by Tyler Cowen
It’s not often that Paul Krugman and Donald Trump agree. But the Nobel-prize-winning economist and former (and future?) president have both subscribed to the mainstream consensus that, in the short run, less skilled immigrants are a burden on public finances. They may receive government benefits, including health care, yet they are not always ready to contribute to the economy productively.
Now that consensus is in question. According to new research from economists at the University of Oregon and the University of St. Gallen in Switzerland, new low-skilled immigrants to the U.S. are a net fiscal plus — each adding an estimated $750 a year to government coffers at the federal, state and local levels. And their contribution to the entire economy is likely larger still.
These new measures do not deny the standard assessments of the potential fiscal costs of immigrants. Rather, they consider an additional positive factor: namely, that low-skilled immigrants enable native workers to move into higher-wage jobs, and in some cases to work more hours. That may occur through a number of channels, some of them highly complex and hard to measure, but most simply recall Adam Smith’s maxim that the division of labor is limited by the extent of the market.
To view this more concretely, consider working parents who would choose more demanding and higher-paying jobs if cheaper and more convenient child care, which typically requires only a high school diploma, were available. If a new immigrant provided that care, those parents would be able to earn more money — and would pay more taxes.
That is an obvious and relatively visible story. A more indirect effect involves businesses. When cheaper labor is available, they may make bigger and more ambitious plans, which also has benefits for government revenue. In any case, the indirect fiscal effects of the immigrants will be more positive than the direct effects.
To be clear, the positive fiscal estimate does not apply to all immigrants: They apply only to unskilled immigrants with a high school degree. Unskilled immigrants without a high school degree still have net negative fiscal effects, though not by nearly as much as previous research suggests.
Nor does this research have an adequate measure for comparing immigrants who arrive legally to those who don’t. Based on economic principles, however, there is a presumption that those who arrive legally will be more effective in adding value to the economy, fiscal factors included. They can make better and longer-range plans, and they are more likely to assimilate in a productive manner.
Finally, the new research also does not account for the possibility that greater immigration raises housing prices in a region. That typically leads to higher property tax payments. Such an outcome may or may not be desirable — but it is another way immigrants may have a net positive fiscal impact. Again, from a strictly budgetary point of view, the new arrivals are more than paying for themselves.
It’s also important not to overinterpret these results. As my colleague Bryan Caplan likes to say, “Trust literatures, not single papers.” It will be interesting to see if these results are supported and replicated. That said, other recent evidence indicates that immigrants to the U.S. boost both wages and employment for native workers. That research counts skilled immigration as well, also finding that it results in an occupational upgrading of the jobs held by natives. It is thus broadly consistent with finding positive fiscal results from a greater number of less skilled immigrants.
At the very least, it seems prudent to discard the assumption that low-skilled immigration is bad for public budgets. The most visible fiscal effects are negative — such as immigrants arriving in cities by bus and requiring immediate aid — but it is a fundamental principle of economics to look past the seen and consider the unseen.
Other unseen consequences may be relevant too, not all of them positive. More unskilled immigrants could also create political backlash, and aid the rise of harmful populist politicians. That can have longer-term negative consequences, many of them serious in nature, and some of them fiscal as well, since populists typically are not fiscally responsible.
So the ledger of effects of less skilled immigration is far from complete. Nonetheless, when you next hear the complaint that low-skilled immigrants are costing the government money, treat it as a hypothesis, not a fact.
