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Immigration Reform and U.S. Economic Performance

Authors: Pia Orrenius, Economist and Research Officer, Federal Reserve Bank of Dallas Vivek Wadhwa, Director of Research, Center for Entrepreneurship and Research Commercialization, Duke University Tamar Jacoby, President, ImmigrationWorks USA Jonathan Bowles, Executive Director, Center for an Urban Future Peter Dixon and Maureen T. Rimmer, Distinguished Professor and Senior Research Fellow, Monash University
Interviewer(s): Aimee Rawlins
March 14, 2011

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[Editor's Note: This is part of CFR's Renewing America initiative , which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

As the United States struggles to rebound from the economic downturn and policymakers try to figure out how to improve U.S. global competitiveness, the question of immigration reform has become more urgent. Approximately eleven million unauthorized immigrants (PDF) are estimated to be currently living and working in the United States. But as unemployment hovers near 9 percent nationally, many Americans are concerned that these immigrants are taking away jobs and resources.

Six experts support immigration reform and improving the legalization process, but otherwise have divergent views. Pia Orrenius of the Dallas Fed and labor expert Vivek Wadhwa stress the need for more visas for skilled workers in order to attract top talent and maintain global competitiveness. Tamar Jacoby of ImmigrationWorks emphasizes reforming the visa process for lesser-skilled immigrants as well, noting they fuel the growth of service sectors and provide the next generation of workers. Jonathan Bowles of the Center for an Urban Future notes that "hard-luck cities" like Cleveland and Detroit are pursuing strategies to attract immigrants because they are "proven economic turnaround specialists and catalysts for growth." Peter Dixon and Maureen T. Reemer of Australia's Monash University argue that improving the path to legalization increases productivity in immigrants and pushes native-born Americans up the occupational ladder.

Pia Orrenius, Economist and Research Officer, Federal Reserve Bank of Dallas

Immigrants help fuel the U.S. economy, representing about one in every six workers. Because of accelerated immigration and slowing U.S. population growth, foreign-born workers accounted for almost half of labor-force growth over the past fifteen years. Public attention has focused mainly on the large number of low-skilled immigrant workers, but the number of high-skilled immigrants actually grew faster during this period. Highly educated immigrants filled critical jobs in the science, engineering, IT, and healthcare sectors. They also fostered innovation and created high-tech businesses. Research has documented the benefits of these workers; foreign-born scientists, for example, patent at twice the rate of their U.S.-born counterparts.

Future U.S. prosperity depends on having a skilled workforce. This requires educating the native-born population and continuing to attract the world's talent to the United States.

Future U.S. prosperity depends on having a skilled workforce. This requires educating the native-born population and continuing to attract the world's talent to the United States. For decades, the nation has been the world leader in attracting skilled immigrants who, until recently, had few good alternatives. Today, other destination countries increasingly recognize the economic and fiscal benefits of these workers and are designing policies to attract them, even as the immigrants' nations of origin seek ways to entice them to return home. Return rates among Chinese students educated abroad have doubled since 2001.

The U.S. immigration system, meanwhile, has not kept up. Piecemeal fixes have turned current law into a web of outmoded, contradictory, and inefficient quotas, rules, and regulations. For example, the number of high-skilled immigrant workers admitted on temporary visas has doubled since 1996, but the number of employment-based permanent residence visas or green cards has remained the same. As a result, there are over one million high-skilled immigrants waiting for employment-based green cards in a queue that will take more than a decade to clear.

Of the 1.1 million green cards issued in a typical year, the United States awards 85 percent to family and humanitarian immigrants and only 15 percent to employment-based, highly skilled immigrants. Of these 15 percent, half go to the workers' spouses and children. Among OECD (Organization for Economic Co-operation and Development) nations, no other nation puts such a low priority on work-based immigration.

It's not known how many high-skilled immigrants are attracted by our economy and society only to be turned away by the broken immigration system, but the United States risks falling behind in the global race for talent if immigration laws are not reformed.

Vivek Wadhwa, Director of Research, Center for Entrepreneurship and Research Commercialization, Duke University

Skilled immigrants have given the United States its greatest global advantage. They started 52 percent of Silicon Valley's tech companies and contributed to more than 25 percent of its global patent filings. They flocked to the United States because it was the greatest land of opportunity.

Anecdotal evidence indicates that the tide is turning. Foreign workers are beginning to return home to countries like India and China, where the economies are booming and there are greater opportunities. Visit any large city in India and China, and you will find hundreds of startups building web technologies, clean-tech products, and mobile applications. At the helm of a significant proportion, you will find returnees from the United States, who studied or worked in the United States, but returned home due to visa problems or to seek a better opportunity.

[We need to] expand the number of permanent-resident visas available for skilled workers and give these visas to anyone who wants to come here to start a tech company or who graduates from an accredited U.S. university.

America obsesses over unskilled immigrants who entered the country illegally. But there are more than half a million doctors, scientists, researchers, and engineers in the United States who entered legally on temporary work visas, and await permanent-resident visas, which are in extremely short supply. These workers can't start companies, justify buying houses, or grow deep roots in their communities. Once they get in line for a visa, they can't even accept a promotion or change jobs. They could be required to leave the United States immediately--without notice--if their employer lays them off. Rather than live in constant fear and stagnate in their careers, many are returning home. So are the students who dominate the science and engineering graduate programs in American universities.

In the future, the United States will have to work hard to attract the world's best and brightest. But today, there are already many here who we need to stay, to start the next 52 percent of our tech companies. All we need do to encourage these immigrants is to expand the number of permanent-resident visas available for skilled workers. And we should give these visas to anyone who wants to come here to start a tech company or who graduates from an accredited U.S. university. This will give our economy a significant boost at no cost to taxpayers.

Tamar Jacoby, President, ImmigrationWorks USA

Most Americans understand that highly skilled immigrants are good for the economy. Less well understood, but equally important, are the economic contributions of lesser-skilled immigrants.

Long-term demographic and educational trends are changing the native-born workforce. U.S. families are having fewer children. Baby boomers are retiring. Perhaps most significant, Americans are increasingly educated. In 1960, half of the native-born men in the U.S. workforce had dropped out of high school and were doing unskilled work; today, the figure is less than 10 percent. Yet if anything, our need for unskilled labor is growing. New technologies and foreign competitors have forced many industries to restructure in ways that increase their dependence on less skilled workers--meatpacking is the classic example. And Americans across the socioeconomic spectrum rely on a growing service sector: everything from fast-food restaurants to healthcare for the elderly. Even in the downturn, this gap between supply and demand is filled by immigrants. Immigration reform would boost U.S. economic performance by providing legal low-skilled workers to fuel the future growth of these sectors--workers we will need more and more as the economy recovers.

Immigration reform would boost U.S. economic performance by providing legal low-skilled workers to fuel the future growth of service sectors--workers we will need more and more as the economy recovers.

Reform would also boost productivity by legalizing unauthorized immigrants. Some economists argue that illegal immigrants are good for the economy, responsive to market conditions and quick to move to where the work is. But lack of legal status can also constrict workers' prospects and productivity. Illegal workers are often trapped at the bottom of the job ladder, forced to relocate frequently and unable to move up to positions that match their improving skills. And indeed, studies show that the 1986 Immigration Reform and Control Act significantly increased immigrants' earnings--by up to 20 percent--when their new legal status allowed them to graduate to better, more productive jobs.

Finally, and perhaps most significant, immigration reform would boost U.S. economic performance by improving the chances of the next generation. According to the Pew Hispanic Center (PDF), 8 percent of the children born in the United States each year have one or more unauthorized parents. This means they grow up in poverty, on the edges of society, in families discouraged from putting down roots and often afraid to meet with teachers and other authorities. These children are the workforce of tomorrow. As much if not more than high-end workers, they are the key to our global competitiveness. We need to do better by them--much better--for their sake and for ours.

Jonathan Bowles, Executive Director, Center for an Urban Future

It's not surprising that hard-luck cities from Cleveland to Detroit are actively pursuing strategies to attract immigrants today. Immigrants are proven economic turnaround specialists and catalysts for growth. In community after community, they have replenished lost population, given local employers a capable workforce, and, perhaps most importantly, provided a critical entrepreneurial spark.

At a time when innovation and entrepreneurship is more crucial than ever to the nation's recovery and future growth, immigrants are increasingly providing what's needed (PDF). The foreign born are starting a disproportionate share of new firms--from tiny retail shops in neighborhoods once marked by empty storefronts to fast-growing tech firms in Silicon Valley and Cambridge. A recent study noted that share of entrepreneurs who are immigrants rose from 13 percent in 1996 to almost 30 percent in 2010.

Immigrants are proven economic turnaround specialists and catalysts for growth. In community after community, they have replenished lost population, given local employers a capable workforce, and, provided a critical entrepreneurial spark.

Immigrants also comprise a significant share of the nation's engineers and scientists, something that can't be overlooked in a global economy where regions and nations with the best human capital have the competitive edge. While the United States surely needs to do a better job preparing its native-born workforce, the expected retirement of large numbers of baby boomers in every industry makes it essential that the country continues to attract and retain high-skilled immigrants.

Passing comprehensive immigration reform will give the United States the ability to retain its advantages in human capital, innovation, and entrepreneurship, and boost the fortunes of many regions. Without it, the United States risks taking a huge step backward at the precise moment when global competition is intensifying.

Peter Dixon and Maureen T. Rimmer, Distinguished Professor and Senior Research Fellow, Monash University

In our work, we have used the USAGE model (U.S. Applied General Equilibrium) to assess three broad policies toward low-skilled, unauthorized workers in U.S. employment: supply restriction through tighter border security; demand restriction through increased prosecution of employers; and legalization through a guest-worker program with a visa tax.

The difference between the long-term welfare effects for U.S. households of the worst and best policies that we considered is $260 billion a year. This is the welfare gap between a tighter border-security policy that reduces the long-term number of unauthorized workers by 30 percent and a liberalized guest-worker policy with an optimal visa charge that allows a 30 percent increase in the number of low-skilled immigrant workers.

The inflow of low-skilled immigrants early in the twentieth century induced native-born U.S. residents to complete their education and enhance their skills. In this way, low-skilled immigration chased native-born workers up the occupational ladder.

The major ingredient in good policy is legalization. Without the need to pay smugglers' fees and undertake associated risks, low-skilled temporary immigrants would be willing to supply their labor to U.S. employers at a lower wage. It is also likely that without the threat of prosecution, they would be more reliable and employers would be incentivized to provide on-the-job training. Thus, guest workers would have higher productivity than unauthorized workers. Increases in productivity and reductions in the supply wage would create a surplus (gap between the value of immigrant labor to U.S. production and the wage needed to attract it) that could be transferred to U.S. households via tax cuts made possible by revenue collected from visa taxes imposed on employers of guest workers.

In our simulations, we decompose welfare effects for legal residents into factors covering changes in wage rates of both U.S. and low-skilled immigrant workers; public expenditures; investment and trade; and the occupational mix of U.S. employment. While most of the political debate concentrates on public expenditure effects, we find that changes in the occupational mix of U.S. workers are the major factor. The occupation-mix effect will be familiar to students of the history of U.S. immigration. The inflow of low-skilled immigrants early in the twentieth century induced native-born U.S. residents to complete their education and enhance their skills. In this way, low-skilled immigration chased native-born workers up the occupational ladder.

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