If labor supply increases, then the number of workers hired will

increase and the average wage will fall. Furthermore, the barbell-like skilldistribution of migrants, combined with a high correlation between workerseducation and earnings, suggests immigrant flows likely increase incomedisparities within the population.

However, the simple partial equilibrium view of the world does not capturethe full impact of immigrants on the wage structure. In a series of papers,David Card of the University of California at Berkeley and George Borjas ofHarvard University, often with co-authors, have debated the extent of thewage effects extensively. Although the two represent opposite poles of thedebatewith Card arguing that the impact of immigrants on the wages of thenative-born is negligible, and Borjas typically finding a stastistically

significant negative effecttheir studies suggest common ground on manyissues.

In the long run, immigration affects labordemandas well as labor supplyacritical point that is often overlooked by commentators in the mainstreammedia. More workers mean more aggregate demandboth directconsumption by the additional population, and investment by businesses tocomplement the larger work force. This shift in the demand curve for labormitigates the impact of the additional labor supply. Exactly where wages endup is an empirical question, but the impact is much smaller than a simplepartial equilibrium analysis of the additional labor supply might imply.

Immigration flows, particularlyunauthorized flows, are sensitive tothe economic cycle increasing theelasticity of the labor supply.

Although the debate over theimpact of immigration on wageshas drawn lots of attention, thebulk of research on the topic hasound very modest effects.


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Issue No: 168 1 2 May 27, 2008

Even on the issue of wage effects, Card and Borjas are not particularly farapart. Borjass early papers suggested that between 1980 and 2000 the influxof immigrants reduced the wages of high school dropouts by 8%-9%, withsmaller effects on more educated workers. Later studies, which assumed thatUS businesses would increase capital investment in response to an increase inthe number of available workers, found a cumulative impact of only 3.6% onthe wages of high school dropouts. The revised model suggested that the

aggregate effect of immigration on all workers wages was nil since moreeducated workers actually saw their earnings increase as a result.8

LawrenceKatz, a Harvard economist who co-authored a 2005 paper with Borjas,summed up as follows: Illegal immigration had a little bit of a rolereinforcing adverse trends for the least advantaged, he said, but there aremuch stronger forces operating over the last 25 years.

Fiscal Implications of Immigration

Immigration is probably a small net positive for the federal budget, becauseincremental tax revenues outweigh the limited services allowed toimmigrants. States and localities often pick up the slack in providing social

services to immigrants, and therefore incur considerable costs, particularly instates with a large share of unauthorized migrants.

The costs immigrants pose to the federal budget are probably relatively low.The welfare reform passed in 1996 stipulated that states could not use federalgrants to finance benefits such as Temporary Assistance to Needy Families,Medicaid, etc. to non-citizens, though they could still offer such assistancewith their own funds.

9However, the American-born children of immigrants

(whether authorized or not) are citizens and thus entitled to benefits.

At the same time, immigrants do provide tax revenues to the Treasury. Evenillegal immigrants pay federal taxes: in order to demonstrate eligibility foremployment, undocumented workers often use fake Social Security cards

with numbers borrowed from others or simply made up. When federal payroll taxes and income taxes are withheld from their paychecks, fundsaccumulate in the Social Security trust funds with no parallel entitlement.

10

Since the Immigration Reform & Control Act went into effect during the late1980s, inflows into the Earnings Suspense File have increased dramatically(Exhibit 8). The cumulative taxes held in this account are $463 billion.

11

8 Even the modest 3.6% effect could be an overstatement, as co-author Katzsuggested that trade flows might further mitigate the wage effects. See: Cost of

Illegal Immigration May Be Less Than Meets the Eye (4/16/06); TheImmigration Equation (R. Lowenstein, NYT 7/9/06); and The Labor SupplyCurve Is Downward Sloping(Borjas, 2003).

9 Gordon Hanson, Why Does Immigration Divide America?: Public Financeand Political Opposition to Open Borders (National Bureau of EconomicResearch, 2005), p. 19.

10 The 2005Economic Report of the Presidentfound that the net present valueof immigrants estimated future tax payments exceeded the cost of servicesthey were expected to use by $80,000 for the average immigrant and his or herdescendants. Accounting for the 1996 welfare reform, which restrictedeligibility and imposed time limits, this figure increased to $88,000 (p. 107).While the figure for first-generation immigrants is slightly negative, the fiscalimpact of immigrants descendants is projected to be positive enough to pushthe aggregate impact well into positive territory.

11 Hanson, p. 13. Data on the annual inflows into the Earnings Suspense File canbe found at this site: http://www.ssa.gov/oig/ADOBEPDF/A-03-03-23038.pdf

Immigration is probably a smallnet positive for the federal budget,

because incremental tax revenuesoutweigh the limited servicesallowed to immigrants.


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Issue No: 168 1 3 May 27, 2008

Exhibit 8: Many Undocumented Immigrants Do Pay Taxes

0

10

2030

40

50

60

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

0

2

46

8

10

12Earnings Suspense File*

Unauthorized Population (Estimate)

*Employee wages reported to the Social Security Administration that

cannot be matched to a valid Social Security number.

Source: Social Security Administration. Pew Hispanic Center.

Billions of dollars Millions

Furthermore, though immigrants from Mexico and Latin America tend to

have lower incomes, they also tend to be younger. This means that on themargin, they mitigate the demographic shift of the US population as the baby

boom generation retires, and reduce the financial pressures on entitlement programs. However, this impact is likely to be modest and ultimatelytemporary. After all, immigrants get older too, so unless the flow ofimmigrants continues to increase, the impact on the age distribution of the

population fades over time.

The situation at the state and local levels is very different. According to aruling of the Supreme Court, these jurisdictions cannot withhold publiceducation and emergency medical services from either legal or illegalimmigrants residing in the United States (Hanson, p. 13). As states generallyfoot the bill for these services, outlays for immigrants likely outweigh the

corresponding tax revenues.

Because they earn less on balance, immigrants tend to rely more on welfare benefits than the US-born population. Most strikingly, the percentage ofimmigrants receiving noncash benefits (such as subsidized school lunches,food stamps, subsidized housing, and Medicaid) is almost two times greaterthan for natives, and the percentage of Mexican immigrants is three timesgreater (Exhibit 9). It is also noteworthy that the ratio of individualsreceiving noncash benefits to those receiving cash benefits is much higher forMexican immigrants than for any other segment of the population. This

probably reflects the fact that unauthorized immigrants make up a large shareof this group, and it is easier for them to claim noncash benefits than it is for

them to access cash benefits.

A particular problem is that immigrants are less likely to be able to pay forhealth care. While nearly five-sixths (86.5%) of native-born Americans havehealth insurance, only two-thirds of the foreign-born populationand lessthan half of those born in Mexicoare insured. A Houston-area studyfound that about one-fifth of the patients in its health system last year wereimmigrants without documents, most of them from Mexico, and costs forundocumented immigrants amounted to 14% of the total for the system. Thefederal government estimated that spending by California hospitals on illegalimmigrants who were not eligible for state or federal reimbursements

However, at the state level, outlaysor immigrants may exceed the

corresponding tax revenues.


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Issue No: 168 1 4 May 27, 2008

Exhibit 9: Immigrants Claim Disproportionate Share ofMeans-Tested Social Benefits

0

10

20

30

40

50

60

Native Foreign-Born Mexico

0

10

20

30

40

50

60

Noncash Benefits

Cash Benefits

Percent Percent

Source: Census Bureau. Current Population Survey, March 2000.

Share of population receiving::

amounted to more than $1 billion per year.12

Since the most prevalent reasonfor hospitalization among the illegal immigrant population is pregnancy and the federal government is not absolved of its welfare obligations to theseso-called anchor babies by virtue of their status as American citizens thishas become a particularly sore point for those hoping to stem the flow ofunauthorized immigrants into the United States.

The bottom line is that natives in states with large immigrant populations,generous welfare benefits, and very progressive tax systems (for exampleCalifornia, New York, and New Jersey) do subsidize immigrants. A studyadmittedly somewhat datedfrom the National Research Council found thattransfers in California amounted to $1,178 per native household.

13

Impact on Mexico and other emigrant nations

The flow of labor to the United States has a substantial impact on the homecountries of immigrants, particularly Mexico. Relative to size of the homecountrys economy, inflows from emigrants are largefor example, nearly10% of Mexican citizens are currently working in the United States. Onemight expect that the economic effects are the opposite of those for theUnited States, and indeed this is true in many casesthe labor supplyshrinks, wages are perhaps a bit higher than they would otherwise be, and soonthough not all (elasticity of labor supply can work similarly in both

countries). However, the most obvious benefit for the Mexican economy,and other sources of immigrant labor, is the flow of remittances from workersin the United States.

The growing number of Mexican workers in the United States, along withtechnological improvements that sharply reduced the costs associated withinternational money transfers, has generated a very significant increase in theflow of workers remittances to Mexico. In fact, in recent years remittances

12 Texas Hospitals Reflect the Debate in Immigration, New York Times, 18July 2006.

13 Hanson, p. 23.

early 10% of Mexican citizens arecurrently working in the UnitedStates.


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Issue No: 168 1 5 May 27, 2008

have grown much faster than other current account receivables, turning theseinflows into a major anchor for Mexicos external accounts and a key sourceof income for many low-income households. Remittances grew from lessthan 1% of GDP during the early 1990s to a record high 2.8% of GDP in2006 (US$ 23.7bn, see Exhibit 10). In 2005, Mexico was the worlds thirdlargest recipient of workers remittances in value, trailing only India andChina, whose populations are an order of magnitude larger.

In 2006 remittanc e equal to 66% of crude exports, 95% of the maquila sectorsurplus, 128% of es wer FDI flows, and 190% of tourism receipts. From acurrent account perspective, remittances are fast approaching the importanceof oil exports.

Exhibit 10: Remittances Have Surged Along With Immigration

1.0

1.4

1.8

2.2

2.6

3.0

95 96 97 98 99 00 01 02 03 04 05 06 07

2

3

4

5

6

7

8

9Workers' Remittances,

Share of Mexico's GDP (left)

Mexican Immigrants,

Entered US Since 1990* (right)

Percent Millions

*Includes immigrants from Central America.

Source: Census Bureau. Pew Hispanic Center. Banxico.

The rapid increase in recorded remittances is in part a reflection of improvedstatistical coverage and increased reporting requirements for thesetransactions, leading to the booking of transfers that were hitherto madethrough unreported channels. (The growth in total remittances since 2000was driven almost entirely by a 265% increase in the number of recordedoperations, rather than an increase in their average size.) Another key driverhas been the significant drop in transactions costs, which prompted manysenders to start using formal financial channels, rather than unrecorded cashor goods transfers. Since 1999 the cost of sending money to Mexico declinedfrom about 10% of the average transaction in 1999 to slightly over 3% in2006. The share of remittances made via electronic transfer rose from abouthalf in 1995 to over 90% in 2006.

The impact of remittances on the Mexican economy comes not only from itssheer magnitude (close to 3% of GDP) but especially its major microeconomic and regional impact. The destination of remittances isconcentrated in the Mexican states that have recorded the largest emigrationflows in recent years, which also tend to be among the poorest states of thenation. In 2006, for the top five (out of 33 Mexican states) recipients,remittances exceeded the total wage bill in the formal sector of the regionaleconomy. The top destination was the state of Michoacn with remittancesrising to a whopping 13.2% of GDP in 2006; that year no region in the

The diaspora of immigrants from

exico and elsewhere generate asizeable flow of remittances to theirhome countries.


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Issue No: 168 1 6 May 27, 2008

country received less than 0.5% of regional GDP.14

Survey data from theBanco de Mexico reveal several basic themes behind remittance flows:

1. Most remittances are intended to support family members. Thebeneficiaries tend to be the closest family members: parents (68%; almostonce a month), spouses (12%; almost twice a month), followed by siblings,grandparents, sons, etc.

2. The bulk of remittances come from relatively new migrants.Remittances tend to fall the longer a worker has been abroad. This isconsistent with evidence from other emigrant nations and suggests that (1)the sender-recipient links weaken over time, (2) the emigrant gets dependents(wife, children, etc.) to migrate to the United States, (3) the number of needydependents declines (e.g. parents die, younger siblings grow up and enter the

job market, etc.), and/or (4) previous transfers make recipients better off.

3. Remittances go towards consumption. The bulk of the money receivedis allocated to consumption: specifically, current consumption (e.g. food,utility bills) 86.4%, education 6.3%, home improvement 3.2%, other 4.1%.

The Mexican authorities are well aware of the large economic incentives toemigrate and recognize that it might take a while before the Mexican-USwage differential tightens enough to render emigration unattractive for largesegments of the population. (About 60% of those emigrating to the UnitedStates were employed in Mexico when they decided to leave.) Thishighlights the urgency of deep structural reforms to increase the efficiency ofthe Mexican economy and generate more and better job opportunities.

Emigration and the remittances it has generated have undoubtedly had a largepositive economic effect on the recipients and the economies of some of thepoorest states in Mexico. Remittances have (1) increased disposable incomeand therefore consumption, (2) lowered poverty levels among importantsegments of the population, (3) served as an important source of funds for

investment, both in human capital (health and education) and in physicalcapital, (4) eased financing constraints for some credit-constrainedhouseholds, and (5) assisted in providing seed capital for a number of small

businesses. As examples, survey data show that children in households thatreceive remittances reached a higher level of schooling that those inhouseholds that did not, and it is estimated that remittances are the source ofalmost 20% of the capital invested in small urban businesses.

At the country level, remittances also contribute decisively to overall macrostability as they allow for an expansion of domestic demand withoutgenerating imbalances in the external accounts. In this regard, they are like anongoing flow of tax refunds with no budgetary consequence and with

favorable exchange rate effects to boot. As a share of imports, remittanceshave grown from about 5% during the 1990s to approximately 9% during2005-06. The flow of remittances reached close to 4% of privateconsumption on average during 2005-06, up from about 1.5% in the 1990s.Thus, without remittances per capita consumption would have been about 3%lower than what was observed, and GDP growth would have been about0.3% lower per year. The effects may be even larger because, bystrengthening the current account, workers remittances have improved thefinancial position of the country and consequently access to internationalcapital markets by both the sovereign and corporates.

14 Banco de Mxico (2007),Las Remesas Familiares en Mxico.

Remittances have lowered povertylevels among important segments othe Mexican population and servedas an important source of funds for

investment in human and physicalcapital.


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Issue No: 168 1 7 May 27, 2008

Remittances could also be a powerful automatic stabilizer of real businesscycles in Mexico. That is, during downturns the number of households inneed of income support increases which leads family members (emigrants) inthe United States to increase the flow of remittances back to Mexico. Thissupports/smoothes consumption levels during periods of low or negative realGDP growth. However, this automatic stabilizer feature of remittances hasweakened in recent years as the real business cycle in Mexico is increasingly

aligned with the business cycle in the United States. As the number ofneedy households in Mexico increases the senders in United States aremore likely to be facing financial difficulties and job insecurity as well.Thus, a deceleration of activity in the United States now has strongerspillover effects into the Mexican economyvia the strong trade andfinancial links between the two countries.

Reflecting these stronger cyclical links, the growth of remittances has slowedsharply since early 2006, from 24.8% (year-to-year) in the first half of thatyear, to 10.3% in the second half, to 1.0% during 2007, and most recently toan outright decline of 2.9% during 1Q2008 (Exhibit 11). Other factors arealso at work, including a high base effect, a fading boost from improvedstatistical reporting, better border enforcement by the US authorities, and

stricter enforcement of labor laws with growing focus on US businesses thatemploy undocumented workers. However, the most important factor appearsto be the marked deceleration in the US construction sector, an intense userof Mexican labor. By itself, the US construction sector accounts for aboutone-fifth of remittances from Mexican workers.

Exhibit 11: Growth in Remittances is Slowing Down

-2

0

2

4

6

8

Q1

2004

Q2 Q3 Q4 Q1

2005

Q2 Q3 Q4 Q1

2006

Q2 Q3 Q4 Q1

2007

Q2 Q3 Q4 Q1

2008

-10

0

10

20

30

40

Quarterly Flow s (left)

Grow th Rate (right)

Billions of dollars Percent change, year ago

Worker Remittances:

Source: Banxico.

The rapid slowdown of remittancesin 2007 reflects many factors, butmost importantly the collapse in USconstruction activitya key source

of such payments.


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Issue No: 168 1 8 May 27, 2008

IV. The Ideal Immigration Systemand the American One

Current US immigration policy is unrealistic and inefficient. Theimmigration system fails to register the majority of new migrants, oftenoperates at a glacial pace, and leaves some key economic needs unmet.

To evaluate the countrys immigration system today, it is helpful to have a setof goals or a benchmark for comparison. What would a rational immigration

policy look like?

1. All immigration would occur in a legal framework. Both the UnitedStates and immigrants would be better off if all immigration occurred throughlegal channels. From the standpoint of US national interests, the potentialsecurity risks of illegal immigration have been well documented.Government administration would also be easier at many levels if immigrantswere properly registered. From the standpoint of migrants, illegal bordercrossings are costly (coyotes charge thousands of dollars for assistancewith border crossings) and dangerous. Foreigners working illegally in theUnited States are also less likely to avail themselves of basic legal

protections, and are at greater risk of abuse by employers or others.

2. Immigration proceedings would be swift, clear, and consistent. Ideally,would-be immigrants could easily determine how to apply for legal entry,quickly receive a decision on their applications, and (if approved) beginworking in the United States with little delay. Perhaps more important thanspeed is a perception of fairness: two immigrants with similar skill sets anddemographic characteristics would have roughly the same chance of beingadmitted to the United States.

3. Immigrant labor would complement rather than substitute forAmerican workers. Ideally, immigrants would fill gaps in the native skilldistribution, and the inflow and outflow of immigrants would dampen

business cycle fluctuations by allowing changes in labor supply to help offset

changes in demand.

Unfortunately, the reality of the current legal immigration system thedetails of which are provided in Box 2 on p. 20 falls far short of this ideal:

1. The majority of new immigrants are in the country illegally. As wehave noted, illegal immigration now outstrips legal arrivals. One huge gap inthe system is the lack of information about when legal entrants depart.According to the Pew Hispanic Center, as many as half of all unauthorizedworkers may have entered the country legally but overstayed short-termvisas. Despite the existence of a legal temporary worker program (H2A), it ishugely underutilized because of its restrictive provisions.

2. Decisions on visa applications occur at a glacial pace and seeminconsistent. A massive backlog of applications coupled with low annualquotas has led to extremely long waiting periods for some family preferencevisas (Exhibit 12). For example, a Mexican woman trying to use a sister withAmerican citizenship as a means of legal entry into the United States wouldhave had to have applied for a green card almost 13 years ago in order to beadmitted in April 2007. Meanwhile, the playing field is clearly skewed;some countries receive preferences out of proportion to their size or desiredemigration to the United States, while the presence of even one familymember in the United States can greatly help ones chances (hence the

phenomenon of chain migration).

The US immigration system fails to

register the majority of newmigrants, often operates at a

glacial pace, and leaves some keyeconomic needs unmet.

Despite large overall immigration

lows, the skilled labor market isextremely tight.


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Issue No: 168 1 9 May 27, 2008

3. The econonomic benefit is significant, but far from optimal.Immigrants can and do aid the American economy, as described in the

preceding section (pp. 9-14). However, despite large overall immigrationflows, the skilled labor market is extremely tight. The unemployment rate for

people with a bachelors degree or more was just 2.2% in January 2008. Insome occupations, the unemployment rate was much lower: for example,1.2% for healthcare practitioner and technical occupations, and 1.9% for

architecture and engineering occupations. High-tech employers have beencomplaining vociferously that they cannot fill thousands of high-paying jobsbecause of visa restrictions and a lack of qualified workers. In the 2007 fiscalyear, the H-1B visa quota of 65,000 was exhausted in the first day, when theUS Citizenship and Immigration Service received 133,000 applications.

Exhibit 12: Migrants Face Long Wait for Family Reunions

0

4

8

12

16

20

China India Philippines Mexico Others

0

4

8

12

16

20

1st 2A Others*

Years

Family-Sponsored Preferences:

*Average waiting time for 2B, 3rd, and 4th family-sponsored preferences.

Source: Department of Homeland Security.

Years

(Country of Origin)

A massive backlog of applicationscoupled with limited annual quotashas led to extremely long waiting

eriods for some family preferencevisas.


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Issue No: 168 2 0 May 27, 2008

Notes:

1. The cap limits visa issuance to 65,000 new applicants per year, but allows an additional 20,000 visas for foreignworkers who have received master degrees or higher from a U.S. institution, and exempts education and non-profitsector employees. H1-B extensions, usually for an additional three years, are not counted under the cap.

2. In 2004, the Department of Homeland Security recorded 22,141 arrivals for H-2A visa holders. Note that a givenindividual could have multiple arrivals in a given year.

3. Legal permanent residents.

4. The limits placed on annual conferrals of legal permanent resident status are based on a rather complicated formula ofthe following nature: (1) Family-sponsored preferences limit = Between 226,000 and 480,000, depending onadmissions in preceding years; (2) Employment preference limit = 140,000 + any unused family-sponsoredpreferences from the prior year; (3) Diversity preferences = 50,000; (4) individual country limit = 7% of all family-sponsored and employment preferences; (5) Refugees having lived in the U.S. for one year or more, assylees andimmediate relatives of U.S. citizens (spouses, parents, and children) are exempt from the quotas.

Box 2: The US Immigration SystemProgram Beneficiaries CurrentAnnual Cap Utilizationin 2006/7 Typical Termof Visa ProblemH-1B Visa Skilled workers in certain

"specialty occupations"

65,000 plus

exemptions1

Cap

Reached

3 years Demand for skilled foreign

labor far exceeds current cap

H-2A Visa Temporary agriculturalworkers

None Very Low2

1 year or less High cost and administrativeheadache: employers must

demonstrate they cannot find

US workers, must arrange for

workers' housing and meals,

and must pay, at a minimum,

the Adverse Effect Wage Rate

(above the federal minimum

wage)

H-2B Visa Temporary

nonagricultural workers

66,000 Cap

Exceeded

1 year or less Cap is too low; same

administrative difficulties and

high costs as pertain to the H-2A visa

"Green

card"

Individuals with family

ties to U.S.

citizens/LPRs3, certain

job skills, or asylee or

refugee status;

individuals from coun-

tries with low levels of

immigration to US

416,000-

675,000,

subject to

numerous

exemptions4

Cap

Exceeded

Indefinite Qualifying formula

complicated; the merits of

effectively discriminating

against people from countries

with large populations and/or

a high number of people

wishing to come to the U.S.,

such as Mexico, India, and

China, is certainly debatable

Other Visas Various specific groups,

including foreign

government officials,

athletes, enter-tainers,

workers with

"extraordinary abilities,"

religious workers, etc.

N/A N/A N/A Only applicable to relatively

small groups of people with

particular skills working in

very specific occupations


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Issue No: 168 2 1 May 27, 2008

V. Making the Immigration System Work

Assuming one can find an ideal immigration policy, enacting it into law islikely to be a challenge. As noted earlier, the federal government hasstruggled to reform immigration policy several times in the 20

thcentury,

usually creating as many problems as it resolves.

President Bush made immigration reform a top priority after winning

reelection in 2004. Under a Republican majority in 2006 and under aDemocratic majority in 2007, the Senate debated legislation that expandedtemporary work programs and substantially increased the cap on green cards.Most controversially, it also provided a legal path to permanent residence forillegal immigrants. In 2006, the Senate passed an immigration reform bill in2006 with 62 votes, but it was unable to reconcile differences with adramatically different House proposal. In 2007, it failed to find agreement ona slightly more aggressive compromise crafted by Democrats.

Congress is unlikely to enact reform until at least 2009. If a compromise isreached in the next several years, we expect it to follow the broad contours ofrecent Senate proposals.

Makings of a Compromise

Any future compromise, particularly if it is modeled on recent attempts, islikely to address three issues:

1. Border enforcement and employment verification: Enforcementprovisions have gained importance in the immigration debate in recent years,and tighter security is likely to be a prerequisite to any politically workablecompromise. In the 2007 debate, these benchmarks were:

Raise the number of border patrol agents from roughly 12,000 to 18,000;

Erect several hundred miles of vehicle barriers and fencing, and installvarious electronic border surveillance equipment;

End the catch and release program; and

Establish a secure identification program and electronic employmenteligibility system.

As a result of piecemeal funding that Congress has enacted over the last fewyears, the Bush Administration has begun to increase border securitymanpower and infrastructure. The Congressional Budget Office estimatesthat the types of enforcement measures noted above would reduce the flow ofillegal immigrants into the United States by one-quarter, with less of animpact on illegal immigrants already in the United States.

2. Expansion of temporary immigration: The Senate bill, like most otherproposals, would have expanded several existing visa programs to clear thebacklog of applications and to boost legal employment-related immigration:

H1-B (skilled workers): There is fairly broad support for raising H1-Bvisas for skilled workers, which are currently capped at 65,000 per year

but rose as high as 195,000 in 2002 and 2003, as a result of legislationenacted in 1998. Most H1-B beneficiaries work in occupations with verylow unemployment rates, making displacement of native-born workers aminor concern. The latest Senate proposal would have raised the cap to115,000 per year for 2008 (equivalent to 0.7% of the college-educated

Tighter security is likely to be arerequisite to any politically

workable immigration bill.


24/30


Issue No: 168 2 2 May 27, 2008

labor force), and to 180,000 for 2009 and beyond. Any increase in theallocation is likely to be fully utilized. While there is general agreementon the need to expand the H1-B program, most proposals also includenew restrictrions on the L visa, which allows intracompany transfers andwhich some companies have used to circumvent H1-B caps.

H2-A visas and agricultural workers: Last years Senate proposal

included an overhaul of the existing agricultural worker visa program toreduce administrative burdens on employers. Most proposals, includingthe recent Senate compromise, would preserve the current requirementthat workers be paid the highest of the statutory minimum wage, the

prevailing wage, or the Adverse Effect Wage Rate as well as requireemployers to cover some housing and transportation costs. Provisionsdealing with undocumented workers would also create a separate processfor agricultural workers to obtain legal status, which would give them

priority over other undocumented workers in obtaining permanentresidency.

Y Visas (guest workers): The Senate compromise would create 200,000annual visas under a temporary guest worker program, dubbed the Y

visa. Although a majority of lawmakers are comfortable with a guestworker program in concept, some have raised concerns that a large-scaleguest worker program could lead to a visa overstay program as guestworkers whose visas have expired decide not to leave. Although the laborforce under the Y visa would supplement other sources of labor, it would

be less flexibile as it would require employers to certify that temporaryworkers are not displacing U.S. workers and that temporary workers will

be paid prevailing wages.

3. Permanent residency and transition to legal status: In addition to thetemporary work visas noted above, recent proposals have included policies totransition undocumented immigrants to legal status, to establish permanentresidency for that population, and to streamline traditional green cards.

Z Visas: The Senate bill proposed a new Z visa for undocumentedworkers present as of January 1, 2007. Eligibility would require that thehead of household file for the visa in the country of origin and payseveral thousand dollars in penalties and fees. Provisional legal statuswould be granted in the interim. Z visa holders could be granted

permanent residence, but only after existing immigration backlogs hadbeen cleared.

Green Cards: The current green card program would be split into twogroups. Family-based visas would be increased to 567,000 annually, butwould then drop to 127,000 once backlogs are cleared. The temporary

increase is meant to clear the large number of pending family-basedapplications, which would take several years at current rates. Anadditional 247,000 merit-based visas would be issued each year. Thecurrent quota on new legal permanent residents (LPRs) already includessome employment preferences to facilitate immigration of skilled,educated workers. Although immigrants in the top two prioritycategories do not face long waiting times unless they are from Indiaand China lower priority immigrants can face waiting times of six yearsor more.

ost H1-B beneficiaries work inoccupations with very lowunemployment rates, makingdisplacement of native-bornworkers a minor concern.

Recent proposals have includedrocedures to transition

undocumented immigrants to legalstatus.


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Issue No: 168 2 3 May 27, 2008

The New Third Rail of American Politics

Despite apparent agreement on the key concepts that must be included in acomprehensive immigration proposal, reform efforts have stalled asincumbent lawmakers feared the political consequences of supportingreforms. In many ways the issues politicians face in the immigration debateare similar to the obstacles to other broad economic reforms: the opposition

from a vocal minority outweighs a less politically active majority, as well asthe broader benefits of such reforms. In this case, the minority that prefersless immigration is nearly as large as the majority that believe it should beheld steady or expanded (see exhibit 13). Similar to other reform efforts,immigration-related issues have become a new third rail of American

politics that no politician dares to touch, at least not until after the 2008election. For the most part, disagreement centers on a few key issues.

1. Should the focus be illegal or legal immigration? One of the keyobstacles to comprehensive immigration reform has been an intense politicalfocus on illegal immigration, despite broader support for increased legalimmigration. Much of the opposition to comprehensive immigration reformis trained on amnesty provisions for undocumented workers. In theory, the

amnesty issue could be put aside entirely simply by expanding legalimmigration pathways and allowing illegal immigrants to take advantage ofthese new rules gradually, just as new legal immigrants would. However,

practical complications may make such a solution unworkable, since mostimmigrants must apply abroad for permanent legal residency. Forcing themto return home would be burdensome and more importantly it is likely thatmany of them would simply opt to remain in the United States illegally. Asolution to this question will be the linchpin in any eventual compromise.

Exhibit 13: A Majority Supports Greater Legal Immigration

0

10

20

30

40

50

60

70

80

90

1993 1995 1997 1999 2001 2003 2005 2007

0

10

20

30

40

50

60

70

80

90

kept at present level

decreased

increased

Percent

Source: The Gallup Organization.

Percent

Share of respondents whobelieve immigration should be:

2. Guest worker programs, while broadly supported, face some concernsover potential abuses. Some policymakers worry that expansive temporaryvisa programs could result in visa overstays, eventually increasing thenumber of illegal immigrants. Others point out that guest workers could beused to replace American workers, though requirements on employers todemonstrate otherwise may alleviate these concerns somewhat.

One of the key obstacles tocomprehensive immigration reformhas been an intense political focuson illegal immigration.


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Issue No: 168 2 4 May 27, 2008

3. Lawmakers must strike a balance between economic and socialconsiderations. Legal permanent resident admissions are dominated byfamily-related admissions, which made up almost two-thirds of totaladmissions in 2006. While there is some agreement that the system shouldfocus on skill-based admissions more than it does now, the shift away fromthe family-based system has caused problems among some Democrats whohave otherwise been fairly supportive of immigration reform efforts.

Progress is Unlikely Before 2009

As noted, in the summer of 2007 the Senate failed to pass immigrationreform for the second time, following failure to reach House-Senateagreement in 2006. Comprehensive immigration reform is unlikely to bedebated again until 2009, at which point the outcome depends on politicalcontrol following this Novembers election.

Despite disagreement on broad reforms, some incremental changes may beconsidered in the interim. The Bush Administration has proposed reforms to

broaden use of temporary agricultural and non-argicultural guest worker

programs (the H-2A and H-2B programs). As noted in Box 2, agriculturalwork visas are underutilized, due to administrative delays and housing andwage requirements. The Administration is apt to reduce administrative

burdens, but may lack the authority to modify other requirements that raisethe cost to companies of employing these workers over illegal laborers.

Enforcement is likely to increase absent broader reforms. The BushAdministration has announced new rules to tighten worksite immigrationenforcement. Specifically, it would treat the notice that the government sendsto employers indicating that an employees Social Security number does notmatch its records as notice that the employee is an unauthorized immigrant. Ifimplemented, this could reduce demand for undocumented workers.However, a substantial portion illegal workers are concentrated in industries

where enforcement would be difficult. A federal court has blockedimplementation of the changes, but the Bush Administration plans to revisethe rules in hopes of lifting the injunction.

Border enforcement has also tightened and may tighten further. In 2006, aftera failure to compromise on a final immigration bill, Congress enacted $1.9

billion in additional border security measures. In 2007, President Bush proposed $4.4 billion in enhanced enforcement, and it is possible thatadditional border security resources could be approved again this year.

The medium term outlook for immigration reform depends in part on theoutcome of the election. Most observers, including ourselves, assume

Democrats will maintain and likely expand their majorities in the Houseand Senate. However, the election is likely to increase support onlyincrementally: only two of the Senators whose seats face a serious challengevoted against the legislation in 2006.

As for the presidential candidates themselves, Senator Obama or SenatorClinton is likely to be as supportive of immigration reforms as PresidentBush has been. Senator McCain, for his part, led early immigration efforts inthe Senate and could have somewhat greater success in convincingRepublicans to support reform.

Any eventual compromise is likelyto resemble last years Senateroposals.

Border enforcement has tightenedabsent comprehensive immigrationreform, and may tighten further.


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Issue No: 168 2 5 May 27, 2008

VI. Conclusion: An Opportunity on Hold

For the next administration, immigration reform represents a substantialopportunity, both politically and economically. On the political front, UScitizens across the political spectrum report dissatisfaction with the currentsystem, and many companies are frustrated they cannot access willing foreignworkers in segments of the US labor markets that remain tight. The systemdoes not serve immigrants well either, given the bureaucratic hurdles

discussed above and the fact that millions of immigrants work without anylegal permission.

Economically, immigration offers substantial benefits. First, it increases thegrowth rate of the labor force, thereby boosting potential GDP growth; asnoted previously, immigrants have accounted for roughly half of recent laborforce growth. Notably, an increase in the immigration rate could help absorbthe excess inventory now overhanging the US housing industry, and it couldmitigate incipient pressures on the federal budget due to the impendingretirement of the baby boom generation. Second, more open immigrationincreases the responsiveness of labor supply to economic conditions both inthe United States and in immigrants home countries. Finally, immigrationdramatically improves the living standards of many migrants and theirfamilies, with little net impact on wage levels, the US income distribution, oroverall government spending. Broader reform could accentuate these benefits

by improving the match of labor supply and demand, even as authorities gainbetter control of US borders.

Over the next year or two, however, this opportunity will likely be on hold,and the rate of immigration to the United States is apt to decline. In part, thisis because of policywith a stalemate on a comprehensive immigration plan,the default path is further tightening of border controls. In part, it is becauseof economicsthe weaker US economy and labor market will prove less of adraw for migrants and more of a political hurdle for reform until growth turnsdecisively stronger for an extended period, probably not until 2010. The

lower flow could cut immigration by several hundred thousand workers peryear, predominantly among undocumented migrants, reducing labor forcegrowth by 0.2-0.3 percentage point compared to the rate over the past fewyears. The potential growth rate of the US economy will be reduced acorresponding amount until the business cycle and government policies

become more favorable to immigration.

In the long term, the United States is likely to remain an attractive destinationfor migrants from around the world. The United States higher educationsystem and professional opportunities in areas like technology and financewill remain a draw for skilled migrants, while wage levels well above thosein much of Latin America will continue to attract unskilled workers.Meanwhile, growth in the native-born labor force is likely to slow, given the

overall aging of the US population and retirement of the baby boomgeneration. The Pew Hispanic Center has estimated that essentially all of theincrease in the US workforce until 2050 will be due to new immigrantsarriving during this period (and their US-born descendants). In short, theUnited States is likely to remain a nation of immigrants for years to come.

Andrew TiltonKent MichelsAlec PhillipsAlberto RamosMay 27, 2008

Immigration offers substantialbenefits, including faster overall

growth, greater responsiveness olabor supply to economicconditions both in the United Statesand in immigrants home countries,and dramatic improvement in theliving standards of many migrants.

The weak US economy and labormarket will draw fewer migrants

until growth turns decisively stronger for an extended period,robably not until 2010.


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Issue No: 168 May 27, 2008

Recent Global Economics Papers

Paper No. Title Date Author

167 In defence of Sovereign Wealth Funds 21-May-08Jim O'Neill, Erik F. Nielsen and Saleem

Bahaj

166 Building the World: Mapping Infrastructure Demand 24-Apr-08 Sandra Lawson, Raluca Dragusanu

165 Vietnam: The Next Asia Tiger In the Making 16-Mar-08 Helen Qiao

164 Women Hold Up Half the Sky 4-Mar-08 Sandra Lawson

163 Building On a Decade of ProgressOur 2007 GES Scores 14-Dec-07Dominic Wilson and Raluca Dragusanu

162 Housing (Still) Holds the Key to Fed Policy 27-Nov-07Jan Hatzius, Edward F. McKelvey,

Andrew Tilton, Seamus Smyth

161 Bonding the BRICs: A Big Chance for Indias Debt Capital Market 7-Nov-07Francesco Garzarelli, Sandra Lawson

and Tushar Poddar

160 Russia: A smooth political transition 22-Oct-07 Rory MacFarquhar

159 Europes Immigration Boom: Causes and Consequences 26-Jul-07 Ben Broadbent and Istvan Zsoldos

158 Rising Income Inequality in the G3 6-Jul-07Dirk Schumacher, Jan Hatzius and

Tetsufumi Yamakawa

157 Latin America: More Than Just a Commodity Play 22-Jun-07 Alberto M. Ramos

156 Can the Carry Trade Carry On? 7-Jun-07 Jens Nordvig-Rasmussen

155 The GCC Dream: Between the BRICs and the Developed World 17-Apr-07 Ahmet Akarli

154 Gender Inequality, Growth and Global Ageing 3-Apr-07 Kevin Daly

153 The N-11: More Than an Acronym 28-Mar-07 Dominic Wilson and Anna Stupnytska

152 Indias Rising Growth Potential 21-Jan-07 Tushar Poddar

151 US Balance of Payments: Is It Turning and What Is Sustainable? 16-Jan-07 Jim O'Neill

150 The 'B' in BRICs: Unlocking Brazil's Growth Potential 4-Dec-06 Paulo Leme

149 Bonding the BRICs: The Ascent of Chinas Debt Capital Market 20-Nov-06Francesco Garzarelli, Sandra Lawson

and Michael Vaknin

148 You Reap What You Sow: Our 2006 Growth Environment Scores

(GES)

8-Nov-06 Dominic Wilson and Anna Stupnytska

147 Globalisation and Disinflation Can Anyone Else Do A China? 5-Oct-06 Jim O'Neill, Sun-Bae Kim and Michael

Buchanan

146 China's Investment Strength is Sustainable 3-Oct-06 Hong Liang

145 Japans Pension Story 6-Sep-06 Dambisa Moyo

144 Capital Markets and the End of Germany Inc. 23-Aug-06 Dirk Schumacher

143 The US Productivity Boom: Far From Finished 17-Jul-06 Andrew Tilton

142 Europe in a Globalised World: Winners and Losers 6-Jul-06 Ben Broadbent and Erik F. Nielsen

141 GloCo-Motives: Arguing the Case for Globalization 1-May-06 Jim O'Neill and Sandra Lawson

140 Can Hong Kong Afford to Keep the Peg? 27-Apr-06 Enoch Fung

139 Long-Term Price Forecast vs. Inflation-Linked JGB (JGBi) 19-Apr-06 Tetsufumi Yamakawa, Naoki Murakami,

Yuriko Tanaka and Daisuke Yamazaki


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Issue No: 168 May 27, 2008

Jim ONeill, M.D. & Head of Global Economic Research

Global Macro & Dominic Wilson, M.D. & Director of Global

Documents

Goldman Sach's Report on Immigration (2008)