How Immigration Affects the Economy

How does immigration affect the economy? Discussions about the economic effect of immigration are often influenced by larger ethical and political stances around this topic, positions grounded in questions about the kind of world in which people want to live. Many arguments against immigration, for instance, tend to emphasize rates of cultural change or assimilation, while those in favor often point toward the history of immigration and America’s moral promises.

Economically, those in favor of immigration argue that immigrants boost the economy by increasing the labor supply and promoting innovation. Those against argue that immigrants harm low-skilled laborers by taking jobs that American workers would otherwise get or depressing wages for native-born low-skilled workers.

How correct are these contentions? And which other factors contribute to the economic impact of immigration? With immigration continuing to be a serious national concern, it is worth taking the time to look at the data as best as we can assess it.

Key Takeaways

  • A 2017 National Academies of Sciences, Engineering, and Medicine report found that immigration has an overall positive effect on the economy.
  • The evidence suggests that the negative impacts of immigration on native-born wages are minimal and contained though traditional arguments hold that immigration depresses wages for native-born workers with less than a high school education.
  • Surveyed data from 1994 to 2013 revealed that the net fiscal impact of first-generation immigrants on federal, state, and local taxes combined was less favorable than that of native-born citizens. However, this changed after the age of 60, when Social Security benefits make native-born citizens more expensive than first-generation immigrants.
  • For that same period, the children of immigrants had a more favorable net impact on government revenue than either first-generation immigrants or the rest of the native-born population, chiefly because higher education and income caused them to pay more in taxes than either first-generation immigrants or the native born.
  • A 2019 study that looked at the imposition of 1920s immigrant quotas showed, using U.S. Census data, that restricting immigration did not lead to higher wages for native-born workers.

During his 2017 address to Congress, President Donald Trump referenced a National Academies of Sciences, Engineering, and Medicine report on the economic consequences of immigration. According to the National Academies, Trump said, the immigration system costs American taxpayers billions of dollars per year. In truth, as the National Academies would later point out, the report found that immigration has an overall positive effect on the economy.

The 2017 National Academies report in question said that the long-term impact of immigration was minimal. It affected the wages and employment of native-born workers, but these negative effects were limited to prior immigrants or American-born high school dropouts. Compared with the native-born, first-generation immigrants also caused more expense, but second-generation immigrants were among the highest fiscal and economic contributors in the country.

Immigrants represent an increasingly diverse category in the U.S., having become more diverse in recent decades. In 1910, 95% of the foreign-born population in the country came from Europe and Canada, according to a Brookings Institute report. In contrast, most of the foreign-born population in America in 2008 and 2009 came from Mexico and Asia. These immigrants also have an increasingly diverse set of skills and backgrounds, ranging from advanced degrees to less than a high school education.

According to the Brookings Institution, immigrants are taking an increasingly large role in the American economy, one that is separate from that of native-born workers. They tend to work different jobs with different skill levels, for example. They also lower the cost of some labor activities, including child care, food preparation, house cleaning and repair, and construction, and provide more demand for housing.

Does Immigration Depress Low-Skilled Wages?

Despite the prevalence of the argument that immigration suppresses the wages of low-skilled native-born citizens, evidence suggests that the impact of immigrants on these wages is relatively small and contained. Some reports say that it is “essentially zero.”

When surveying the economic impact of immigrants over more than a decade, the National Academies study found “little evidence” that immigration lowered employment rates for native-born workers. There was some evidence that immigrants affected the employment of native-born teens and previous immigrants, who may represent close labor substitutes. Although low-skilled native-born workers saw a depression in wages because of the increase in labor supply from foreign-born competitors, this effect was muted by several factors, including that native-born and immigrant workers are imperfect substitutes.

The actual long-term impact on native-born wages was minimal and relatively contained, because the negative consequences were felt by prior immigrants and native-born high school dropouts, according to the 2017 National Academies report. While first-generation immigrants did cause higher government costs, mostly at the state and local levels, a summary of the findings said that their children more than made up for it. Indeed, they comprised “the strongest fiscal and economic contributors in the U.S. population.”

Other reports have suggested there may in fact be a small increase in wages. Surveying data from 1994 to 2007, an Economic Policy Institute study of whether immigration depresses wages found that immigration raised wages for U.S.-born workers by 0.4% (or $3.68 per week) and lowered wages for foreign-born workers by 4.6% (or $33.11 per week). U.S.-born workers with less than a high school education, the report said, saw a 0.3% increase in wages (or $1.58 per week).

Does Restricting Immigration Improve Wages?

Further studies have suggested that restrictions on immigration do not necessarily lead to higher wages for native-born workers. A recent National Bureau of Economic Research study of 1920 immigration quotas found that—although they did reduce immigration—the quotas did not lead to an increase in wages for native-born workers. In fact, the study reported a slight decline in native-born wages after the quotas were implemented because of both the falling rate of immigration and the immigration of unrestricted groups.

A 2019 National Bureau of Economic Research study of the 1920 immigration quotas found that they did not lead to an increase in wages for native-born workers; in fact, wages slightly decreased.

Effects on Productivity and Government Revenue

The 2017 National Academies report concluded that foreign-born workers return net positive economic growth in the long run. A projection from that report said that over the next 75 years, the fiscal impact of immigration in the U.S. would probably be a net gain at the federal level but “generally negative” at the state and local levels. The distinction occurred, the report said, because state and local governments incur the cost of educating these immigrants, but tax collection does not recover much of the money spent. Federal benefits, meanwhile, tend to go to aging adults, meaning that immigrants are a net gain for them because they contribute greater taxes during their working lives.

High-skilled immigration has grown, and with it comes a noted positive impact on the wages and employment of natives, whether they're college-educated or not. One economic benefit has been an increase in innovation, measured by an increase in patenting per capita, which is connected to productivity growth. This has led economists to argue that high-skilled immigration has brought more innovation, entrepreneurship, and technological change.

Based on its surveyed data from 1994 to 2013, the National Academies report also conveyed that during their working years, first-generation immigrants paid less in federal, state, and local taxes combined than native-born citizens. However, this changed after the age of 60, when Social Security benefits make native-born citizens more expensive than first-generation immigrants.

For that same period, the children of immigrants had a more favorable net impact on government revenue than either first-generation immigrants or the rest of the native-born population. This is chiefly because of higher education and higher income, which caused them to pay more in taxes than the other two groups.

Effect on the Aging of America

Immigrants may also offer a way to slightly slow the rising age distribution of the American population.

Scholars have expressed concern over the low fertility rate and the rising age of the American population, which they say could strain government budgets in the coming decades as the number of people who pay into public-sector benefits, such as Social Security and Medicare, falls in comparison to the number of people collecting those benefits. An aging population would also require more medical care.

Analysis of Social Security Administration projections indicates that the number of workers paying into Social Security per Social Security beneficiary will be roughly 2.1 by 2040, down from 3.7 workers in 1970. Fertility rates in the country have been generally below the "replacement rate," the fertility rate necessary for a population to maintain itself (2.1 children per woman) since 1971, according to the U.S. Centers for Disease Control.

Immigrants tend to be younger than the populations of their receiving country with a larger proportion of them being of working age, which has led economists to argue that net immigration represents a means of stabilizing the aging populations of economies in the global North in general.

In North America, for instance, immigration made up 32% of the population growth between 2000 and 2018, according to an economic analysis published by the International Monetary Fund.

An increase in immigration to the economies of the global North is desirable from a demographic point of view, Giovanni Peri, a professor of economics at the University of California, Davis, has argued.

"It would reduce population decline, keep the size of the labor force from shrinking, improve age dependency ratios, and produce positive fiscal gains. From a policy standpoint, this means increasing the number of immigrants allowed, reducing other constraints on immigration and planning for future inflows," he said.

One additional point: An aging society needs healthcare workers. Previous studies have also suggested that immigrants often work in medicine-related fields.

The Bottom Line

During the Trump administration, the U.S. took aggressive steps to restrict the flow of immigrants, based on the belief that they negatively influence the culture and economy. The administration, which came to office by promising to curb immigration at the southern border by building a wall and stepping up enforcement, explicitly linked immigration to criminality and suppressed wages, such as in President Trump’s 2017 “Buy American and Hire American” executive order.

The Biden Administration has reversed some of these policies, even walking back some of the core commitments of the Trump presidency to restrict immigration flows. It has halted the construction of the border wall, raised the refugee cap from 15,000 to 62,500, kept deportation relief under the Deferred Action for Childhood Arrivals (DACA) program, and stopped using the “public charge” rule, which refuses green cards to immigrants who are likely to use public benefits such as Medicaid.

A 2020 report from the U.S. Congress Joint Economic Committee said that immigrants work “on the front lines of the fight against coronavirus pandemic, particularly in healthcare,” placing them at severe risk for contracting COVID-19. They also suffered from the economic impact of business closures because they work predominantly in industries impacted by them. About one in five immigrant workers lost their jobs between February and April alone, the report said. It also argued for passing the HEROES Act, the Democrat’s $3 trillion coronavirus relief bill, to give immigrants coronavirus testing and hazard pay and build upon the recent Supreme Court decision about DACA.

Article Sources
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