Illegal Immigration and the Wage Gap

There is a close long-term correlation between low-skill wages and illegal immigration. An influx of low-skilled labor drives down wages at the bottom of the income scale, aggravating the wage gap and social divisions, providing fodder for left wing demonization of the prosperous and successful.

The normal equilibrating capacity of a market economy is short circuited when the influx of low-skill illegal immigrants is nationwide. If American workers could easily escape to another country offering higher wages, then wages in the USA would quickly recover from a surge of immigrant workers, and employers would gain only a short-lived benefit.  So, it might not be worth paying off politicians to import cheap labor from poor countries.

The Mariel Boatlift event provides a demonstration of this.  Wages were hammered down in a local economy (Miami) by a flood of refugees and then recovered as workers scattered to surrounding areas with higher wages.  The whole process took 10 years.

Miami Wages after the Mariel Boatlift

Harvard professor George J. Borjas has been called "America’s leading immigration economist" by BusinessWeek and The Wall Street Journal.  The good professor recently surprised himself and outraged many of his pro-immigration colleagues with a study measuring the dive in wages for low-skill natives in Miami after the Mariel boatlift of 1980. 

Private boats brought more than 100,000 Cubans to Miami within 5 months.  The data displayed in the graph below shows what happened.

In 1980, Miami low-skilled wages (blue line) were already trending at 94% of those in the rest of the USA. (orange line).  Then Miami wages were hammered down by the Mariel boatlift.  If that event had not occurred, Miami wages presumably would have followed the gold line (Reference), which is 94% below wages outside of Miami.  If so, we get the following wage gap (Gap) between the gold (Reference) and blue (Miami) lines:

Gap = (Miami - Reference) / Reference

The wage gap (Gap, blue line) hits -0.35 in 1986, which means wages dropped 35% below where they would have been if the Mariel event had not happened.  Then the Gap closes back up near zero by 1990. 

The red line is the output of my Gap predictor, which I described in a previous article.  Also, see my notes.  The simple Gap predictor assumes an immediate reaction in wages, but in reality the reaction takes several years to occur (6 years in this case).  The predictor also assumes almost all the resident low-skilled workers will take a 39% pay cut without moving out of the job market.  That is not going to happen for long in an American city like Miami, surrounded by higher-paying job markets. 

The Gap predictor works fairly well for the US as a whole because there is no foreign country where a low-skill worker can get enough of a pay raise to make it worth the move.  So, the wages stay depressed for about 40 years, until the immigrant workers retire.

It is easy to say that immigrants can upgrade their schooling and training and thus reduce the surplus of low-skill labor.  In practice, it is usually very difficult, especially while raising kids. For example, Senator Marco Rubio’s father spent his career mostly as a hotel bartender. He was also a street vendor, security guard, apartment building manager and crossing guard. Rubio’s mother worked as a maid and Kmart store clerk. 

They stayed in low-skill jobs over their entire working careers.  Their children did very well, however.  If the children of immigrants do as well as the children of natives, then the depression of low-skill wages goes away unless more low-skill workers are brought into the country. 

If the children and grandchildren of a large class of  immigrants remain low-skill workers like their parents, then my simple Gap predictor no longer works and we are left with a persistent underclass of people who continue to cause a surplus of low-skill workers and thus continue to depress low-skill wages.

Unfortunately, this is the case for most of the illegal immigrants that are continuing to pour into the country.

Another Permanent Underclass?

If the illegals are allowed to stay, the effects will be dire, according to the findings of Gregory Clark, Professor of Economics at the University of California, Davis.  “Immigration to the United States … rarely changes one’s social status,” he concludes after extensive study and many published works.  His recent book is about the tendency of descendants within a family to stay in the same social class as their ancestors.

Clark writes,

“... the social status of Latinos, even those born in the United States, is persistently low… they are often the people who found themselves in such desperate economic circumstances at home that they preferred to live as illegal immigrants in the United States. (Latinos constitute nearly half of the foreign born in the United States, but four in five of illegal migrants.) The effects have been dire: there can be no doubt that immigration is widening social inequality in the United States.”

Professor Clark suggests a less disastrous immigration policy: 

“To avoid having a substantially poorer and less educated Latino underclass for many future generations, [the US] should considering policies to increase the number of highly educated Latino immigrants.”

But if current immigration policy is continued, the “United States is likely to soon have the unprecedented situation of fostering a semi-permanent underclass.”  This lack of social mobility from one generation to the next is a result that no government uplift program has been able to erase, according to Clark’s study of government efforts in Sweden, the US, and elsewhere.

This means that my simple wage formula will underestimate the negative wage effects of illegal immigration, because the formula assumes that the effect is limited to the 40-year career of immigrants but not their descendants.  A society over-loaded with low-skill workers will have lower wages in that category until the surplus disappears, which in this case might be generations away.

I estimate that enforcing the law and deporting all illegals would raise real low-skill wages by about 20% to 40% within 6 years, providing immediate relief to the oppressed low-skill citizens of our country.  (See my notes.)  Allowing in more high-skill people and few low-skill people would have long-term benefits that would eventually tower over this short-term benefit.  A more skilled population would increase the historical trend of economic growth in this country.  We might even become the richest per capita country in the world.