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The U.S. Labor Market in International Context

The Division of International Labor Comparisons at the U.S. Bureau of Labor Statistics has put out the 2011 edition of its chartbook, Charting International Labor Comparisons. There are sections with comparisons on GDP, manufacturing, and consumer prices. Here, I\’ll stick to a few charts of comparisons on labor force participation levels, employment rates, and unemployment rates that caught my eye.

In terms of employment growth, the light blue lines show job growth from 2000 to 2007. The dark blue lines show job growth–positive or negative–from 2007 to 2009. BLS writes: \”Between 2007 and 2009, the sharpest declines in employment were in Estonia and Spain, followed by Ireland and the United States.\” Notice that over the 2007 to 2009 period, many countries have had job growth that was positive, or only very slightly negative.

Here are three measures of unemployment, as explained by BLS. \”UR 1 is the most restrictive rate of labor
underutilization and consists only of the subset of the unemployed who were unemployed for at least 1 year. UR 3 is the official unemployment rate and the most widely recognized. The broadest rate, UR 6, includes
the unemployed, the marginally attached, and persons who are employed but who worked fewer hours than they would like (i.e., the time-related underemployed).\” Spain clearly has the most grievous unemployment problem. But while the U.S. economy is OK on it\’s long-term unemployment rate–at least as of the 2009 date for this data–it\’s official unemployment rate and its broader rate of labor market underutilization are among the worst of the rest.

In terms of labor force participation rates for men and women. BLS writes: \”The highest participation rates for men were in large emerging economies: Brazil, India, Mexico and China. China also had the highest participation rate for women and, thus, a relatively low gender gap.\” The U.S. shows up here are roughly comparable to a number of other high-income countries.

In labor force participation rate by age, the U.S. doesn\’t look especially good in the prime-age 25-54 age group, but performs relatively well in younger and older age groups. As BLS points out: In Argentina and the
Philippines, more than one-third of persons ages 65 and older were still in the labor force. In contrast, many European countries had rates below 5 percent for this age group. Participation rates among youth varied most across countries. The Netherlands and Australia had the highest participation rates (above 70 percent) while
Hungary, the Republic of Korea, and Greece had the lowest rates (under 30 percent).\”

When it comes to labor force participation as a share of the working age population, BLS writes: \”Italy was the only country with less than half of its working-age population engaged in the labor force.\” Given the financial difficulties in Greece, it\’s interesting to see its very low rate of labor force participation among working age adults. 

 

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Long-Term Care in International Perspective

As societies age, the cost of long-term care is going to rise. A May 2011 OECD report– Help Wanted: Providing and Paying for Long-Term Care–lays out many of the issues.

Long-term care is a broader category that what we usually think of as health care. The OECD report defines the term this way: \”Long-term care is the care for people needing support in many facets of living over a prolonged period of time. Typically, this refers to help with so-called activities of daily living (ADL), such as bathing, dressing, and getting in and out of bed, which are often performed by family, friends and lower-skilled caregivers or nurses.\”

While the United States spend much more per capita on health care than other high-income countries, the share of Americans receiving long-term care is quite low compared to many other countries. OECD projections also suggest that U.S. spending on long-term care as a share of GDP will stay below the OECD average in coming decades. 

Because the number of Americans receiving long-term care is so low, U.S. spending on long-term care–whether per capita or as a share of GDP–is well below that of other OECD countries. For example, U.S. spending per capita on long-term care was $455 in 2008, while the OECD average was $543 per capita, and per capita spending on long-term care is upwards of $1200 in Norway, Sweden, and Netherlands. Over time, according to the OECD: \”In 2008, public LTC expenditure accounted for 1.2% of GDP, while private LTC expenditure for another 0.3%, on average across the OECD. Public LTC expenditure is expected to at least double and possibly triple by 2050.\”

As I look over the OECD projections, however, what strikes me is that the countries that already have the much higher levels of spending on long-term care also have large shares of the population already receiving such care, and receiving it in an institutional setting. For example, while 0.5% of Americans are receiving long-term care, about 4% or more of the population is already using long-term care in Netherlands, Norway, Switzerland Sweden and Austria. In addition, about three-quarters of the long-term care users in several of those countries are receiving their long-term care in institutions, which are far more expensive than long-term care provided at home.

Moreover, in a number of countries, including Norway, Netherlands and Sweden, almost all of the spending on long-term care is from public programs, not private insurance or out of pocket.

These patterns suggest to me that societies make a choice about long-term care. It\’s often not a choice that\’s made all at once, or made by a single piece of legislation, but rather a choice that arises out of a series of other decisions. It\’s a choice about how large a share of the extreme elderly are going to live in institutions paid for by a publicly financed program, and how large a share of the elderly are going to get support for continuing to live at home, while relying on their own personal and financial resources or on private insurance. Leaning toward the second option is clearly preferable. But there an inevitable need for public support for long-term care for some of the elderly–provided in the U.S. by Medicaid. Once that public back-up system exists, getting people to rely on their own resources becomes harder. Every country, including the U.S., needs to think urgently about how to strike this balance. At least in the case of long-term care, the U.S. has a health care situation where it is not starting off with problems of costs that are already extraordinarily sky-high.

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The Rise in Commodity Prices: Speculation or Fundamentals?

Commodities include items like rubber, corn, copper, cotton, and oil. Their prices have been rising sharply in the last couple of years. Brett W. Fawley and Luciana Juvenal of the St. Louis Fed investigate \”Commodity Price Gains: Speculation vs. Fundamentals.\” They argue that fundamentals are more important, while leaving open the possibility that speculation might have made some contribution.

Start by looking at the increases that have occurred. Notice that the vertical axis of the graph is an index number with January 2005 set equal to 100, and the vertical scale runs up to 600. 

It\’s easy to come up with supply and demand reasons to explain the increase. Reasons on the supply side seem especially relevant to agricultural commodities: \”In a report on the pre-recession spike in food prices, the Food and Agriculture Organization of the United Nations (FAO) identified numerous reasons why stock levels have been falling by an average rate of 3.4 percent per year since the mid-1990s. …  [T]he price impact of low stocks becomes magnified when stocks reach critically low levels. For all of these reasons, low stocks in food and other crops mean that the weather disruptions faced in 2010 were all that much more significant. For example, the 47 percent increase in wheat prices in 2010 was largely attributable to drought in Russia and China and to floods in Canada and Australia. High cotton prices can be traced, in part, to floods in China (the largest producer) and Pakistan (the fourth-largest producer). In many cases, the high prices in one market have spilled into other markets because of the competition between crops for the same land and growing resources.\”

Reasons on the demand side–especially increased demand from emerging economies like China and India–seem especially relevant for nonagricultural commodities like metals and energy. Here\’s a figure showing rising demand for copper and aluminum in China and India.

If speculation was driving up the price of commodities, how would it work? Presumably the mechanism would be that agents in the market are expecting prices to rise, and so they would build up stocks of the commodities to sell in the future. But as they build up these stocks, the quantity supplied in the market is decreased, and so prices could spike. Low interest rates could contribute to such build-ups in stocks, because they decrease the opportunity cost of holding such inventories. But a difficulty with this explanation is that: \”Broad declines in aggregate commodityinventories, however, cast doubt on thecurrent importance of this effect.\”

It does seem clear that additional capital has been heading into commodity markets. \”According to
Barclay’s, index fund investment in commodities increased from $90 billion in early 2006 to just under $200 billion by the end of 2007. … [H]owever, the true impact of speculative inflows on underlying commodity prices remains debatable. … Factual inconsistencies are numerous. For example, inventories should have risen between 2006 and 2008 according to the bubble theory, but they actually fell. Other reasons for discounting this theory include: • arbitraging index-fund buying is fairly easy due to its predictable nature, • commodity prices rose in markets with and without index funds, • speculation was not excessive after accounting for hedging demand, and • price impacts across markets were not consistent for the same level of index fund activity.\”

The underlying issue here is that price bubbles are easier to envision in markets like real estate than in commodities or in futures markets. \”Commodity markets, however, do not meet the usual theoretical criteria for a bubble. … [T]heory holds that bubbles are limited to markets such as real estate, where the good in question has a long lifespan, is hard to sell before you own, and buying and selling is
costly in terms of time and money.\”

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Boone and Johnson on the euro situation

Peter Boone and Simon Johnson have written an insightful and well-informed essay, \”Europe on the Brink.\” The whole thing is well worth reading, but here are a couple of points that especially struck me.

What are the immediate financing needs for European countries? \”The ability to refinance or roll over debt is a much clearer concept, and it is this need for liquidity that breaks nations and pushes them into default. Figure 2 shows rough estimates of the financing needs for some euro area countries over the next year to cover debt falling due plus the budget deficit. There is wide variance in amounts due, ranging from 7 percent of GDP for Austria to one–third of GDP for Greece. Because all these nations are running budget deficits, none of them can source this financing from their revenues.\”

The European Central Bank is already providing financing to sustain various European nations through its payments mechanism. \”The ECB operates a payment system that nets out transactions across borders. When, for example, there is more money flowing out of Irish banks into German banks, the Irish central bank incurs a liability to the Bundesbank. The Bundesbank claims on Ireland could be repaid by the Central Bank of Ireland, for example by selling holdings of gold or other valuable assets, but this is not done. Instead, the balances continuously build up and they become
financing to the Irish banking system. Figure 3 shows the current status of this financing at the end of 2010. It illustrates that the Bundesbank is the largest creditor to the system, being owed €340 billion, while the central banks of GIIPS are the largest debtors. The total credit to GIIPS is €336 billion, which is more than the combined value of all the bailout packages to Greece plus the European Financial Stability Facility, the rescue fund backed by euro area nations. The credits are provided with no approval required from national parliaments or budgets, and there is an implicit assumption that all will be fully repaid. These correspondent account balances are critical to the functioning of the euro system. If some central banks decided they would no longer accept claims from another central
bank—let us say, hypothetically, the Bank of Ireland—this would effectively end the euro area. If euros held in Irish banks become less useful than euros held in German banks, the price
of the two will diverge.\”

Emerging nations get into international financial crises because they need to borrow in a currency that is not their own. As a result, when it comes time to repay and a crisis is near, they cannot print additional money, and their central bank cannot act as a lender of last resort in the currency in which they have borrowed. In a real way, nations of Europe that have borrowed in euros find themselves in this same position: that is, they have borrowed in a currency, euros, which they themselves do not control, and where the central bank controlling that currency is unwilling to act as their lender of last resort. Boone and Johnson write:

\”The problem the euro area faces is that creditors lent money to banks and the sovereign under the assumption that they would all be supported fully during periods of trouble. Led by Germany, the euro area is now switching from a “moral hazard” regime to new arrangements under which all nations must fend for themselves. The stated reason is that these nations will otherwise spend too much and become insolvent. … It becomes increasingly likely that no lender of last resort exists in the euro area, making it more like a typical emerging market than a developed nation. Emerging markets succumb to defaults because they borrow in currencies which they cannot print. The defaults occur when the nation runs out of foreign currency with which to make payments on its debt. Such nations typically have low debt levels relative to income and modest short–term debt, compared with the 85 percent debt/gross domestic product average in the euro area. If the Germans get their way, we should compare euro area deficits and debt levels to emerging markets, not to other developed nations with their own printing presses and domestic debt.\”

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The Dispute over "Core Inflation"

Is there a danger of inflation taking off? When the price of gasoline and food shoot through the roof, it seems like it. But central bank officials calmly comment that it makes more sense to focus on \”core inflation,\” which strips out energy and food prices, on the grounds that these prices fluctuate a relatively large amount, and thus give a distorted view of the inflation that is actually occurring. Of course, this leads a lot of distraught citizens to respond that they have to pay for energy and food, whether the central bank thinks that those prices are relevant or not.

Zheng Liu and Justin Weidner of the San Francisco Fed  argue that \”headline inflation,\” which is the announced rate of inflation including energy and food, does tend to converge to \”core inflation,\” which strips out those factors, which implies that a central bank focus on core inflation makes sense. On the other side, James Bullard of the St Louis Fed argues in \”Measuring Inflation: The Core is Rotten,\” that the Fed should focus on headline inflation.


As a starting point, here\’s a figure from Liu and Weidner showing headline and core inflation over time.



The figure suggests several interesting patterns and lessons. 


1) Over time, headline inflation is a lot more volatile than core inflation. This is often used to upports the Fed case that focusing on core inflation makes sense, because focusing on headline inflation raises a risk of  overreactions and excessive volatility in monetary policy. However, as Bullard points out, reacting to a less volatile measure of core inflation poses risks of overreacting, too. Bullard writes: 
\”On the topic of the volatility of headline inflation, the headline index can be smoothed in any number of other ways that stop short of ignoring a wide class of important prices in the economy. One simple way is to consider headline inflation measured from one year earlier, but there are many others. To the extent that the volatility of headline inflation is a problem, there are better methods of addressing that than to simply dismiss troublesome prices.\”


2) There is dispute over whether core inflation is a better predictor of future inflation than headline inflation. As Liu and Justin Weidner write: \”In the 1960s through the 1980s, deviations of headline inflation from core seem to have been resolved by core inflation catching up with headline. For example, the two episodes of high headline inflation in the 1970s were followed by significant run-ups of core inflation. However, since the early 1990s, core inflation has remained stable despite fluctuations in headline. This observation is confirmed by empirical studies and formal statistical analysis showing that the behavior of inflation has substantially changed since the late 1980s and early 1990s …\” On the other side, Bullard sets a skeptical standard for such evidence: \”Suppose we have a full model of the inflation process, one that includes expected inflation, measures of real activity, and measures of the stance of monetary policy. We then add core inflation as a variable to this model and assess the marginal predictive value of core inflation given all other variables. If the marginal value of adding core inflation in this context is positive, one might then have a claim that core inflation contains some “special” information over and above information coming from the rest of the economy concerning the future course of inflation. I have not seen convincing evidence of this type.\”


3) Are movements in energy and food prices just adding volatility to measured of inflation, before they return to near long-run levels, or are they in the middle of ongoing trends? Bullard warns that we have common examples of long-term trends in certain price levels, and so this possibility shouldn\’t be disregarded. \”One might also reasonably question the “temporary” characterization of the shift in energy and other global commodity prices. It is certainly true that we should not expect energy prices to increase faster than the general price level without limit. But it is also true that there are wellknown
examples of long-term secular trends in certain prices. One example is medical care prices, which for decades have generally increased faster than the headline CPI index. Another example is computing technology, where prices have more or less continuously declined per unit of computing power, even as other prices have continued to rise. So it is possible—and indeed it does happen—that whole sectors of the economy experience relative price change.\”


My own sense is that its almost always possible to construct a situation in which an overly mechanical rules for central bank behavior won\’t work well. The central bank should certainly look at what factors are affecting headline inflation, and adjust its reactions in light of which factors seem to be operating. Such adjustments will sometimes have the affect of looking at \”core inflation.\” But announcing publicly that core inflation is your goal and defending that goal in front of incredulous citizens and reporters seems overly rigid and a certain PR disaster.

Fear of inflation really should the least of our economic troubles during this Long Slump of a quasi-recovery. Indeed, a bit more core inflation would cut real wages, which might help a bit in increasing hiring. It  would reduce the federal debt burden as a share of GDP (because past debts could be repaid in inflated dollars). It would made a deflationary scenario much less likely, which allow the Federal Reserve to stop running near-zero interest rates and start getting the financial sector back on a more normal footing. A few weeks back I asked one of my macroeconomist friends whether we should be worried about a resurgence of inflation. He replied: \”We should be so lucky.\” 

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Tax Expenditures: One Way Out of the Budget Morass?

When seeking to reduce budget deficits, the usual choices are lower spending or higher taxes. But there is a third option, a category-scrambler called \”tax expenditures.\” Basically, this category includes all the ways in which government tax revenues are reduced by deductions, credits, deferrals, exclusions, exemptions, and special preferential tax rates.

Tax expenditures scramble how one thinks about spending and taxes because if they were repealed, they would presumably lead to higher taxes, which seems like a tax increase, but they also would mean that the government is ending a decision to direct resources and intervene in a particular direction, which sounds like a spending cut. Earlier this year, there was a political dogfight over ending the tax breaks for ethanol production: some viewed this as a cut in government \”spending\” for ethanol; others viewed it as a covert tax increase. Because tax expenditures scramble categories, they may offer a politically savvy way to address some of our budget woes. Reducing tax expenditures might offer some revenue to reduce budget deficits, finance lower marginal tax rates, and raise funds for some more important government spending priorities. 

Donald Marron has written a nice overview of these issues in the Summer 2011 issue of National Affairs in \”Spending in Disguise.\” Richard Epstein also takes up this topic in an article in Defining Ideas called \”The Tax Expenditures Muddle.\”

The dollar numbers here are enormous. Each year, the Analytical Perspectives volume of the federal budget presents tables showing the dollar cost of tax expenditures. Here\’s the list from the 2012 budget volume, cropped to include only those provisions which cost the Treasury more than $4 billion in the 2012 fiscal year

There are two obvious problems with using tax expenditures as a policy tool. The first is that the many of the biggest tax breaks are wildly popular. Just look at some of the big ticket items on the list: Exclusion of employer contributions for medical insurance premiums and medical care; Deductibility of mortgage interest on owner-occupied homes; Step-up basis of capital gains at death; Deductibility of charitable contributions, other than education and health; Exclusion of interest on public purpose State and local bonds; Capital gains exclusion on home sales; Deductibility of State and local property tax on owner-occupied homes; Exclusion of interest on life insurance savings; Social Security benefits for retired workers; and so on.

The second issues is that many of these tax expenditures have at least some economic justification. For example, money given to charity can be viewed as not devoted to one\’s own consumption, and thus appropriately outside the scope of taxation. Epstein offers an interesting potential justification for the interest deduction on home mortgages: \”One clear case of a tax expenditure is the interest deduction on a home mortgage. There is no question that interest payments count as expenditures, and thus a reduction to gross revenues. But that expenditure is offset, not quite perfectly, by the consumption value of the home purchased with a home mortgage. A precise economic test would first allow the interest deduction but bring the imputed income attributable from home use into the system, even though it is not a receipt of any kind. But since calculating that imputed income is too costly, the law should follow the simpler rule that treats the consumption enjoyed as a perfect income offset to the interest deduction. In fact in most cases, the consumption value of the home is probably greater than the interest payments on the loan, especially toward the end of the life of the mortgage. Nonetheless, that excess imputed income goes untaxed, because of the insoluble difficulties of its direct measure.\”

Moreover, many tax expenditures are a kind of gamesmanship that can easily go astray. Marron offers a nice hypothetical example: \”Princeton economist David Bradford once offered a simple thought experiment to illustrate how far such games could go. Suppose that policymakers wanted to slash defense procurement and reduce taxes, but did not want to undermine America’s national security. They could square that circle by offering defense firms a refundable “weapons-supply tax credit” for producing desired weapons systems. The military would still get the weapons deemed essential to national security, defense contractors would get a tax cut, and politicians would get to boast about cutting both taxes and spending. But nothing would have changed meaningfully.\”

Despite the political and practical issues, tax expenditures need a close look. They add up to something like $1 trillion each year, which is just too large a total to ignore. Certainly one can make an argument that tax expenditures have contributed to the rapid rise in health care costs over time, because health insurance is for so many people a form of untaxed compensation. One can also argue that tax expenditures have contributed to the roller coaster of housing prices that helped bring on the Great Recession. One can also point out that if the goal is to help people afford health insurance or housing, there are surely more effective and equitable methods than these tax breaks. Granted,  lot of tax expenditures aren\’t attractive political targets, but it\’s not clear to me that they are tougher than Medicare, or defense spending, or tax increases, or any of the other ways of addressing the U.S. budget deficits.

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Four More Ways of Illustrating the Financial Crisis

I\’m always on the lookout for figures that offer vivid illustrations of what happened during the financial crisis. In fact, my first blog post in May was called \”Two Ways of Illustrating the Financial Crisis.\” Here are four additional figures I\’ve run across.

The first shows problems with bank lending. The figure was put together by the Stanford Institute of Economic Policy Research (SIEPR) as part of a \”chartbook\” for its annual economic summit. The note under the figure explains: \”Non-current Loan Rate refers to the percentage of loans and leases 90 days or more past due and loans in nonaccrual status. Net Charge-off Rate refers to the annualized
percentage of loans and leases charged off (removed from the balance sheet because of uncollectibility), less amounts recovered on loans and leases previously charged off.\” Notice how the rise in these negative statistics far outstripped the credit crunch of the early 1990s. Notice also that both of these problems continued past the official end-date of the recession, but appear to have turned a corner in 2010.

The second figure shows the net capital inflow of foreign assets invested in the U.S. economy, constructed using the always-helpful FRED tool–that is, Federal Reserve Economic Data–from the Federal Reserve Bank of St. Louis.  on data from the always  Notice that in the mid-2000s, inflows of foreign assets were very large and rising, topping out above $700 billion. Then during the recession, this inflow plunged all the way into negative territory, although the inflows are now back in the range of $500 billion. When I think about why the Federal Reserve felt compelled to buy Treasury debt during the recession, I think of this sudden disappearance of inflows of foreign capital.

The third figure shows the hump in housing prices, as the housing bubble inflated and then deflated. Again, this is taken from the SIEPR chartbook.

The final figure is a more standard illustration of interest rate spreads: in this case, the so-called \”TED spread.\” The note under the figure explains: \”The TED Spread is defined as the difference between the 3 month London Interbank Offered Rate (LIBOR) and 3 month U.S. Treasury Bill yield. It is an indicator of perceived credit risk in the general economy because Treasury Bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks.\” This measure strongly suggests that the financial crisis itself took off in August 2007 and ended by June 2009. Again, the figure is lifted from the SIEPR chartbook.

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I Love Buses

Rail is great for freight, and for sightseeing, and for passengers in the Northeast Corridor and a few densely packed downtowns. But for most other purposes, I love the flexibility and cost-effectiveness of buses.

Randal O\’Toole describes a quiet transportation revolution in \”Intercity Buses: The Forgotten Mode.\” He writes about companies like Megabus, BoltBus, and Vamoose, and how they are transforming the intercity transportation market. From the Executive Summary:

\”Entrepreneurial immigrants from China and recently privatized British transportation companies have developed a new model for intercity bus operations that provides travelers with faster service at dramatically reduced fares. New-model bus companies save money by selling tickets over the Internet and loading and unloading passengers at curbsides rather than in expensive bus stations. They speed service by running most buses non-stop between major cities rather than making numerous intermediate stops. Some companies distinguish themselves from their competition by providing
leather seats, free wireless Internet, more legroom, and—in a few cases—onboard meal
service and movies.\”

\”In 2006, scheduled intercity bus service reached its lowest level in decades, yet intercity buses still carried almost three times as many passenger miles as Amtrak. Since then, intercity buses have become the nation’s fastest-growing transportation mode, with ridership growing almost twice as fast as Amtrak. Intercity buses carry at least 50 percent more passenger miles than Amtrak in Amtrak’s
showcase Northeast Corridor. They do so with almost no subsidies and at fares that are about a third of Amtrak’s regular train fares and little more than 10 percent of Amtrak’s high-speed Acela fares. Intercity buses are safe and environmentally friendly, suffering almost 80 percent fewer fatalities per billion passenger miles than Amtrak and using 60 percent less energy per passenger mile than Amtrak.\”

\”Policymakers can encourage expansion of intercity bus services by ending subsidies to Amtrak and minimizing regulatory barriers to new bus start-ups.\”

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U.S. Labor Market Sclerosis?

Whatever happened to the vaunted flexibility of the U.S. labor market, able to rebound from recessions back toward full employment? I\’m not sure how to tell a story that blends public policy choices with changes in hiring and layoff practices, but here are some intriguing fact patterns that would need to be part of the story. 

The percentage share of those who are unemployed and find a job by the next quarter has been trending down for about four decades. Interestingly, the percentage share of those who have a job and are separated from it has also been trending down for about three decades. Here\’s a figure from Pedro Amaral of the Cleveland Fed: 

The U.S. employment-to-population ratio for some decades substantially exceeded that of the nations of western Europe. But in the last couple of decades, the rates have converged. Here\’s a figure from Christian Grisse, Thomas Klitgaard, and Aysegul Sahin of the New York Fed:

In the recent recession, many other economies responded by reducing hours-per-worker, and thus keeping employment rates relatively high. The U.S. economy kept hour-per-worker high, but saw a sharp drop in employment. Here\’s a figure from the annual IMF report on the U.S. economy:

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Thoughts on Immigration

Each summer for the last 20 years or so, I\’ve spent a few days at the Stanford Summer Economics Institute for High School Teachers, giving some of the lectures and talking pedagogy with the participants. This year, one of my talks was on \”The Economics of Immigration.\” Here are some of my favorite Powerpoint slides from the presentation (as always in a jpeg format so they are easy to copy for your own presentation, if you wish), along with a few thoughts.

Immigration–legal and illegal combined–is often measured by looking at the share of the U.S. population that is foreign-born, which is available through Census data. America\’s previous huge wave of immigration took the foreign-born share of the population up to around 14% for the later decades of the 19th century and the early 20th century. As the figure shows, the wave of immigration in recent decades hasn\’t topped that level yet, but is near 12% of population. It\’s worth remembering that America has long fluctuated between two views of immigration: one view represented by \”give me your tired, your poor\” written beside the Statue of Liberty, and the other represented by fierce restrictions on immigration, like effective ban on immigration from China starting in the 1880s, or the strict and limited quotas on immigration imposed in the 1920s. Both welcoming and opposing immigration are as American as apple pie.

The current wave of immigration is somewhat split by skill level. Immigrants from Mexico and central America typically have an education level considerably below the American average. However, immigrants from other regions of the world have an education level above the American average. The tables, based on data from a Congressional Budget Office Report in July 2010, also show that this difference is manifested in the sorts of jobs that migrants take. The relatively low-skilled immigrants from Mexico and Central America are more likely to end up in jobs like construction, building and grounds maintenance, and food preparation and service. The relatively high-skilled immigrants from the rest of the world are more likely to end up in jobs like health care practitioners, mathematics, or computer science.

The gains to immigrants coming to the U.S. from a low-income country are very large.Take someone with a given level of skill and work effort, move them from a low-income country to the United States, and their earnings are going to be much higher. Here are some illustrative numbers for building laborers and female factory workers from a 2009 report by UBS. 

The question of how much immigration affects wages of U.S. workers is highly controversial. The answer often seems to depend on whether one analyzes data from a cross-section of cities, which tends to find that more immigration helps wages of native-born workers of all skills, or if one analyzes a time series of immigration patterns over time, which often finds that immigration hurts the wages of low-skilled native-born workers. Another factor underlying these different answers are analysis of whether low-skill immigrant labor is a complement or a substitute for low-skill native-born labor. The figure contrasts findings from two studies with different approaches. It is intriguing that even the studies which find a negative effect of immigrants on the wages of some skill levels of native-born labor find an effect that is quite small–no more than a few percentage points.

Spending on border patrol enforcement has risen substantially in the last decade or so. In the aftermath of 9/11,  greater policing of the border was politically inevitable. But in the last few years, improvements in the work prospects in Mexico combined with the slowness of the U.S. economy has meant that flows of illegal immigrants have dramatically slowed, or even stopped. Thus, the U.S. is spending more money on the border patrol at a time when the need for doing so has diminished. As the figure shows, the result is that the cost per border apprehension has been rising sharply.

Moreover, it turns out that about half of those in the country without authorization arrived with a legal visa in hand, but then overstayed their visa. In a world of limited resources, there is a case to be made for stopping any increased spending on border enforcement and instead increasing the very limited spending on those who overstay their visas. There is also a case to be made for at long last ramping up the federal E-Verify program so that employers can more easily check whether potential hires are authorized to work in the U.S.

Finally, U.S. immigration policy is distinguished from most other countries both by the large numbers it admits, and also by its emphasis on handing out immigration slots based on family ties, rather than for work-related reasons. Here\’s a table from the Federal Reserve Bank of Dallas, based on OECD data, showing the difference. A group of experts convened in 2009 by the Brookings Institutions and the Kenen Institute for Ethics at Duke University estimated that if family preferences in immigration law were limited to spouses and children, and not extended to aunts, uncles, cousins, and the like, this change could free up 160,000 slots to be filled by skill-related immigrants. This change would roughly double the level of skill-related U.S. immigration.

Note: In an earlier version of this post, there was a typo in the second paragraph, where I referred to \”12% of GDP\” instead of \”12% of population.\” This version incorporates the correction. Thanks to sharp-eyed reader T.D. for calling this to my attention.