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One of the selling points of immigration reform is that it will boost the economy and raise the U.S.’s GDP. But opponents counter that there will be economic losers in this process, and those hurt by higher immigration may be low-skilled workers who already are having a hard time economically.
This points to a tricky aspect of thinking about immigration: While the total economic gains are important, it also matters to whom those dollars go, because an income gain to one person doesn’t necessarily offset an equal dollar loss to another. Simply put, it hurts more to lose a dollar if you’re poor than it helps to gain a dollar if you’re rich, an effect of what economists call the “declining marginal utility” of money.
The figures below come from a recent paper by Harvard’s George Borjas estimating the long-run effects of immigration on earnings, broken down by educational attainment. High-school dropouts lose over 3 percent of earnings, because immigrants, their new competitors, are on average not well educated. Those with high-school diplomas and some college education receive small gains, while college grads and post-grads experience small losses, because of competition with higher-skilled immigrants.
This makes the analysis tougher: The poor take the biggest loss, while the middle class benefits a bit, and higher earners take a small loss. The income changes aren’t similar and each group isn’t the same size. So while we understand the qualitative point that not every dollar is the same, one needs to quantify things to make the conclusions more solid.
To measure the welfare effects of income changes, economists often turn to utility functions. Practically all utility functions assume that the marginal utility of income declines as income rises, but they differ in terms of the rate at which it falls. One common utility function expresses that rate of decline using a parameter known as the CRRA; while it doesn’t have any obvious intuitive meaning, in practice the number used for the CRRA usually ranges from 1 to around 4, with a higher number indicating that one assumes utility of income declines more steeply.
If you assume a low CRRA value, 1, then the overall welfare loss, for the entire economy, from immigration is very small – but it is a loss, not a gain. If you think that the marginal utility of income declines more quickly — which I suspect many liberals do, given their worries about inequality and support for progressive taxation and redistribution — then the welfare losses to less-skilled workers get pretty large. At a CRRA of 4, utility for high-school dropouts falls by over 9 percent. Other Americans still gain, but the net welfare loss is over 5 percent. That’s a pretty big deal. And if you assume that lower-income individuals are more risk averse than high earners, overall welfare losses would be larger.
Now, the winners from immigration reform could transfer their gains to the losers; in practice, though, this almost never happens. Alternatively, we could consider the welfare of new immigrants in these calculations; their incomes and welfare would increase a lot if they moved to the U.S. But that raises the question of how policymaking should weigh the interests of citizens versus non-residents.
Or maybe things will be different going forward. Maybe, as the CBO has assumed, higher immigration will spur additional productivity gains, erasing the income losses for low earners. Some studies support this claim; others disagree; still other papers find that even high-skilled immigration has little effect. There’s a lot of uncertainty here, and the downside risk is falling on people who may not easily be able to bear it.
I could be convinced to support immigration reform — Ramesh Ponnuru’s version of it, at least — but I still don’t know exactly what to say to the people who may lose out.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of Social Security.
Immigration reform will likely hurt the incomes of the poor, who, economics tells us, can least afford it.
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