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Daniel T.Griswold is associate director ofthe Cato Institute’s Center for Trade PolicyStudies.
By the latest estimates, 8.3 million work-ers in the United States are illegal immi-grants. Proposed policy responses rangefrom more restrictive border and workplaceenforcement to legalization of workers whoare already here and the admission of new  workers through a temporary visa program.Policy choices made by Congress and thepresident could have a major economicimpact on the welfare of U.S. households. This study uses the U.S. Applied GeneralEquilibrium model that has been developedfor the U.S. International Trade Commis-sion and other U.S. government agencies toestimate the welfare impact of seven differ-ent scenarios, which include increasedenforcement at the border and in the work-place, and several different legalizationoptions, including a visa program that allowsmore low-skilled workers to enter the U.S. workforce legally.For each scenario, the USAGE model weighs the impact on such factors as publicrevenues and expenditures, the occupationalmix and total employment of U.S. workers,the amount of capital owned by U.S. house-holds, and price levels for imports and ex-ports. This study finds that increased enforce-ment and reduced low-skilled immigrationhave a significant negative impact on theincome of U.S. households. Modest savingsin public expenditures would be more thanoffset by losses in economic output and jobopportunities for more-skilled American workers. A policy that reduces the numberof low-skilled immigrant workers by 28.6percent compared to projected levels wouldreduce U.S. household welfare by about 0.5percent, or $80 billion.In contrast, legalization of low-skilledimmigrant workers would yield significantincome gains for American workers andhouseholds. Legalization would eliminatesmugglers’ fees and other costs faced by ille-gal immigrants. It would also allow immi-grants to have higher productivity and createmore openings for Americans in higher-skilled occupations. The positive impact forU.S. households of legalization under anoptimal visa tax would be 1.27 percent of GDP or $180 billion.
 Restriction or Legalization? 
 Measuring the Economic Benefits of  Immigration Reform
by Peter B. Dixon and Maureen T. Rimmer 
 
Peter Dixon is the Sir John Monash Distinguished Professor and Maureen Rimmer isa Senior Research Fellow at the Centre of Policy Studies at Monash University in Australia. Their USAGE model of the U.S. economy has been used by the U.S.Departments of Commerce, Agriculture, and Homeland Security, and the U.S. International Trade Commission.
Executive Summary 
August 13, 2009No. 40
 
Introduction andMethodology 
As of March 2008, there were an estimated8.3 million illegal immigrants working in theUnited States, accounting for about 5 percent of total employment.
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Public attitudes on illegalimmigrants vary from the negative view that they are impoverishing low-income legal residents by depriving them of jobs to the positive view thatthey are a vital part of the U.S. economy becausethey perform tasks that legal residents are unwill-ing to undertake. Illegal immigration is now amajor component of the political debate with pol-icy suggestions ranging from mass deportation tolegalization and amnesty. The aim of this study is to explain and mea-sure the implications for the U.S. economy of dif-ferent policies toward illegal labor, ranging fromincreased enforcement at the border and in the workplace to a temporary worker program that would allow additional foreign workers to enterthe United States legally. In determining the eco-nomic impact, the study will consider the num-ber of illegal immigrants, their skill mix, their wage rates, the taxes they pay, and the publicexpenditures made on their behalf. We will com-bine these data with data on the structure of theU.S. economy and the skill mix of U.S. workers.In drawing conclusions from the data, we need tomake assumptions about the demands for andsupplies of illegal immigrants, and the growthprospects for the U.S. economy. To analyze theinterconnected effects of policy changes on theU.S. economy, we employ a 38-industry, 50-occupation version of the U.S. Applied GeneralEquilibrium model.
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A computable general equilibrium modelsuch as USAGE allows us to approximate theeconomywide effects of a policy change on dis-tinct but interconnected markets. It takes intoaccount interrelated changes in labor demand andsupply, wages, capital investment, public expendi-tures and revenues, and exchange rates and trade.Although the model is complex, the intuitionbehind it is not. The results can be understoodand explained by familiar economic mechanismssuch as supply and demand curves supplementedby back-of-the-envelope calculations. This allowsreaders to assess our results in terms of both theplausibility of the underlying theory and the reli-ability of the data.
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 The study uses seven USAGE simulations tomeasure the economic impact of different policy changes toward illegal immigration. In the firsttwo simulations, the policies restrict illegal im-migration. In Simulation 1, the restrictive policy is tighter border enforcement; in Simulation 2, itis tighter internal enforcement.In the other five simulations, we considerpolicies in which illegal immigration is largely replaced by programs of entry visas. Undersuch programs, employers in the United States would be able to offer jobs on a temporary basisto people outside the country. Such a policy change would largely eliminate smugglers’ feesand other costs of illegal entry, thereby induc-ing an increase in the supply of what we willnow refer to as guest workers.In Simulation 3, we assume that the work-force characteristics (e.g., productivity) of guest workers are the same as those of the illegalimmigrants considered in Simulations 1 and 2.In Simulations 4 and 5, we recognize that it islikely that legalization would move the charac-teristics of immigrant workers in each occupa-tion toward those of native-born workers. Thismeans that guest workers would be more readi-ly substitutable for U.S. workers in the sameoccupations and have higher productivity thanillegal immigrants. In Simulations 6 and 7, weintroduce a visa tax. This would be paid by employers seeking a permit to allow them to hirea foreign worker. The tax can be used to controlthe number of guest workers and to facilitate thetransfer to U.S. households of part of the guest- worker surplus. This surplus is the gap betweenthe value of what guest workers can produce andthe wage necessary to induce them to supply their labor.Via the USAGE model, the effects of changes in immigration policy on the economic welfare of U.S. households can be understood interms of six factors: (1) the direct effect on theoutput of illegal or guest workers relative to thecost of employing them; (2) the effect on theoccupational mix of U.S. workers; (3) the effecton the amount of capital owned by U.S. house-
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 This study explainsthe implicationsfor the U.S.economy of different policiestoward illegal labor,ranging fromincreasedenforcement at theborder and in the workplace to a temporary worker program.
 
holds; (4) the effect on the employment rate of U.S. workers; (5) the effect on public expendi-tures; and (6) the effect on the macro structureof prices, particularly the prices paid for importsand exports. The six factors will be explained inmore detail below. To simulate the effects of each policy changerequires two runs of the model: a business-as-usual run and a policy run. The business-as-usualrun is intended to create a plausible baseline fore-cast out to 2019 that assumes no policy changesare made, while the policy run generates devia-tions away from the forecast caused by the policy change under consideration. For the most part, we report percentage deviations in variables (suchas wage rates and employment) away from theirbusiness-as-usual paths caused by the policy.In our business-as-usual forecast we assumethat the present global slowdown will be short-lived. Under this assumption, employment of foreign illegal workers will grow from 7.3 mil-lion in 2005 (the base year) to 12.4 million in2019—an annual rate of growth of 3.8 percent.Rapid growth of illegal employment occursdespite only moderate growth (about 1 percenta year) in the net inflow of illegal immigrants. The reason is that the net inflow in 2005 waslarge, so that even if there were no growth innet inflow, the stock of illegal workers in theUnited States would increase rapidly. By con-trast with the 3.8 percent annual growth inemployment of illegal workers, employment of legal workers grows at an annual rate of only 1percent. Throughout the study, we will use the terms“unauthorized” or “illegal” immigrants to de-scribe those workers who are in the country  without valid documents. When discussing poli-cies that would authorize them to work in theUnited States on a limited tenure, it would beconfusing and inaccurate to continue to refer tothem as illegal. Under such policies, we wouldexpect most illegal immigrants to transform into what we will refer to as “guest workers.” When we use the terms “U.S. households” or “U.S. workers,” we mean everyone in the United Statesexcluding illegal immigrants and guest workers. This includes U.S. citizens as well as legal per-manent residents.
Summary of Results: The Gains from Legalization
A major finding of the study is that the pro-gram of tighter border enforcement, Simulation1, strongly reduces the welfare of U.S. house-holds. A principal effect is that it raises the wagerate of the illegal immigrants who remain in theUnited States, in effect transferring incomefrom legal residents of the United States to ille-gal immigrants. Even more importantly, restrict-ing the inflow of illegal immigrants biases theoccupational mix of employment for U.S. work-ers toward low-paying, low-skilled jobs as those jobs become relatively more attractive and avail-able compared with higher-paying occupations. This eventually reduces the overall productivity of U.S. workers and consequently their averagereal wage rate. Tighter internal enforcement, Simulation 2,has negative effects similar in magnitude to thatof Simulation 1. Rather than the scarcity value of illegal immigrants being realized as an increase inillegal wage rates, it is dissipated in prosecution-mitigating activities by employers, including thehiring of lawyers, accountants, and other profes-sionals. In the language of economics, the scarci-ty value of illegal immigrants is translated into adead-weight loss.In Simulation 1, increased border security moves the supply curve for illegal immigrantssufficiently inwards to reduce their employmentin the United States in 2019 by 28.6 percent,from 12.4 million in the business-as-usual run to8.8 million in the policy run. This reduces the welfare of U.S. households by the equivalent of 0.55 percent of the gross national product, or $80billion in today’s economy.
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 The internal enforce-ment scenario, Simulation 2, is scaled to have asimilar effect on illegal employment as that inSimulation 1. In Simulation 2, the reduction inU.S. household welfare is 0.45 percent.In Simulations 3 to 7, legalization movesthe supply curve for immigrants (now guest workers) outwards. To aid comparability withSimulations 1 and 2, we assume that the per-centage increase in supply of guest workers atany given wage (post-tax) is the same as thepercentage reduction in Simulation 1.
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 A major finding of the study is that a program of tighter border enforcementstrongly reducesthe welfare of U.S. households.
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