ARTICLE SUMMARY

The Economic Logic of Illegal Immigration

Gaurav R. Wankhade1
ABSTRACT Illegal immigration is a source of mounting concern for politicians in the United States, as it has risen tenfold in the last decade prompting to an uncontrolled situation. There is a strong consensus that if the US could simply reduce the number of illegal immigrants, either offering a legal status or deterring them at the border, U.S. economic welfare would be enhanced. In this situation the article tries to provide an answer to various questions like -Is there any evidence to support these prevailing views? -In terms of the economic benefits and costs, is legal immigration really better than illegal immigration? -What should the United States as a country hope to achieve economically through its immigration policies? -Are the types of legislative proposals that Congress is considering consistent with these goals? The analysis concludes that there is little evidence justifying legal immigration is economically preferable to illegal immigration, and in their efforts to gain control over illegal immigration, Congress and the administration need to be cautious that the economic costs do not outstrip the putative benefits.

Introduction The premise of this article stands on the Economic Impacts of Immigration, especially, Illegal Immigration, on the countries economic welfare, which is the ultimate concern of any economy, in general. It is focused on the illegal immigrants moving into United States from all over the world, particularly from the neighbourhood (third world) countries like Mexico and Canada. There are many views-counterviews, arguments-counterarguments put forth by U.S. Citizens, Policy Makers and U.S. Government regarding the issue. But the article questions the basic facts related to it like, Is there any concrete evidence to prove any particular view or argument regarding Illegal Immigration? How one should make comparison in between Legal and Illegal Immigration on the basis of monetary parameters (economic value; benefits and costs)? Are the purpose and objectives, for the fulfilment of which United States as a country devising immigration policies, clear?, Are the legislative proposals devised by the U.S. Government, in tune & in consistent with the goals set for immigration? Thus, the basic purpose of this article is not to present an overview of the related issues to immigration & homeland security concerns arising thereof. Instead it is an examination of monetary advantages (benefits or incentives) and disadvantages (costs or disincentives) of illegal immigration particularly, within a framework of economic analysis. Optimal immigration with preferred vision of economical benefits (tax contribution minus costs of Immigration resulting in a positive figure) permits immigrants with special skills which are scarce in the present economy, to migrate at ease. But is this a case with the issue of U.S. Immigration? Such pool of immigrants not only contains individuals with high education & skills (for e.g. software professionals) but low-skilled labour specially operating in low-income industries such as construction, food preparation etc. But again as compared to world standard, what these immigrants receive in the form of wages in U.S. Market is much more than what they countrys economic wealth.
1 Article, The Economic Logic Of Illegal Immigration, written by Gordon H. Hanson, CSR No. 26, April 2007, Council on Foreign Relations, U.S.A. summarized by Gaurav R. Wankhade, Research Associate, IRC IBS Mumbai.

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There are various flaws which are the part & parcel of illegal immigration generally neglected by mere aggregate economical impacts. Illegal Immigration with it brings an inflow of heterogeneous population which may become a serious threat to National Security and Normal Social Life, leading to an inability on the part of U.S. Government to enforce regulation with the predefined intensity and affectivity. An explainable concern is the countries response to terrorism under the purview of recent outbreak of such consequences. It also leads to uncertainty for the inland workforce, tightening the free intra-mobility of such a mass in the available four possible directions (Up-down, back-forward). The debate is ongoing and will continue, but the time has now come to put forth an actual altitude of cost & benefit ratio associated with Legal and Illegal Immigration and act according to the outcome (The better option in comparison should be promoted). Current U.S. Immigration Policy There are three (3) possible options (ways or paths) available to any foreign individual to enter and stay (live and/or work) in the country of United States, according to which his/her status would get defined. -Legal Permanent Resident -Temporary work permit (visa) -Illegal or Unauthorised Immigrant or ALIEN Each type of immigration i.e. legal permanent, temporary legal, and illegal, is subject to its own set of admission policies and behavioural restrictions2. In 1965, Hart-Caller Immigration Bill has been made effective by the then U.S. Government, for the purpose of awarding Legal Residence. One of the prominent features of the bill was family reunification through quota based system, awarded on the citizenship status basis of relatives of the applicants who are also sponsoring the immigration, thus allowing the whole process of Visa Granting to tilt in the favour of such applicants. The entire exercise has been made more tedious for other because of the long time lags in between applying & receiving of permission to immigrate. Table I: Detailing Immigration -IMMIGRATIONLEGAL IMMIGRATION Migration of Documented Individuals for any known purpose defined by the US government as Legal, complying with the norms, rules and regulation to the policy framework stipulated. High cost, stay is limited for stipulated time period. Long delays, many times running Definition: ILLEGAL IMMIGRATION Migration of Undocumented Individuals for any known or unknown purpose unaccepted by the US, breaking norms, rules and regulation set by Administrators, partially or in their entirety. Very low or minimal cost of migrating and have no time limit. No Legal procedure and hassles but

Characteristics:

2 Article, The Economic Logic of Illegal Immigration, Gordon H. Hanson, Council of Foreign Relations, United States of America, 2007.

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into several years, in the acquisition of desired status. Very complicated Procedures. Need for authenticated information and documentation. Should be sponsored by an US Citizen or Legal resident. Biased nature of quotas allocated. A long wait of years for up-gradation of status. Conditions applied to some status are rigid restricting migrants in many cases like switching in between jobs. Temporary -Temporary work permit or visa is a first legal step towards an US citizenship status. -Individuals can apply for Green Card or Visa. -There exists a long lag or delay in applying for and granting of visa. -After five years of Legal Permanent residence an immigrant is eligible for applying to US citizenship. -Temporary work visa means stay & work permit for a stipulated period of time -3 types of temporary visa i. Temporary workers ii. Investors from a country having a free trade treaty with US iii. Intra-company Transferees Permanent -Visa for Legal Permanent Residence status or Green Card is based on Quota System established by Hart-Cellar Immigration Bill, 1965. -Family Re-unification is the core feature of the bill. -Guaranteed admission to the immediate family members of US Citizens (i.e. full exemption from entry quota) its a big risk. Can transit as requirement. No need of documents, sponsorer. Can live anywhere and work anywhere. No need to wait. Insecurity of Life, Stay. Tension of US Law.

Types:

Temporary -Temporary Illegal Immigrants are mostly seasonal in nature -it means they migrate according to or in response to the seasonal and business or market variations -generally one time transfer cost (in form of bribe paid to the illegal boarder transfer agents or border security officers -resides in the border adjacent areas, mostly with the family members or other relatives arrived before.

Permanent -Permanent Illegal Immigrants are lowskilled but highly experienced labour who have well understood the market demands and would easily cope up with changing market environment. -they are well aware of public administrative loopholes and have influential lobbies present at state or sometimes at federal level working for 3

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-Applicants are classified in different categories which have been awarded its own quota. -Categories are i. Other family members of US citizens or Legal Permanent Residents ii. highly qualified and skilled individuals iii. Refugees iv. Asylees v. few other -Applicants must be sponsored by any US citizen or Legal Permanent resident. -The Grant of permit is biased and skewed towards Family members or relatives of US citizens. Legal Status Right to Vote & Right to draw on all Governments Development & Benefits. them. -gradually by using illegal methods they produce necessary documents and apply for legal permanent residence -their family avails all basic public assistances in the form of health care, education, and primary protection from the administration.

Advantages:

Have to pay Taxes In the case of Employer based visas, inability to switch or rotate in between jobs

Disadvantages

Sudden increase in their income No need to pay taxes Flexible nature of employment Can move in or out anytime Can draw on basic government facilities Illegal/unauthorised/unaccepted/alie n Status Do not have any rights to draw on public facilities Insecurity of job and life Have to face public aggravation and anger and sometimes legal and social harassment

After 5 years of Legal Permanent resident status, an individual is eligible to ask for right to vote and right to avail government benefit programmes. But to get a Legal Permanent resident status one has to first apply for temporary immigration visas. Temporary immigration visas permit foreign citizens to work in the United States for a stipulated period of time. Below depicted are two major types and sub-types of Temporary Immigration Visas. H1-B Visa: 65 thousand visas are made available annually to the Highly Skilled workers working mostly in the advanced technology field. H1-B is a temporary type of visa eligible for 3 years. H2-A Visa: made available to the seasonal labourers in the field of agriculture and allied activities. It is eligible for a very short term of a year. H2-B Visa: made available to the seasonal manual labourers operating in construction, tourism and non-agricultural industries. It is also eligible for the same period of 1 year like H2-A visa. 4

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There are total 66 thousand H2-A and H2-B visas made available each year by U.S. Immigration authorities. H2 type of visa accounts for less than 10% of the total allocated visas. Other temporary work visas goes to the workers with extraordinary abilities, athletes, artists and workers in religious occupation. Major pie out of temporary work visas are allotted to peoples with very high degree of qualification or those who are in highly specialized occupations. The strict regime of these types of visa make it difficult for most temporary workers to respond to changing demands as they get tied with the employer (link in between H1-B is that it is an employer sponsored permanent immigration). Hence many employers opt for an H1-B visa, when they are unable to obtain an employer-sponsored green card for a foreign born worker they would like to hire. ILLEGAL IMMIGRATION AND THE U.S. ECONOMY: U.S. born workers with low education level are very limited in numbers because of average increase in the educated people. The advantage, the type of low educated labour with their average skill-set provides, is of immense importance to relatively low income jobs. These jobs include construction, food manufacturing, low-level agricultural tasks and unfilled factory work. On one side by the migration of Illegal labour, U.S. economy in terms of monetary advantage, gains very negligible as compared to the advantages migrants receives for themselves. But, on the other side, we have to consider the amount of loss U.S. economy as A Globally Leading and Competitive Market will incur, if these migrants doesnt come to the U.S. With very low education and required skill-set which they do or do not possess, these people are far from qualifying for the employment based permissions such as Green Cards or Temporary Work Visas, forget Legal Permanent Residence in first place. Hence there remains only one viable option for such kind of labour and i.e. to enter into the country of U.S., illegally. Again, too long queues for family based immigration and too strict admission criterias make the option of Illegal Immigration somewhat mandatory for the most of the undereducated and low skilled labour force from Mexico. Though ultimately these unauthorized immigrant population will be receiving a legal status in the near future, but, till that time, they are bound to remain unauthorized and unaccepted. What Illegal Immigration fulfils in terms of objective, is the smooth transfer of low-skilled labour from a low-productivity, low-income market to a high-productivity, higher-income market environment. Also, Legal Immigration is only the primary option available for high-skilled labour, too. Due to booming economic conditions, technological advancement and financial supremacy, U.S. economy has been enjoying a status of attractive destination and thus receiving an uninterrupted supply of skilled labour from all over the world as compared to the rest of the part. Employment based Green Cards & Temporary Work Visas make such immigration possible. Though the Skills-based Immigration (either permanent or temporary) infuses right kind of labour, what dilutes its value is the timing and the stringent nature of such type of occupation. Also, the long delays and lengthy procedural autocracies increase the volatility of such type of employment based admission. Family based immigration, which is the largest source of permanent admission, is designed without considering the actual conditions, ground realities of the U.S. market and is in fact biased towards favouritism. Thus, too many obstacles and technical loopholes in the framework of Legal Immigration, discussed above, reduces the overall attractiveness and economic value of such immigration. But Illegal 5

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Immigration in contrast, is most compatible with the U.S. & Third World Countries like Mexicos Business Cycle. Thus, the basic objectives i.e. supply of right kind of labour, at right time and with desired flexibility, is fulfilled mostly by Illegal Immigration followed by Temporary Legal immigration. Employment-based Permanent Immigration too serves the purpose up to some extent, but family based immigration is the weakest contender which should be relooked upon. BENEFITS AND COSTS OF IMMIGRATION: Are the gains that Illegal Immigration brings in terms of labour market flexibility offset by other economic costs?3 If some of the costs which seem to be urgently tackled, according to the some observers of the issue like, continuously reducing domestic income and transfer of a major pie of public administrational expenses towards illegal immigrants, are high enough then it would be more appropriate to make a strong case out of Abandonment of Illegal Immigrants. Though, optimum utilization of domestic capital and resources, which is the effect of immigration, increases immensely, what differentiates the economic effects, is the variety in types (Legal, Temporary & Illegal), Educational and Skill Level, income generating capacity, family size (no. of persons dependent on the working immigrant), rights offered to immigrants (like to opt for public services increasing public expenditure), and contribution from the immigrants in terms of taxes they pays and extra income they generates. It is but obvious that an immigrant with low educational level, low skill-set, low income earning ability and larger family size is a greater drain on U.S. Public Expenditure, making very negligible contribution to improve the economic condition of the country as a whole, but asking in return for and absorbing greater pie of public services like, health care, education, protection and public assistance. The analysis of immigrants tax payment minus his pre-tax earned revenue and value of public assistance they received is enough to provide an average estimate of Immigrations impact on U.S. economy. Let us first take an account of benefits other than tax paid by immigrants to the economy Immigration increases economic value of the country by generating extra income. They provide ease and flexibility to the changing market conditions and environment. Labour complementary resources utilization and productivity gets optimized because of increase in amount of labour. Thus more labour means greater utilization & optimum productivity of Capital, Natural & Land Resources. Well call this extra income as Immigration Surplus. Because of abundant supply of low-skilled labour there is a substantial reduction in wages for this low-skilled labour and what it means lower prices of labour intensive goods and services, which in turn raise the real incomes of U.S. households.

3 Article, The Economic Logic of Illegal Immigration, Gordon H. Hanson, Council of Foreign Relations, United States of America, 2007.

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Though these benefits are enough for anybody to think positively about Immigration, what dilutes these benefits are the unavoidable costs related with the issue which are as below Immigration not only steals that extra income earned by the Domestic low-skilled labour but sometimes take away the job itself, making Domestic Labour more insecure and vulnerable to the Global Market Competition. Immigration may aggravate inefficiencies allied with the countrys public finance system, by admitting a flow of low-skilled individuals generally accompanied by there respective families. Due to Immigration National Security concerns get excavate and flourish with double intensity.

In short, Economic Impacts of Immigration on United States Economy are due to i. ii. iii. iv. v. vi. Varying skill levels of Immigrants Income earning/generating ability of immigrants Family size of Immigrants Rights of Immigrants to use public services Tax revenue transfer from immigrants to U.S. economy Public expenditure transferred from U.S. government to Immigrants

The Net Fiscal Transfer is generated, if value of any of the component i.e. taxes paid to the government by an individual and benefits received by these individuals from the government, is greater than the other. And Net Immigration Surplus i.e. pre-tax income gained by an individual is created by immigrants while working in U.S. Market. Now, the Net or Total Impact of immigration on the economy, especially on the legal permanent residents of the country can be calculated as the summation of Net Fiscal Transfer from immigrants and the Net Immigration Surplus. But it is positive for employment based permanent and temporary immigration of highly skilled labour. Thus, they generate a Net Positive Surplus (by increasing productivity) and at the same time does Net Positive Contribution in the form of tax. But the impacts get negative, if immigrants contribute less in taxes, but receive more in terms of government benefits. These Negative Impacts act as a burden on the residents, as they will be sharing a pie of their income in form of taxes for the immigration. Paying for this fiscal transfer of share would require increase in the payment of taxes from the native residents, reduction in the benefits received by them from government and increase in the issue of debt on the side of governments. The only case where total impact of immigration would be positive is when Net Immigration Surplus exceeds the Net Fiscal Transfer made to immigrants. But in case of low-skilled immigration (either legal or illegal), this is not true. This whole exercise has an inaccurate and inappropriate outcome. To predict or to calculate or to straightforwardly conceptualise, the fiscal consequences of immigration are in reality very difficult, because of the unavailability of required details about the overall monetary (income and expenditure) behaviour of the entire immigrants population. Hence there are very few comprehensions and authentic studies analysing the fiscal impacts of immigration on the economy are available. From the no. of authentic and accurate analysis available what one could estimate is that, the net economic impact of immigration on the economic scenario of U.S. is balanced and up to some extent is modest. This is 7

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because of the fact that, the small positive impact generated by immigration of highly skilled individuals offset by the similar scaled negative impact created by low-skilled immigration (either legal or illegal). Also this estimation is based on a very high degree of pre & post-assumptions and represents a negligible fractional percentile of total U.S. GDP. Hence it would be more appropriate to take this impact as Null or Zero. Now under such circumstances the issue under immediate attention is of Whether the cost of abandoning/ restricting/ reducing illegal immigration to the zero level is diluting the modest or null impact created by immigration? Whatever may be the answer to this question, what we are focusing on here, are pure monetary benefits and not other issues like threat to National security and Integrity due to immigration, which are not direct economics. Thought he average impacts of both legal and illegal immigration are small, what aggravate the debates over the issues are relevant socio-economic costs and gains either actual or perceived under different consequences. Those benefiting from high levels of low-skilled or high-skilled immigration (mostly illegal) are the strongest defender and those getting affected in a negative way (low skilled & under/un-educated) seems to be the biggest opposition of the immigration, with this opposition being strongest in the areas with high density of immigrant population. In such areas local or native tax paying residents form a major portion of this opposing group who are at the direct receiving end of the negative effects generated due to immigration. Again, state level governments seem to be the looser (who provides benefits in the form of protection, health-care and educational facilities to illegal immigrants) and federal government is the beneficiary, since immigrants pay federal income in the form of taxes, but does not receives any benefits from federal government. Thus all the costs are incurred and expenses are borne primarily at the state or local level. Hence state government as well as political groups residing in such states irrespective of their affiliation are the strongest critics and opposition of lax federal enforcement system. REFORMING IMMIGRATION POLICY: The current framework within which Current U.S. policy for Illegal Immigration works and the suggestion by the congress to make many changes will restricts the inflow of Illegal migrants tremendously as of what would be thought. And these changes will provide an expansion for Legal Permanent and temporary immigration. But will these measures taken would be appropriate or will their impact be positive on the U.S. economy, is a question of debate. Though there is a common consensus amongst the members of Congress about expanded enforcement of security on the borders and the adjacent interiors, what it means is the substantial increase in the expenditure of resources, which is already more than fiscal benefits received due to reduction in illegal immigration. Thus effective enforcement of policy will require bigger pie of revenue to be allocated towards the issue. The different actions taken in this regard till date or proposed also consider increase in temporary work permit for more low-skilled labour, reducing the existing number on the paper, because anyhow these temporary or guest workers will be re-migrating to their native countries somewhere in the future. But it will be effective to what extent is in the wrap of time. The first major consideration to be taken by U.S. Government, before confronting any policy for Illegal or Unauthorized immigration, is the ease & flexibility these labour force brings in the market and economy increasing fluency of the overall market processing. It fulfils increasing demand of low skilled labour 8

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which is anyhow is in declining proportion in the U.S. country itself. The major task in front of U.S. policy designers is to cater to dynamic nature of market economy, by filling the gaps created due to declining rate of home based low-skilled labour and increasing market demand for such labour. Lack in advance planning, occupational stringencies and bureaucratic hurdles are the prominent setbacks diluting the value of temporary high skilled labour, which will benefit tremendously to the US economy otherwise. If immigration reform has the effect of replacing flexible and mobile illegal workers with inflexible and immobile guest workers, it would be likely to diminish the immigration surplus that foreign labour generates for the U.S. economy4. The most disruptive concern seeking immediate attention w. r. t. immigration reform is whether or not to offer an opportunity to illegal immigrants for legalizing their status. There is a pair of view-counterview, which cannot be neglected. It is, on the one hand providing such an opportunity will reduce the burden on the part of government, but on the other hand, it seems like providing incentives promoting such illegal acts in the future as well. But to reduce a population of 12 million illegal immigrants spread out over the entire American subcontinent is in itself is a cumbersome and time consuming task which need intensive hard work on the part of regulators. Though various methods like, sending an illegal immigrants back to his origin will reduce the number, but it will take out that chunk from the market on which base of many small scale industries has established for e.g. likely raise in costs of non-traded goods and services, increase in wages for low-skilled resident labour, decrease in revenues of employers hiring these labours, and increase in the incomes of taxpayers that pay for the public services utilized by such immigrants. But suppose if they are allowed to be, as they have been, the rights facilitated to them will decide the economic outcome. Most of the basic facilities, government services and public assistants which are offered to US citizens and to the legal residents are enjoyed by illegal Aliens too. And if they are going to apply for any of the legal status, till then they are the burden on the other legal form of residence. What this means is that there are no simple and immediate solution to the overwhelming problem of illegal immigration. More expenditure on border security and order enforcement and/or allowing a legal status to most of those who are living in America illegally since decades or more will ultimately be a discrimination with U.S. Citizens lowering their Gross Domestic Income and pressurising them for tax payment. Again converting these illegal immigrants into temporary workers will dilute their flexible nature of employment creating more problems for hiring entities. Though the actual economic or monitory impacts of providing a legal status to such individuals, will be seen in near future may be after a decade or so, but it will largely depend on in return what these individuals receives in return after such conversion. Suppose they are receiving like normal US citizens then it would be an inappropriate situation, but will be beneficial to the US economy if changes have been incorporated accordingly i.e. different rules and rights for such converted (illegal-to-legal) individuals from the US citizens, legal residents and other legal temporary workers.

4 Article, The Economic Logic of Illegal Immigration, Gordon H. Hanson, Council of Foreign Relations, United States of America, 2007.

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FINAL CONSIDERATIONS: Before taking into account any major considerations and changes to be made into the current policy framework for Immigration, some critical facts should be organised, prioritized and concurrent issues should be embarked upon, appropriately. Though reasoning of this issue is directing towards a predictable future that degree (level & intensity) of illegal immigration is going to increase tenfold, there is a very clear economic logic behind it which strengthens its case, make the overall deal more attractive and unalterable with the current form of reformative measures under contemplation. The logic is simple. Illegal immigration responds to the ever changing business horizon by pouring right kind of labour, at right time, at right place (by filling the gaps caused by increasing scarcity of low skilled labour in the domestic U.S. market) and with mobility & flexibility desired by the respective business community employing these labour. Again, the disputatious and litigious nature of illegal immigration dissuades the administrative authorities to tackle it. It is a ceaseless prodigy in bits because of its proven economic vindication, with its attractive proposals to businesses in comparison to the highly regulated and strictly governed counterpart i.e. Legal Immigration (both temporary and permanent). Now, what Authorative or Governing Bodies should understand that the modified or reformed policy framework which they have designed or planning to design for Immigration in general and Illegal Immigration in particular, may extravagate the economic impacts on some specific groups of beneficiaries, but overall the impact will be negligible. So, by adopting such unreasonable derivatives, they will expend too much and will gain too little in terms of aggregate effects, expected beforehand. So the outlays of funds on stake will subsequently deteriorate the U.S. economic health. Hence the current initiatives under observations are impotent to produce any valuable and economically viable outcome. They should therefore first understand the exact market requirements. Otherwise simply restraining illegal immigration, without providing any other accurate and appropriate choices, they will create a chaotic situation conflicting with economic forces, which else wise mobilises labour from a low productivity, low income countries to the higher productivity, greater income market of U.S. This in fact will motivate domestic businesses to hire unauthorised labour, which in turn will ultimately take away the job opportunities from local labour. One way to diminish demand for unauthorised labour is, to create a novel immigration programme which will provide the exact benefits offered by illegal immigration with an added incentive of protective labour laws, rules and regulation from U.S. Government. The main features of such a programme should be mobility and flexibility, so that businesses will employ the kind of labour they want, when they want and where they want. This flexibility should not be there only in the labour behaviour but could also be there in the no. of such guest workers admitted at different point of time. This would be possible by defining a scale or range in which fluctuating auction prices for visa allocation should be set. This will help U.S. economy, allowing a dynamic participatory mechanism of legal immigrants and will also help to ward off demand for Illegal Aliens.

Reference:Disclaimer: Article, The Economic Logic of Illegal Immigration, written by Gordon H. Hanson and summarized by Gaurav R. Wankhade, Research Associate, IBS Mumbai. 10