June 23, 2007
The Borjas Objection: Immigrants Just Steal American Jobs and Depress Wages
The George Borjas blogpost that John Hinderaker linked in his post on the economics of illegal immigration argues that immigration in general (not just illegal immigration) costs American workers much more in wages than it benefits America (all the benefits go to rich industrialists, he seems to believe). He claims to demonstrate this by comparing two formulas, both of which he crafted -- one for cost, the other for benefit -- and finding that the former is many times more than the latter.
The problem with Borjas's argument is threefold:
- The ratio of wage losses to gains to the economy is artifactual... it derives entirely from the way he constructs his formulas.
It turns out that no matter how many foreign-born workers there are, what the GDP is, what percent of earnings are paid to workers, or what level he attaches to "wage elasticity" (which is the ability of a business to respond to higher wages by firing workers and vice versa), his formulas will always yield a ratio of wage loss to economic gain equal to exactly twice the ratio between the percent of native-born workers and the percent of foreign-born workers.
(See the "slither on" for the actual formulas. If you're really interested.)
Thus, if 85% of the population is native born, while 15% is foreign born, the ratio between the two is 85 divided by 15, or 5.67; and Borjas's formulas will always claim that immigrants create wage losses 11.33 times as large as whatever economic gains they produce for the country (which, along with the wage losses, drop as profits into the pockets of CEOs).
This sets up a perfect reductio ad absurdum: Suppose a bunch of Indian programmers immigrate here from Bangalore and create a number of new businesses; the new businesses hire lots and lots of progammers, testers, marketing people, salesmen, managers, and administrative personnel (both native-born Americans and immigrant Americans).
By the Borjas Theorem, these new companies and all the new hires will massively depress wages for everyone.
Yeah. That makes sense.
- Borjas's base assumptions are purely static: he assumes that immigrants will in no way increase the gross domestic product (GDP) of the United States, alter the percent of GDP that goes to paying wages, or in any way affect the ability of a business to hire or fire workers in response to wage changes.
This too flies in the face of our experience: The GDP grows; as it expands, and as new products, services, and entire industries come on line, the percent that goes to paying wages fluctuates up and down; and some industries can have a high wage elasticity, whereas others (such as service industries) cannot afford to let employees go and must instead pass along wage increases in the form of price hikes to consumers. None of these variables is invariant (which is why I call them "variables").
In particular, Borjas treats the GDP as if it were an invariant measurement that neither grows nor shrinks. That is, he assumes from the start that immigrants will never help "make a bigger pie," and every gain by an immigrant must produce a corresponding loss by a native.
Naturally, with such assumptions, Borjas can easily prove that immigration in general -- not just illegal immigration -- is a terrible thing for America. (Amusingly enough, Borjas is himself an immigrant from Cuba.)
The oddest thing about Borjas' estimates is not that he (invariably) estimates that immigration is a huge net loser for American workers, but the reason why... which he displays, perhaps inadvertently, in this passage. Here he attacks another economist's more positive calculation of gain and loss:
This is all based on a particular economic model--and obviously the answers are sensitive to the underlying assumptions. The CEA, in fact, reports an alternative set of estimates (in the $30 to $80 billion range) based on calculations of the wage impact made by economists Gianmarco Ottaviano and Giovanni Peri (here). But that model also faces various difficulties:
1. The higher benefits result entirely from accounting for the possibility that immigrants increase the productivity of natives who have the same education and work experience (although the importance of this point is often glossed over). In other words, the immigration of high school dropouts who are 30 years old makes natives who are high school dropouts and 30 years old more productive! Put bluntly, young low-skill immigrants made young low-skill African-American construction workers more productive. Maybe--but just think about it for a second. Wouldn't most people be skeptical about this?
But this "difficulty" is, in fact, the fundamental thesis of Capitalism: that competition increases productivity. And no, I do not believe most Americans are "skeptical" about the efficacy of Capitalism; it has a pretty good track record here. (None of this applies to Buchananites, of course.)
Borjas appears to believe that all the benefits of both immigration and also the huge "wage loss" went to fat-cat corporate owners, while the workers suffered massive losses every year; I of course have no idea what his political affiliation may be, but he is arguing classical Marxism -- that because workers are alienated from their produce, they will not respond to competition by stepping up their game. Is this really the expert upon whom John Hinderaker wants to rely?
Certainly, empirical data indicates that the Ottaviano-Peri model of the economics of immigration is a better fit than Borjas's model: Over the past hundred years, we have experienced a staggering increase in immigration; by the Borjas model, native-born workers should have suffered a correspondingly staggering loss of wages.
But instead, they have benefited from a huge rise in average wages per capita, even adjusted for inflation: Every category of worker makes more today than corresponding workers did in 1907, in constant dollars. And in fact, there are a lot more wage-earners today than ever before... so total wages are vastly greater than a century ago. How does that comport with the theorems?
Clearly, there is something terribly wrong with the Borjas model; it's even less predictive than the "general circulation models" of the global-warming alarmists! At what point must a theorist be required to come out of his cave and see how his ideas mesh with the real world?
But there is a third bizarre assumption that Borjas must have made:
- Borjas assumes that immigrants are basically unskilled, wage-earning workers when they arrive -- and remain unskilled wage-earners until they retire. Thus, the arrival of new unskilled workers hurts all existing immigrants.
What else can one conclude by reading his next blogpost on the issue and stumbling across this passage?
But they completely ignored the fact that the same complementarities that supposedly help natives also hurt immigrants, and by quite a bit. In other words, the CEA uses a strange definition of who “we” are: including only native-born workers and ignoring the millions of immigrants already here who are affected by yet more immigrants. This choice is not one that is typically made in the academic studies the CEA borrows from. In recent studies, the simulation usually examines the impact of a particular immigrant influx (say, the 1990-2000 arrivals) on the wage of workers present in the United States in 1990, regardless of where those workers were born.
Had the CEA taken the immigrant losses into account, the Bush administration would have had to report that the net gains from immigration for the pre-existing population are equal to.......ZERO!
But in reality, over time, immigrants do not simply remain at whatever job level they were when they arrived; a huge precent of them improve their job skills and move up to more demanding jobs for higher wages. They are not threatened by new unskilled laborers arriving every year.
And even worse for his theorem, many immigrants open their own businesses and become capitalists! These businesses can be as small as a "gypsy" cab driver or a Mom & Pop carniceria -- or as big as a giant software company or an aerospace military contractor. They hire many, many people (my last job was as a technical writer for a software company owned by Indian immigrants), which increases the total amount of wages paid. How is the immigrant owner of a hotel damaged by the arrival of new immigrants eager to become hotel maids and busboys?
Borjas does not just play games with statistics; he tortures them until they confess whatever he wants to believe. The idea that immigration, wages, and the GDP are all zero-sum -- that any gain must generate a corresponding loss, that an immigrant who gets a job picking strawberries therefore displaces a previous person picking strawberries (immigrant or native) and depresses the strawberry-picking wage to boot, is simply absurd... and is belied by the continuing rampage of GDP growth that we have enjoyed for the past many decades.
We need more and more immigrants because jobs are being generated by our economy faster than Americans are breeding. If there are million new jobs created in a year (an underestimate, by the way), but only 600,000 new American-born workers to fill them (an overestimate -- we're breeding at exactly replacement rate, no more)... then why would importing 400,000 more immigrant workers depress wages?
The jobs are there to be filled; that's why we have such low unemployment. There is no labor surplus; if anything, there is a growing labor shortage, which is why wages are rising.
Borjas sums up his anti-immigration, anti-capitalist thesis:
Imagine the headlines had the CEA reported that immigration during the 1990s led to a $3,333 drop in the average earnings of pre-existing immigrants! This is not the spin the White House was looking for, but it is a direct implication of the spin they did put out. What an inconvenient truth!
I wonder if the compassionate conservatives will shed a tear about the huge wage losses suffered by pre-existing immigrants.
Where are all the wage losses that Borjas predicts as a result of immigration? We have more immigration than any other country on Planet Earth; but our wages have steadily risen, in real dollars, over the years. Even for "pre-existing immigrants." What on earth is Borjas talking about?
Is he using some bizarre economics jargon, where "huge wage losses" actually means "significant wage increases?" If so, then I certainly understand why economics is called the "dismal science."
Addendum: The Borjas Theorems
Here are his two formulas. We define the variables thus:
L = labor's share of income; E = wage elasticity; F = % of foreign born workers; N = % of native-born workers.
Economic gain from immigration = 0.5 x L x E x F²
Economic loss from immigration = L x E x F x N
The ratio of loss/gain must therefore = 2N/F, and both other terms (L and E) cancel out. Since Borjas estimates N = 0.85 and F = 0.15, this always produces a loss over gain ratio of 11.3, regardless of any values of L, E, or (static) GDP. The formula is deliberately crafted to always show a wage loss from immigration that completely swamps any economic gain.
Hatched by Dafydd on this day, June 23, 2007, at the time of 3:22 AM
TrackBack URL for this hissing: http://biglizards.net/mt3.36/earendiltrack.cgi/2200
The following hissed in response by: Terrye
I think that one of the problems with guys like Bojas and even the guys at Powerline is that they do not live in the real world with the rest of us.
Lawyers and economists can say what they want, but when immigrants make up 47% of of the labor force for agriculture in a country with an unemployment rate of less than 5%, they are obviously not displacing anyone.
In recent months commodities like corn and wheat and even milk are seeing some of their first gains in decades in price, and people are worried about inflation, as if there is something uncapitalistic about a price hike. At any rate, what do people think would happen to the rate of inflation if we suddenly removed 11 million people from our workforce?
You do not need a PhD in Economics to answer that question.
The truth is if they do not let people come in and do this work, we will have to import the product and that will do wonders for the balance of trade.
This country has been having this argument for more than a century. The Know Nothings back in the days before Abraham Lincoln were saying the same thing.
That is a good name for them, Know Nothings.
The following hissed in response by: Dafydd ab Hugh
That is a good name for them, Know Nothings.
I don't think that's fair. John Hinderaker knows a lot about a lot of things; sometimes his ideology gets in the way of his rationality, but that's likely true of nearly all of us.
(Less so with me, because I'm the most Spockian person I've ever met. But that's not necessarily good, either. The ideal is to be neither Spockian nor Bonesian but to attain the Kirkian mean, able to swing Spockish or Bonesian at will, as the circs demand.)
Like many of the most vociferous anti-illegal immigration activists, John lives in a non-border state that is barely affected by illegal immigration. (I mean non-southern border; of course Minnesota borders Canada. But I don't think we're inundated by border-jumping Canucks.)
Those of us who hale from the occupied territories of Aztlan (Alta California, in my case) tend to have a more nuanced view... though of course there are exceptions (Sen. Cornyn, e.g.).
Patterico, for example, is of course opposed to illegal immigration (as an assistant D.A., he'd better be opposed to people breaking the law!)
But he is actually most interested in deporting illegal aliens who commit actual crimes in the United States -- deporting them after they serve their sentences, naturally. I join him whole-throatedly in that desire.
The above hissed in response by: Dafydd ab Hugh at June 23, 2007 5:55 AM
The following hissed in response by: lsusportsfan
I think that is a great post. I am getting more disturbed by the day with thi sillegl immigration debate for various reasons. Two of which you touched on
(1) People taking the tact of all these HEritage reports I see. I am skeptical of their conculsions to start with. However that fact is one cannot look at this only in the amount of taxes paid vers the anount of services recieved. No where do we talk about for instance illegals provide labor for business that produces a ton of revenue many times over. It is like that doesn't exist
(2) THe fact that we think "low skilled" folks will be low skilled till they die. First what is low skilled? IS a person that can build a HOuse low skilled? IS a guy that is trained plumbing low skilled? LEt me tell you as to HOuse repair I hear from my friends in New ORleans that those illegals have a whole much of helpful skill?
The following hissed in response by: Dale Gribble
Mexican Derangement Syndrome proves that the rightroots can pull a Ned Lamont too.I figure it would take around 5000 deportations to give Hillary a landslide with 60+ seats in the Senate.How do you think the "breath holders and arm flappers" will like Hillarys immigration bill?
The following hissed in response by: lsusportsfan
I wish I knew Spanish. I would love to hear how all this playing over Spanish language media. I suspect noet well
The following hissed in response by: Terrye
I was not referring to Hinderacker in particular, but to the whole mindset. They really do remind me of the Know Nothings. If you read the kind of rhetoric the original Know Nothings used you would be amazed at how familiar it sounds.
Smart people can have prejudices too and it seems to me that when it comes to this particular subject a lot of people just are not being reasonable.
The following hissed in response by: Terrye
And sticking with the status quo will not cause an increase in deportations of illegals who commit crimes. My understanding was that the Senate Bill addressed that issue and the hardliners still did not think it was good enough, in spite of the fact that the way things are obviously is not getting the job done.
So sometimes I wonder just how interested some of these people are in meaningful reform.
The following hissed in response by: Terrye
On the Know-Nothing Party (anti-immigrant party)
Letter to Joshua F. Speed
August 24, 1855
I am not a Know-Nothing. That is certain. How could I be? How can any one who abhors the oppression of negroes, be in favor of degrading classes of white people? Our progress in degeneracy appears to me to be pretty rapid. As a nation, we begin by declaring that "all men are created equal." We now practically read it "all men are created equal, except negroes." When the Know-Nothings get control, it will read "all men are created equal, except negroes, and foreigners, and catholics." When it comes to this I should prefer emigrating to some country where they make no pretence of loving liberty-to Russia, for instance, where despotism can be taken pure, and without the base alloy of hypocracy.
The following hissed in response by: GreggT
I'm a native, trained as an economist, working as a computer programmer, and I've seen my share of babble dressed up with economic jargon and passed off as erudite wisdom. The Borjas piece evidences the same faulty reasoning as those leftists who keep telling us the "The rich are getting richer and the poor are getting poorer. They assume (1) That the nation's economy (the macro side of things) is a zero-sum game -- that is, every dollar that someone earns is a dollar taken away from someone else. And (2) that people are bound by some type of caste system that prohibits (or at least effectively constrains) people from moving up the economic ladder.
The zero-sum game argument is totally at odds with the experience of this nation. In fact, the better analogy is that a rising tide raises all boats. Everyone benefits from the growing American economy.
By the way, just look at the average American our government defines as "poor" -- one car, 2 TVs, a telephone, food as close as a supermarket, medical care as close as the community ER or clinic, etc. Because "poor" is a relative term, and our standard of living is so high, our "poor" are very well off by historical standards. What is the life expectancy of today's poor versus the rich of 200 years ago?
As to the micro-economic argument that the poor do (or will) get poorer, I ask you to show me this class of people. Show me this huge group of people that are working their fingers to the bone, but yet just keep getting poorer and poorer and poorer. No matter what they do, they just keep losing and losing until they have nothing left, and still they just continue to get poorer. That's ridiculous! There is no such class of people. It is entirely a verbal construct that has no other purpose than to deceive. What is really meant is that the dollar difference between the wealth or income of the top earners and the bottom earners continues to rise. But this is a very different thing, and not at all bad, if you consider that (1) Neither the top earner group nor the bottom earner group is comprised of the same individuals year after year. And (2) Just because the dollar difference between top and bottom is increasing doesn't mean that the wages or wealth of the bottom earners aren't increasing-- in fact they are!
The reality is that most people may begin their working career in the lower end of the earning spectrum, but work their way up to the higher end. True they may never reach the very top, and there may be setbacks along the way, but the trend for workers as a whole is definitely upward.
Additionally, while wages at the low end of the spectrum may not be increasing as much as wages of those at the top, is this really so odd when you stop to think about it? If top entrepreneurs or CEOs made $1 million 20 years ago, and this year people in those same positions (though not necessarily the same individuals as 20 years ago) are making $20 million, would you really expect the kid who is making $4.00 an hour ($8,000 annually) flipping burgers 20 years ago to be making $19,008,000 per year today -- because that's what would have to happen for the dollar differences to be equal? Or would it be reasonable to expect that the same kid who was flipping burgers 20 years ago is still going to be flipping burgers today? No, there's a very real chance that today's top entrepreneur was the burger flipper of 20 years ago.
I look at my own situation. Three years ago I was at the bottom, now I am at the top. As the comedian said, "What a country!" And I think that while I'm smart enough, I'm not the smartest guy in the world -- there are definitely people in Bangalore, or Manilla, or Beijing, or a thousand other places that can do what I do better than I can, but why is it that I enjoy the "American dream" and they can't? Well, it's right there in that last sentence: because I live in America. There is something about this country that is truly great -- on many different levels, but I refer here to the economic opportunity that is afforded the people that live within her. Other countries have computers and electricity and smart people and decent schools and most all of the things that we have, but this country is the economic superpower. Why is that?
Well, I think an argument can be made that one of the factors in our relative success has been that we have brought the best and brightest people from other countries here to work in America. For instance, what would have been the path of our military and aerospace industries if we hadn't brought German engineers over after WWII?
This is why it is so aggravating to hear people get so worked up about illegals coming in and "stealing" the minimum wage jobs from Americans. If minimum wage jobs are American's highest aspirations, then we're already finished. But I can't believe that this is the case. Minimum wage jobs are not what will continue to make this country greater that the other countries. No, it's the other end of the spectrum that is really important. What we desperately need is to bring in the High Value Immigrants. I believe the simple fact to be that when America has these resources (the HVI) and her competitors do not, America will continue to be the global superpower -- which I, for one, as my children grow up and enter the work force, would like to see happen.
If we continue shutting off debate and saying that an immigration bill is entirely bad, even before all the amendments and tweaks have played out, we’re never going to make any progress on this issue. The tragedy here is that the disgust at illegal immigration is directed at immigration in general. Now I have the same ideological revulsion with granting benefits and removing punishment for those who have broken the law to get here. Ideologically, I'd be fine with deporting all the illegal aliens tomorrow. They're not supposed to be here. But practically, this will not and cannot happen. As noted above, with an unemployment rate of 5%, what would happen if we removed such a significant portion of the population? Do you think we would have 0% unemployment? Hardly -- we'd just have a lot of economic pain and suffering. I think we can argue over the specific implementation, but we need to agree that we need a better system than we have now, both for keeping the illegals out, and for making sure that the legals get in. Perhaps this is idealistic, but I would like to be able to say that America imports people to do her minimum wage jobs, and that as those people are here for a time, they gain skills and more and more realize that American Dream and then we have to import more people to take their place in doing our (and now their) minimum wage jobs
So an economist can throw all the cooked up calculus he wants to into whatever formula he decides to fabricate from his yard of whole-cloth (and Borjas’ by the way, are ridiculously simplistic), but by experience, it is absurd to conclude categorically that immigrants bring this nation no benefit, only detriment. For crying out loud, have you looked at the names of the doctors on a medical building's directory, or at the names of the kids enrolled in the university computer classes. There's not a lot of Smith's! And you know what, that's a good thing, because those people will be making each of our lives better in addition to making their lives better.
The following hissed in response by: flenser
For crying out loud, have you looked at the names of the doctors on a medical building's directory, or at the names of the kids enrolled in the university computer classes.
None of these people are swimming across the Rio Grand or entering the country illegally.
Borjas shot down the CEA study precisily because it conflated the legal immigration of high skill/high wage earners with that of illegal low skil/low wahe earners.
How dense do you people have to be to repeat the same mistake?
The following hissed in response by: flenser
The formula is deliberately crafted to always show a wage loss from immigration that completely swamps any economic gain.
The formulas used by Borjas are the same ones used by the Presidents economic advisors if showing that immigration gave us a whopping teo tents of once percent gain in GDP, which you see as fantastic. So if his formulas are bunk, so is the report of the CEA.
That is, he assumes from the start that immigrants will never help "make a bigger pie," and every gain by an immigrant must produce a corresponding loss by a native.
Those who read what he wrote will know this is bunk. I'm sure your readers will swallow it whole though.
I'm amused that you regard Borjas, and presumably Friedman also, as "Buchanites", which I take to be an insult among your Vulcan people.
competition increases productivity
"Competition" for low skill labor surely exists in Mexico, and China, and Bangladesh, and many other countries. And they have very low productivity.
The US has the most expensive labor force in the world. And it has the highest productivity in the world.
Competition DOES lead to greater productivity - that is, to greater output per worker. To be more precie, competition FOR LABOR leads to greater productivity. This is why high wage countries are also high productivity countries, and why you understandinf of economics is fatally flawed.
The following hissed in response by: Colin
I couldn't find your email address, so I hope you don't mind if I post this as a comment.
I don't know if you've seen this yet, but this story from the Washington Times seems almost like a threat from House Republicans to Bush. Mess with us on Immigration, and we'll torpedo the war.
The following hissed in response by: hunter
The illegal immigration problem is being highjacked and framed, more and more, by thinly veiled racists and rednecks. The kind of pap that concludes all immigration is bad for our economy is as counter factual as those who believe that all immigration is just swell.
Unfortunately, the idiots on the right, those who are now merging who are against all immigration, and for blatantly racist reasons, are taking over on our side.
They can be marginalized, and in so doing the entire case for immigration reform and border security will be lost in the faux righteous indignation over the Savages, et al, who bellow in the public square.
Even Mike Gallagher, posing as a common sense guy, went on an embarrassing tirade last week over how a commercialin Spanish nearly made him physically ill, and how he struggled to quickly find his remote to save himself from that darn Spanish stuff.
The case to control our border and other points of entry is compelling and just. The case to halt illegals is compelling and just. The case to find out just how many illegals are here is compelling and just.
Unfortunatley, it will not happen, because the pro-amnesty extremists are going to focus on the ignorant bad faith of studies like this and tlak about how the nation must silence the racists.
So thanks to the know nothings for derailing and distracting from real work.
And shame on our political culture for speinding more effort on this than on winning the war.
If I was not an American, I would wish on the the defeat both sides are very close to deserving.
Instead, I still root for victory for our side, if for no other reason that that our troops deserve it - afterall, they have laid out their lives for us in this.
Shame on us.
The following hissed in response by: cdquarles
Sigh. The economic education in our country is so dismal. On top of that, you have gross misuse of English. Being "poor" is not a state of being that being "broke" is. Being "poor" is a state of mind, generally blaming others for your own bad judgments and behaviors. Being "rich", likewise is not a state of being that "not broke" is. Being "rich" is a state of mind, generally being industrious, virtuous (in a Biblical sense), or engaging in serving the needs/wants of others in a voluntary exchange of value for value.
IOW a rich man can find himself being broke/having no money, and a poor man can find himself possessing a big pile of gold. These states of being will eventually revert to the rich man having the gold and the poor one being broke. Why do you ask? It is the simple result of the actions of the rich man and the poor one. The poor one will waste the pile of gold and not realize that the pile of gold isn't wealth, while the rich one will find a way to serve others so well that he will earn a big pile of gold in the process.
In a similar vein, I find it offensive that folks claim that the US or the world is overpopulated when you can comfortably house the whole US population in the State of Alabama or the whole world's in the State of Texas. It is a retrogression to thinks of people solely as a burden when 99% are or will be productive [does not include lawyers or politicians :)].
We are indeed seeing the modern version of the Know-Nothings and the Copperheads in action. I fear for my country's future.
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