Economic impact of immigration in US revealed in new research

The long-term impact of immigration on wages and employment of native-born workers in the USA is very small, according to a new report co-authored by a City economist.

Professor Michael Ben-Gad, of the Department of Economics, was part of a team of researchers who investigated the effect of immigration into the United States over a 20-year period.

Published by the US-based research organisation the National Academies of Sciences, Engineering, and Medicine, and funded by the MacArthur Foundation, the report provides a comprehensive assessment of economic and demographic trends of immigration, its impact on the labour market and wages of native-born workers, and its fiscal impact at the national, state and local levels.

Read the report, The Economic and Fiscal Consequences of Immigration

Professor Ben-Gad said: “This 500-page report shows that the impact of immigration is highly differential, both in terms of the types of immigrants that arrive and the different types of people in the absorbing population.

“The impact of an influx of new immigrants on wages, particularly at the low end of the skill distribution, is likely to be negative for at least a decade, as the economy adjusts, though on current numbers not extremely large. The greatest impact is felt by previous cohorts of immigrants.

“At the same time, those who employ these immigrants, or buy the labour services they provide benefit. Aggregating across everyone, the overall effect is likely to be positive, though very small, given the current profile of immigration, but could be substantially greater if immigrant flows were more highly skilled – this is what my own research, published in 2008 in the Review of Economic Dynamics, demonstrates.

“A much bigger effect is the way immigration redistributes income within society, which could be exacerbating inequality. Again this is particularly the case for low-skilled immigrants.”

The research was conducted to estimate the fiscal contributions and costs of first-generation immigrants, the second generation (native-born individuals with at least one parent who is an immigrant) and the rest of the native-born US population.

More than 40 million people living in the US were born in other countries, and together immigrants and their children comprise almost one in four Americans.

Professor Ben-Gad said: “This was done in a dynamic generational accounting framework over a range of different scenarios regarding the future trajectory of US fiscal policy. The taxes payed by immigrants and their descendants as well as the costs associated with them are simulated. At the same time a static analysis was performed to isolate the current fiscal impact of current immigrants not only at the national level, but for individual states.”

Among the report’s key findings and conclusions:

• When measured over a period of ten years or more, the impact of immigration on the wages of native-born workers overall is very small. To the extent that negative impacts occur, they are most likely to be found for prior immigrants or native-born workers who have not completed high school – who are often the closest substitutes for immigrant workers with low skills.
• There is little evidence that immigration significantly affects the overall employment levels of native-born workers.
• Some evidence on inflow of skilled immigrants suggests that there may be positive wage effects for some subgroups of native-born workers, and other benefits to the economy more broadly. The empirical evidence matches the research I have published on this in the past.
• High-skilled immigration has an overall positive impact on long-run economic growth in the US.
• In terms of fiscal impacts, first-generation immigrants are more costly to governments, in large part due to the costs of educating their children. However, as adults, the children of immigrants (the second generation) are among the strongest economic and fiscal contributors in the US population, contributing more in taxes than either their parents or the rest of the native-born population.
• Over the long term, the impacts of immigrants on government budgets are generally positive at the federal level but remain negative at the state and local level – but these generalizations are subject to a number of important assumptions. Immigration’s fiscal effects vary tremendously across states.
• Over the last 20 years, as the wage structure becomes less equal, and the burden of taxation shifts as a result to high-income people, the gap between the positive net contributions made by high-skilled immigrants and the negative net contributions made by low skilled immigrants has widened.

Professor Ben-Gad added: “The report uses two different methodologies with lots of different scenarios to calculate the impact of immigration on public finances. Under the most appropriate scenario, the static impact of first generation immigrants is roughly $43 billion per annum.

“The impact is not uniform across federal, state and local governments. Being relatively young, immigrants pay taxes to the federal government that helps to fund transfer spending they will only receive themselves in the distant future. They also help to defray the cost of some public goods, particularly defence spending. The total effect is equivalent to a net boost to federal revenues of about $53 billion.

“At the same time immigrants place burdens on states and local communities, particularly on education systems that result in a loss of $96 billion. Taken as a whole the positive impact on native income and the burden on public finances suggests that the total impact of current immigrants is effectively zero.”

The 14-member panel included researchers from institutions across the US, UK and Canada, including Cornell University, Harvard University, University College London, City and Princeton University.

The report was sponsored by the John D. and Catherine T. MacArthur Foundation, with additional support from the National Academy of Sciences Independent Fund, the National Academy of Engineering Independent Fund, and the National Academy of Medicine Independent Fund.

The National Academies of Sciences, Engineering, and Medicine are private, nonprofit institutions that provide independent, objective analysis and advice to the nation to solve complex problems and inform public policy decisions related to science, technology, and medicine. The Academies operate under an 1863 congressional charter to the National Academy of Sciences, signed by President Lincoln.