Immigration will lower wages and cause more income inequality

Immigration is probably the biggest issue in the country right now, running up there with the economy. Recently, the Congressional Budget Office did a report on the effect of this rapid rise in immigration across our southern border on the economy.

Economic theory is pretty clear what’s going to happen, and CBO validated that. The first thing they noted is the economy will be larger. Well, yes, more workers, larger economy. The headline that you saw was a little bit eye-catching, and that’s how it was intended. Over the next 10 years combined, GDP, our size of our economy, will be $7 trillion higher than it otherwise would. Think of that as 700 billion more a year. So by the end of the decade, but they do over 10-year periods, we’re going to have a GDP that is 2% more than it otherwise would be. Sounds good, larger economy.

There is a catch. We’re going to have 3% more workers, 5.2 million more workers, 3% more workers to produce 2% more GDP.

Oops. That means less output per worker. We will be poorer, even though the economy will be larger. More precisely, we will be poorer on average, because the economy will be larger. Real wages, according to the CBO, will fall eight tenths of a percent. So right now, if you’re making say, $50,000, your purchasing power is gonna go down by about $400 as a result of the immigration.

Well, that’s a little bit of a mixed bag. There is a second drawback to all of this, and that is higher inequality. And I don’t think the public discussion focuses enough on this issue.

Few things happen. First, the people crossing the border are lower-end workers, not a comment about them as people, it’s common about the skill sets they’re bringing. You know, only 28% of American jobs are filled by people with high school education or less. Most have at least some training after high school, oftentimes an associate’s degree or a training in, say, carpentry or some skill. Most of the workers coming across the border do not have that. And so they’re coming into a market, which is not the whole economy, but less than a third of the economy.

More supply of those workers is going to push down wages in that sector, basic law of supply and demand. So lower-end workers in particular are going to feel the brunt of the decline in wages.

Second, because lower-end wages go down, employers are going to make less investment in labor-replacing capital, new technologies. You’ve probably gone to a computer to order in your local McDonald’s, for example. There’ll be less of that, because the workers are going to be so much cheaper.

So what we’re going to see is a decline in the amount of money going to labor and an increase in the amount of money going to capital. Well, labor is a lot more evenly distributed than capital. And so the returns, the extra returns to people who own capital, i.e. the rich people, are going to go up. That is one cause of more inequality.

The second cause has to do with what’s going to happen in labor income. As I mentioned, it’s really people in the bottom third or so of the workforce that are going to face the competition from all these extra workers. Their wages are going to go down sharply.

But if you’re not one of those workers, particularly if you’re at the top of the income distribution, having more of those workers around is a good thing, right? If nannies and gardeners and people who pick crops and what have you are more plentiful and cheaper, then the stuff you buy is cheaper as well. So we have another source of transfer from lower-income people to higher-income people as a result of the extra immigration.

So we have a larger economy, but one in which we’re on average poor, and one which is more unequal. You can choose which you think is most important. But simply having a larger economy really doesn’t make us better off. Our focus should be on raising wages and on making us a more equal country. I think that is the big import of the CBO report, that on balance, these extra workers are not good at helping America achieve its economic objectives.