The Cato Journal’s new issue is all about immigration, and it includes an article from Gordon Hanson, who is one of the leading economists on this. Hanson repeats a claim that is common, and I think worth debating: that the fiscal externality of low-skilled immigrants should be internalized by their employers. Here is how he puts it:
Another source of unequal burden sharing is that U.S. employers enjoy benefits from immigration, in terms of higher productivity for their operations, while taxpayers pay for the education and health services that immigrant households receive. Taxpayers thus subsidize employers in agriculture, construction, meatpacking, restaurants and hotels, and other sectors that have high levels of employment of low-skilled immigrant labor. A reasonable solution to the current predicament is to eliminate such subsidies by making employers internalize the fiscal cost of immigrant workers. One way of achieving internalization is to subject employers to an immigrant labor payroll tax that would fund the benefits that their immigrant employees, and their family members, receive. Such a tax would make employers bear the fiscal consequences of immigration, releasing taxpayers from the burden and perhaps easing political opposition to immigration.
The notion here is that the employment of low-skilled immigrants is generating an externality, and that the employer who make up one side of these exchanges are not internalizing the cost of this externality. This leads them to hire them more low-skilled immigrants than they would if they had to pay the full cost. This treats low-skilled immigrants as being comparable to pollution generated by the employers, and proposes a Pigouvian tax to internalize the costs. But is this logic correct?
For one thing, I am surprised when I read liberals accepting that welfare and subsidies to low-income people are externalities to the Americans who pay for them. Is there some economic reason why these externalities should be internalized when foreigners generate them and not when natives do so?
Typically, transfers to the poor are justified on the economic grounds that people care about other people, and so improving the welfare of the poor is a public good to some extent. This isn’t just a liberal argument, here’s Greg Mankiw embracing it. In this case the fiscal burden of the low-skilled is not an externality, because everyone else receives positive utility from seeing them less poor. Some might argue that by this logic what separates subsidies to immigrant from subsidies to natives is that Americans in general don’t care about the welfare of immigrants enough to justify the subsidies, so they are in fact externalities. This, to me, suggests that it is the policy that is generating the externality, and not the employers. If we wish to correct this is it not better to change the law so we stop giving subsidies to immigrants?
Another problem with thinking of employers as generating the externality is the fact that non-working immigrants surely generate a greater net fiscal burden than working immigrants. A tax on low-skilled immigrant working hours will result in less low-skilled immigrant working hours. In some cases this will result in immigrants returning home which will reduce the fiscal burden. But in other cases it will just result in immigrants working less hours, with perhaps less family members per household working, which will increase the net fiscal burden. Given this it seems to make more sense to tax immigrants themselves rather than those who hire them.
Gordon Hanson is just trying to find ways to make immigration more acceptable to Americans so that there can be more of it, so I don’t begrudge him for proposing an unpalatable solution. After all, most pragmatic solutions to convincing Americans to tolerate more immigration seem to have some unpalatable aspect to them. But I think accepting that the fiscal burden of low-skilled immigration represents a real externality generated by employers is both untrue and an unproductive framing of the problem.
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Sunday ~ January 22nd, 2012 at 7:34 am
Pascal Warnimont
First, from my modest readings, I thought education was not only a benefit to households, but also intellectual capital investment from the nation into a future skilled and productive workforce ; the same being true at least partly for healthcare. Second, thinking, in this case indirectly, about other countries as negative externalities generators may back fire: by that kind of logic, the countries of origin of immigrants should ask to be reimbursed for the education and health cost for the production of the 60+ % of engineers, scientist and other highly technical personnel that backbone US production and R&D
. Can anyone enlighten on the (in)validity, of those arguments and suggest further reading, for example, on measuring the cost and benefit of health and education, and the capital flow from highly skilled workers towards homeland? Thank you
Sunday ~ January 22nd, 2012 at 8:08 am
Chris
By Hanson’s logic shouldn’t we rebate to employers the sales taxes paid by immigrants?
Sunday ~ January 22nd, 2012 at 9:51 am
Max
Welfare is distinct from philanthropy. You can support welfare even if you don’t care about poor people in general.
Sunday ~ January 22nd, 2012 at 11:43 am
Th
Why do we think there are any externalities to pay for? I am certainly not convinced there are. My experience (30 years in construction supply) is that there are businesses that are not economically viable in the US if not for cheap immigrant labor (food processing, vegetable growing, textiles, etc.) and prices would be higher in others (hospitality, lawn care and home maintenance, construction). Our standard of living is improved in some part by taking advantage of the low wage rates and high productivity of low-skilled immigrant labor. We consumers are the ones who should be paying any externalities if Hanson is going to insist they exist.
Sunday ~ January 22nd, 2012 at 12:01 pm
macphisto007
I second Th’s response.
Cheap labor in certain of those industries means lower prices for consumers.
So while there are direct measurable social costs including education, healthcare, and welfare, there are indirect difficult to measure benefits such as increased utility from being able to consume more.
Sunday ~ January 22nd, 2012 at 3:19 pm
teageegeepea
Didn’t Putnam show that more diverse communities are less trusting? And I believe there are a number of political scientists & economists who argue that more homogenous societies are more supportive of a welfare state, partly explaining why the U.S is more hostile to it.
“If we wish to correct this is it not better to change the law so we stop giving subsidies to immigrants?”
California attempted to deny certain benefits to immigrants (including Americans who came from other states in one referenda), but the supreme court prohibited that. Prop 187 was the one that dealt with illegal immigrants. Saenz v. Roe was the SCOTUS case on the law about inter-state migrants.
I sometimes hear people justify the welfare state by saying that it’s bribing the poor/working class not to revolt, kill the bourgeoisie and seize their property. So it’s arguably an externality if we have to bribe more people. I don’t that theory seriously because I think the government could suppress revolt for far less (and most of the welfare state is directed toward old people).
I wrote up the immigration policy I would put in place here. It has a larger role for guest workers. There are a lot of people who just want the higher pay associated with jobs in America but don’t necessarily want to leave their home country permanently, and many Americans don’t want them to live here permanently either. Having them work here temporarily and then return home to their families seems the most win-win solution. It does also contain a tax on the guest workers to appease Americans who don’t like that either.
Sunday ~ January 22nd, 2012 at 4:18 pm
amspirnational
George Borjas has already proven the diminishing of wages for native workers involved. Start from here and address the question,
Tuesday ~ January 24th, 2012 at 7:11 pm
Th
Borjas shows that the increased supply of less educated low skilled immigrant labor reduces wage rates for comparable native workers. He also shows that these immigrant workers produce gains for other native workers. Let those who benefit share some of their gains in the form of higher taxes and increase the EITC to mitigate reductions on the lower end.
If there is a total net gain from immigrant labor (I definitely think so), it is simply a matter of distribution of the benefits. Having businesses handle the redistribution will kill the golden goose of global competitiveness.
Could we have saved our textile and furniture manufacturing in the South if immigrants had shown up 20 years earlier? Did they save the carpet industry in Dalton, Ga.? Is the immigrant crack-down going to doom the chicken industry (growers, processors, shippers, etc.) in Alabama, Arkansas and Georgia?
Monday ~ January 23rd, 2012 at 4:24 am
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Monday ~ January 23rd, 2012 at 9:14 am
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Monday ~ January 23rd, 2012 at 10:07 am
Pete Murphy
This discussion completely misses an issue that dwarfs the relatively minor costs associated with integrating immigrants into our society: exacerbating the effects of the inverse relationship between population density and per capita consumption. With the arrival of each new immigrant comes an infinitesimal (but not negligible) need to crowd together just a little more. As overcrowding intensifies (when the effects of each new immigrant are mulitiplied by one million each year), our per capita consumption steadily erodes. Since per capita consumption and per capita employment are inextricably linked, rising unemployment and poverty are inescapable.
Pete Murphy
Author, “Five Short Blasts”
Monday ~ January 23rd, 2012 at 2:09 pm
Immigrant employment as an externality « Urban ethics and theory
[...] Immigrants as negative externalities « Modeled Behavior: Gordon Hanson is just trying to find ways to make immigration more acceptable to Americans so that there can be more of it, so I don’t begrudge him for proposing an unpalatable solution. After all, most pragmatic solutions to convincing Americans to tolerate more immigration seem to have some unpalatable aspect to them. But I think accepting that the fiscal burden of low-skilled immigration represents a real externality generated by employers is both untrue and an unproductive framing of the problem. [...]