conversableeconomist

Parental Leave in Other Countries

Note:  On February 22, 2012, two  comments from readers added at the end of the post.
 ____________

The United States has far fewer laws that offer protections to parents with family responsibilities than do most other countries. Alison Earle, Zitha Mokomane, and Jody Heymann discuss \”International Perspectives on Work-Family Policies: Lessons from the World’s Most Competitive Economies,\” in the Fall 2011 issue of the Future of Children. Indeed, the issue is devoted to issues of \”Work and Family.\” From the \”Summary\” of the Earle, Mokomane, and Heymann article:

\”The United States does not guarantee families a wide range of supportive workplace policies such as paid maternity and paternity leave or paid leave to care for sick children. … Using indicators of competitiveness gathered by the World Economic Forum, the authors identify fifteen countries, including the United States, that have been among the top twenty countries in competitiveness rankings for at least eight of ten years. … They find that every one of these countries, except the United States, guarantees some form of paid leave for new mothers as well as annual leave. And all but Switzerland and the United States guarantee paid leave for new fathers. … The majority of these countries provide paid leave for new mothers, paid leave for new fathers, paid leave to care for children’s health care needs, breast-feeding breaks, paid vacation leave, and a weekly day of rest. Of these, the United States guarantees only breast-feeding breaks (part of the recently passed health care legislation).\”

Here are some illustrative tables showing policies in these countries. The U.S. does not have paid parental leaves. All of the 14 comparison countries in the table offer such paid leaves for mothers, lasting at least 18 weeks and in some cases more than a year, and replacing at least 25% of salary and up to 100% of salary. Thirteen of the 14 comparison countries offer paid parental leave, ranging at the low end from a few days or a couple of weeks up to more than a year, and replacing from 25% of pay up to 100%.

The next figure looks at  leave policies for attending to children\’s health care. U.S. law does have provisions for breast-feeding breaks, as do 7 of the 14 comparison countries. All of the countries, including the U.S., have provisions for leave to care for children\’s health needs–but unlike in the U.S., that leave is paid in 11 of the 14 comparison countries.

The final table looks at policies on paid annual leave, a weekly day of rest, or night work. These are not policies specifically aimed at parents, but at all workers. The United States has no law guaranteeing paid annual leave, while all 14 of the comparison countries do–often requiring four or five weeks of such leave. Thirteen of the 14 comparison countries also have legal guarantees of at least one day of rest each week.

Earle, Mokomane, and Heymann discuss evidence that paternal leave policies of various sorts are associated with improved infant health and lower infant mortality–in part by enabling more breastfeeding, in part by enabling parents to be more involved in preventive and other health care for their children.  They argue that parental leaves help to foster \”children’s social, psychological, behavioral, emotional, and cognitive functioning.\”

I\’m enough of an American at heart that some of these international comparisons open my eyes pretty widely. In Germany, you can have more than two years of paid leave for both mothers and fathers? In Austria, Denmark, Sweden, and the United Kingdom, there is a national legal guarantee of five weeks of paid vacation? I\’m enough of an economist to wonder about the incentives that such provisions give employers to avoid hiring women of child-bearing age, or to slot young people into into certain jobs where they can be replaced without too much fuss if they disappear for a couple of years. With workers who make middle-income salaries or higher, guarantees of paid vacation can be considered part of their overall compensation, but for low-paid, low-skill workers, such rules may discourage hiring them at all. I\’d want to know more about how such policies are designed and enforced before enacting them in the United States.

But it is just  a fact that the U.S. labor market is at the far end of the international spectrum of high-income countries in not offering these kinds of policies. Even with my born-in-America, economist-trained skepticism, I find myself thinking that experimenting with such policies at the firm level, the state level, and even the national level is worth a closer look. After all, the days when American society could count on nearly all mothers to exit the (paid) workforce and spend their time in childcare and homemaking are long behind us.

___________________

David Paul writes:

\”I happen to be a student from Germany and just had this topic in school, so I wanted to clarify the laws a bit. You wrote: \”I\’m enough of an American at heart that some of these international comparisons open my eyes pretty widely. In Germany, you can have more than two years of paid leave for both mothers and fathers?\”

\”It\’s actually not quite that extreme. 14 weeks vacation for the mother at 100% pay are standard (6 before birth and 8 after – the 8 after are mandatory – paid by the statutory health insurance). After that, either the mother or the father can stay at home for a year at ~66% previous pay (this is paid by the government). They can switch in that time, for instance mother half the time and father half the time – in that case it goes up to 14 months. Or alternatively one parent can stay at home for 2 years, but then at only ~33% of previous wages. This doesn\’t change the basic point on the difference between the US laws and those of the other countries of course.\”  David adds: \”The laws can be found in the MuSchG and the BEEG.\”

Michael Cain writes:

\”As I am inclined to say, the US, particularly over the last 30 years, has made policy on the basis of making the country be a good place to be a capitalist, while most of the other developed economies have made policy on the basis of making their countries be a good place to be a worker.  Personally, I tend to believe that the latter works out better for social outcomes, although it\’s possible to go overboard, of course.  Business owners, once forced into the corner where they must have and keep employees, and must pay a living wage, and must contribute as necessary to provide benefits such as universal health care access, are *very* good at finding ways to increase the efficiency of the employees so that the owners still make money: they demand better education, they invest in better equipment, they listen to their workers (eg, Japanese auto companies make their engineers design for easy construction as well as other attributes).  The US has let business owners take the easy way out: drop health insurance, relocate the factory to a different region or foreign country, and so forth.\”

conversableeconomist

Six Adults and One Child: The Coming Baby Bust

Wendell Cox and Emma Chen tell the story of \”Six Adults and One Child\” in their chapter in
\”The New World Order,\” edited and largely written by Joel Kotkin for the Legatum Institute. Much of the report is about thinking of the world as dominated by three spheres: the Indian sphere of influence,
the Sinosphere and the Anglosphere. But Cox and Chen are focused on the demographics of the coming baby bust. Here\’s their story from China (footnotes omitted):

\”On a Saturday afternoon at The Bund, Xiao Ming (or “Little Ming”) clings tightly onto the hands of his paternal grandparents. His maternal grandparents walk slightly ahead, clearing a path for him in the midst of all the buzz and traffic. Retracing the imprints of their imaginary footsteps, Xiao Ming takes his first tentative steps as a three year old in town for the first time. Slightly behind him, the watchful eyes and
ready hands of his own parents spur him on. 

Xiao Ming’s personal parade epitomises the popular quip in Shanghai and across China, that “it takes six adults to raise one child”. These six individuals form the unspoken support structure of China’s youth: While the OECD points out that 80% of students in Shanghai attend after-school tutoring, it fails to capture the “soft factors” behind Shanghai’s top rankings in the Program for International Student Assessment (PISA). Popular Chinese dramas such as 房奴 (House Slave) depict this in meticulous detail: Grandparents spend hours brewing “brain tonics” for their grandchildren, and parents pack austere work lunchboxes to save up for their child’s tuition fees. …

Here’s the big issue down the historical road: Thirty years from now, how will Xiao Ming handle six elderly parents and grandparents, all by himself? Xiao Ming’s impending dilemma is not unique to China. Overall what author Phil Longman calls a “gray tsunami” will be sweeping the planet, with more than half of all of population growth coming from people over 60 while only six percent will be from people under 30. The battle of the future – including in the developing world – will be, in large part, how to maintain large enough workforces required for the economic growth needed to, among other things, take care of and feed the elderly. …

Already the global fertility rate, including the developing countries, has dropped in half to an estimated 2.5 today. Close to half the world’s population lives, notes demographer Nicholas Eberstadt, in countries with below replacement rate birth-rates. The world, he suggests, is experiencing a “fertility implosion”.\”

Here\’s a figure to illustrate. The \”dependency ratios\” here refer to the number of either elder people over 65 or children age 14 and under compared to every 100 members of the working-age population between ages 15-64. Thus:

  • The dark blue line shows that in regions of the world with more developed economies, there were more than 40 children for every 100 working-age people back in 1950, but that has now fallen to about 30. 
  • The light blue line shows that in those same regions of the world with  more developed economies, there were about 10 over-65 elderly for every 100 workers back in 1950, but that ratio has now reached 30 and is headed for 40 by mid-century. 
  • The orange line shows that less developed regions (leaving aside the poorest countries) had about 75 children for every 100 workers back in 1965, but that ratio has now fallen to about 40 and is headed for 30 by mid-century. 
  • The scarlet line shows that in the less developed regions (again leaving aside the poorest countries) have only about 10 elderly for every 100 workers today–not much of an increase in the last half-century–but that this ratio is about to rise sharply to about 30 by mid-century and 40 by the end of the century.

The question of how the workers of tomorrow will support the elderly of tomorrow is a global issue. Ultimately, the only answer I can see to the policy question is an expectation that most people will retire later than their current expectations.  But I also suspect that living in a society where the elderly outnumber the children will reshape all sorts of institutions of everyday life. Schools and playgrounds will become more scarce; libraries and senior centers will proliferate. Holidays like Halloween are already moving from being child-centered to being adult-centered. 

Many people will find that they are part of a tall, slender family \”tree.\” Instead of experiencing three generations of relatives–children, parents, grandparents–more and more people will be living in families where there are four or even five generations living at the same time. However, with smaller family sized these generations will not include large numbers of people. Thus, you can imagine a typical family \”tree\” of the future as consisting of two grandparents approaching age 60, who had one child, who in turn married and had one child, but who are also feeling responsible for two of their own parents who are about 80 years of age, and also also for one of their grandparents who has just turned 100. Families with fewer children will spend less of their adult lives in raising children. There will also be ever-greater numbers of adults who never become parents. For example, will we rely more on close family members, because each generational tie feels more precious? Or of necessity, will we all need to rely more on non-relatives? We do not have mental templates for how we organize or family ties and responsibilities in these tall slender family trees.

conversableeconomist

The Remarkable Consistency of Long-Run U.S. Economic Growth

President Obama\’s proposed budget for FY 2013 came out yesterday, and I did what I usually do: Skip the details of the budget proposals, and in particular skip the projections for years off in the future , which are under every president a mix of political calculations and feigned optimism about what will be enacted into legislation. Instead, head for the volumes labelled \”Analytical Perspectives\” and \”Historical Tables.\”

For example, the \”Analytical Perspectives\” volume of the proposed FY 2013 budget has some discussion of whether the U.S. economy will eventually bounce back all the way from the Great Recession to its earlier trendline of growth, or whether the Great Recession will cause a drop of the economy to a lower growth path. A figure illustrates that from 1890 to the present, the U.S. economy has followed a very consistent growth path.

The vertical axis of the graph shows per capita GDP measured by it natural logarithm. For those eyeballing the graph, the natural log of $40,000 is 10.6–roughly the present level of per capita GDP. The natural log of $5,000 is 8.5–roughly the level of real per capita GDP back in 1890. A straight line on a log graph means that the variable is growing at a constant percentage rate: in this case, at about 1.8% per year.

Here\’s how the budget discusses the question of whether the economy will eventually return to trend:

\”Recent recoveries have been somewhat weaker than average, but the last two expansions were preceded by mild recessions with relatively little pent-up demand when conditions improved. Because of the depth of the recent recession, there is much more room for a rebound in spending and production than was true either in 1991 or 2001. On the other hand, lingering effects from the credit crisis and other special factors have limited the pace of the recovery until now. Thus, the Administration is forecasting a slower than normal recovery, but one that eventually restores GDP to near the level of potential that would have prevailed in the absence of a downturn. Some international economic organizations have argued that a financial recession permanently scars an economy, and this view is also shared by some American forecasters. On that view, there is no reason to expect a full recovery to the previous trend of real GDP. The statistical evidence for permanent scarring comes mostly from the experiences of developing countries and its relevance to the current situation in the United States is debatable. Historically, economic growth in the United States economy has shown considerable stability over time as displayed in Chart 2-7. Since the late 19th century, following every recession, the economy has returned to the long-term trend in per capita real GDP. This was true even following the only previous recession in which the United States experienced a disastrous financial crisis – 1929-1933 …\”

Of course, past performance is no guarantee of future results, as the investment adviser are quick to remind you. Still, those who believe that the Great Recession will move the U.S. economy to a permanently lower growth path are making a prediction that flies in the face of the last 120 years of U.S. economic experience.

conversableeconomist

Labor\’s Declining Share of Total Income

Margaret Jacobson and Filippo Occhino of the Cleveland Fed offer a short overview of what is \”Behind the Decline in Labor\’s Share of Income\” in the February 2012 issue of Economic Trends.

Back in the day, when I was first getting familiar with these numbers, the standard summary of the data was that labor income was about two-thirds of total output in the U.S. economy, although the share fluctuated over the business cycle. As Jacobson and Occhino write: \”Over the cycle, the labor income share tends to increase during the early part of recessions, because businesses lower labor compensation less than output, and compensation per hour continues to increase even as productivity slows down. Then, after reaching a peak sometime during the recession, the labor income share tends to decrease during the rest of the recession and the early part of the recovery, as output picks up at a faster pace than labor compensation, and compensation per hour grows at a slower pace than productivity. Only later in the recovery, as the labor market tightens, does labor compensation catch up with output and productivity, and the labor income share recovers.\”

But this basic fact–labor as two-thirds of economic output–no longer seems to be holding true. It\’s not just that the ratio is at historic lows in the post-World War II period, as shown in the figure; after all, given the depth and length of the Great Recession, and the sluggishness and sustained high unemployment of the tepid recovery, it\’s no surprise that the labor share of income would be low about now. But the data seems to show an overall pattern of a dropping labor share of income even before the Great Recession started, and reaching back to the 1980s or the late 1970s.

When output is rising faster than labor income, it necessarily follows that labor compensation is rising more slowly that output per hour. Here\’s the figure. Note that up until about the early 1980s, productivity as measured by output per hour rose more-or-less in step with compensation per hour (although it appears that even then, output/hour was trying to creep ahead). But the gap has expanded since then, and was expanding even before the Great Recession.

What explains this change? Jacobson and Occhino list the possibilities: \”Economists have identified three long-term factors that can explain why the wage-productivity gap has widened and the share of income accruing to labor has declined. The first is the decrease in the bargaining power of labor, due to changing labor market policies and a decline of the more unionized sectors. Another factor is increased globalization and trade openness, with the resulting migration of relatively more labor-intensive sectors from advanced economies to emerging economies. As a consequence, the sectors remaining in the advanced economies are relatively less labor-intensive, and the average share of labor income is lower. The third factor is technological change connected with improvements in information and communication technologies, which has raised the marginal productivity and return to capital relative to labor.\”

This list seems basically right to me, although my reading of the evidence is that the items are listed in inverse order of importance. But I also find it useful to think about the fall in labor income in reverse, as the rise of capital income. For example, the Dow Jones index roughly tripled from 1980 to 1990 (rising from 900 to 2700), and then more than tripled from 1990 to 2000 (rising from 2700 to 10,800). While the Dow was basically flat over the decade from 2000 to 2010, large non-labor income was generated during the earlier part of the decade by housing prices. While many of us participate in gains in the stock market or the housing market in some ways, the bulk of those gains do tend to flow to those with higher income levels.

But looking ahead, another rapid tripling of stock market, as in the 1980s and again in the 1990s, seems unlikely, as does another housing price bubble. Meanwhile, the U.S. labor market is showing some feeble signs of resurgence, and may well strengthen over the next couple of years. Over the next 3-5 years, I\’d expect the labor income share of output to rise–although I don\’t expect labor income to re-attain the old level of two-thirds of national output in the near- or the middle-term.

conversableeconomist

Medicaid in Transition

\”Medicare is for the elderly and Medicaid is for the poor.\” I\’ve heard it a million times, and probably said it myself, but of course the distinction isn\’t quite correct. Medicaid was from the start focused on the \”deserving\” poor, which at the time was low-income families with children, along with the poor who were also disabled or elderly, but it didn\’t cover single adults below the poverty line.

The vast majority of Medicaid\’s spending is not on low-income families of able-bodied adults with children, but instead on those with low incomes who are also blind, disabled, and elderly. The 2010 Actuarial Report on the Financial Outlook for Medicaid reports that in 2009, Medicaid covered 50 million people on average at any given point in time, and had outlays of $380 billion. Thus, the elderly represented about one-tenth of all Medicaid enrollees, but about one-fifth of all Medicaid expenditures. As the Medicaid actuaries report:

\”Per enrollee spending for health services was $6,890 in 2009. Per capita spending for non-disabled children ($2,848) and adults ($4,123) was much lower than that for aged ($15,678) and disabled beneficiaries ($16,563) … While blind or disabled enrollees and aged enrollees are the smallest enrollment groups in Medicaid, they are projected to account for the majority of spending. … [F]or FY 2009, benefit spending was estimated to be $148.4 billion for blind or disabled enrollees and $74.6 billion for aged enrollees. Combined, spending on these two groups constituted 66 percent of Medicaid expenditures … Medicaid spending on non-disabled children represented about 20 percent of total Medicaid benefit expenditures, and spending on non-disabled non-aged adults accounted for about 14 percent.\”

Medicaid is a huge part of the U.S. health care system. The actuaries report that in 2008, \”Medicaid spending for that year represented 14.7 percent of total NHE [national health expenditures]. Private health insurance was the largest source of spending on health care in 2008, accounting for 33.5 percent of total NHE, while Medicare paid for 20.1 percent.\” If you\’re adding up at home, yes, Medicaid plus Medicare pays a higher share of the nation\’s health care bills than does private health insurance. At any given time, Medicaid also covers more people than Medicare: in 2009, Medicaid was covering an average of 50 million people at any given time compared to 46 million for Medicare.

However, Medicaid is about to start into two major changes that will drive up its costs. One set of changes is related to the Affordable Care Act of 2009, and the other to the aging of the U.S. population.

One of the main ways in which the Affordable Care Act plans to expand health care insurance to those who not presently have it is through an expansion of who is eligible for Medicaid. The actuaries write:  \”The Affordable Care Act will have a substantial effect on Medicaid trends over the next 10 years and beyond. In terms of the magnitude of changes to the program’s projected expenditures and enrollment, it is likely that the Affordable Care Act will be the largest legislative change to Medicaid since the program’s inception.\” The Affordable Care Act is projected to add about 20 million enrollees to Medicaid by 2019, with roughly three-quarters of them being adults. Medicaid is now funded about two-thirds by the federal government and one-third by state governments, but for the first few years (with no promises for after that time!), the federal government  will pick up essentially 100% of the cost of these additional enrollees.

The issues of \”Medicaid and the elderly\”  are explored by  Mariacristina  De Nardi, Eric French, John Bailey Jones, and Angshuman Gooptu in the most recent issue of Economic Perspectives, published by the Federal Reserve Bank of Chicago. In particular, Medicaid has become a major provider of long-term care. The authors write:  \”The principal public provider of long-term care is Medicaid, a means-tested program for the impoverished. Medicaid now assists 70 percent of nursing home residents and helps the elderly poor pay for other medical services as well. … Although Medicaid is available only to “poor” households, middle-income households with high medical expenses usually qualify for assistance also. Given the ongoing growth in medical expenditures, Medicaid coverage in old age is thus becoming as much of a
program for the middle class as for the poor …\”

Here\’s a figure from the actuaries showing Medicaid\’s share of total U.S. spending in certain markets. Again, notice that Medicaid spending is a lot less about doctor visits for low-income children and a lot more about nursing home care and home health care:

As the actuaries put it: \”Medicaid has a major responsibility for providing long-term care because the program covers some aged and many disabled persons, who tend to be the most frequent and most costly users of such care, and because private health insurance and Medicare often furnish only limited coverage for these benefits, particularly for nursing homes. Many people who pay for nursing home care privately become impoverished due to the expense; as a result, these people eventually become eligible for Medicaid.\”

At least so far, payments for long-term care are not yet a major driver of Medicaid expenses. The front edge of the baby boomer generation is just hitting its retirement years, but the really substantial demand for nursing home care kicks in more at age 85 than at age 65. The Medicaid actuaries write: \”As the oldest members of the baby boom generation begin to reach age 65, both the number of aged enrollees in Medicaid and eventually the rate of long-term care spending growth are projected to increase. While the baby boom generation is not estimated to have a major effect on long-term care spending during FY 2010 through FY 2019, the increase in the number of people over age 85 in the next 10 years is expected to do so.\”

For a more detailed discussion of Long-Term Care Insurance in the U.S. and its interaction with Medicaid, see also my post of November 22, 2011.  For a broader discussion of Long-Term Care in International Perspective, see my post of August 9, 2011. 

It\’s worth remembering that unlike Medicare, Medicaid has no dedicated tax or revenue stream. Unlike private health insurance, Medicaid isn\’t financed by premiums. Instead, the ongoing rise in Medicaid costs will be in direct competition with other government programs funded from general tax revenues.

conversableeconomist

U.S. and World Perspective: Immigration Policy #5

This is the fifth of five posts on immigration policy. For the first post and an overview, see here.

American public discourse on immigration is so hot-blooded that it often sounds as if the fate of the republic–or at least the economy–is at stake. But oddly enough, the economic issues related to U.S. immigration are in all likelihood dwarfed in size by the global gains.

While I believe that that an expansion of immigration offers gains to those already in this country, the gains seem likely to be small. For example, in the Cato Journal symposium, Raúl Hinojosa-Ojeda uses a computable general equilibrium approach to estimate that a substantial rise in immigration could increase U.S. GDP by 0.8%–and even this modest gain is well above other estimates I\’ve seen. Similarly, while I argued in the third post in this series that the effects of immigration on government budgets were probably positive, they arguments over gains and losses to different levels of government, and the gap between the two, are measure in billions or at most tens of billions of dollars–which isn\’t much in the context of an annual federal budget now approaching $4 trillion.

The main gains from immigration, perhaps not surprisingly, go to the immigrants themselves, who may easily increase their incomes by a multiple of four or five times when moving from a low-income country to a high-income country. Large increases in immigration thus offer a possibility of a massive increase in world GDP Giovanni Peri sums up some of the evidence in \”Immigration, Labor Markets, and Productivity.\”  

\”[I]f one looks at several recent reports and studies on international migrations by economists and research institutions, their main emphasis is on the large size of global gains obtainable by increasing, even by a small measure, the mobility of people. A study by the World Bank (2005) estimated that an increase in international
migration equal to 3 percent of the labor force of developed countries would produce gains (to be shared globally) of $356 billion. Pritchett (2006) argues that the gains from increasing international mobility, even by a little, are much larger than those that can be obtained by fully liberalizing international trade, estimated in 2005 to be $104 billion. In the more extreme case of a full opening of more wealthy, Organization for International Cooperation and Development (OECD) countries to workers from the rest of the world, Klein and Ventura (2007) calculate a potential massive increase in the world GDP on the order of 150 percent over 50 years. For economists, in short, international migration has the formidable ability of increasing total world income and productivity, generating huge global economic opportunities. The reason is very simple. By allowing people to move to countries where they can produce four to five times more value per hour of work on average than in their country of origin, migrations allow the deployment of world human resources in a massively more efficient way …\”

My own Journal of Economic Perspectives had some articles on emigration in the Summer 2011 issue that emphasized the possibility of substantial Gains from Emigration, as I posted last August 22. (Current and back issue of my journal going back to 1994 are freely available to all, courtesy of the American Economic Association.)

In short, the strongest case for immigration is not that it conveys huge benefits to the U.S. economy–it probably doesn\’t. But it certainly conveys huge benefits to those who migrate. I believe that national boundaries matter, and I\’m an American at heart. When it comes to public policy, I place a lower value on what happens to non-Americans than I do on what happens to Americans. Thus, I do believe that any costs to Americans resulting from immigration are a legitimate policy issue. But placing a lower value on what happens to non-Americans doesn\’t mean placing no value on what happens to them. The truly enormous gains received by migrants predispose me toward policies that would allow more immigration to the U.S.–and to seek alternatives for dealing with potential costs.

conversableeconomist

Enforcement: Immigration Policy #4

This is the fourth of five posts on immigration policy. For the first post and an overview, start here.

Discussions of enforcing limits on immigration often seem to begin and end with border security: how many guards, how long a fence, how many arrests and deportations. Such policies have been pursued with vigor since the 1990s, and they appear to have been effective.For example, here\’s a figure from Pia M. Orrenius and Madeline Zavodny showing that southwest border apprehensions peaked back around 2000, and have had a generally downward trend since then.

Edward Alden sums up the current situation in \”Immigration and Border Control.\”

\”For the past two decades the United States, a country with a strong tradition of limited government, has been pursuing a widely popular initiative that requires one of the most ambitious expansions of government power in modern history: securing the nation’s borders against illegal immigration. Congress and successive administrations—both Democratic and Republican—have increased the size of the Border Patrol from fewer than 3,000 agents to more than 21,000, built nearly 700 miles of fencing along the southern border with Mexico, and deployed pilotless drones, sensor cameras, and other expensive technologies aimed at preventing illegal crossings at the land borders. … [T]the U.S. borders are far harder to cross illegally than at any time in American history, and the number of people entering illegally has dropped sharply. Evading border enforcement has become more difficult, more expensive, and more uncertain than ever before. …

The United States will never again be a country with loosely guarded borders. The political coalition in favor of tough border control is strong and probably durable; the threats from terrorism or other transnational crime are severe enough to necessitate effective border measures; and the desire by many to migrate illegally to the United States will remain strong enough that deterrence through enforcement is essential. The challenge, therefore, is how to make border security compatible with a sensible immigration system that strengthens the U.S. economy rather than weakens it.\”

My own sense of the evidence is that it is time to stop this continually increasing spending on border security and instead move to other ways of discouraging illegal immigration, including better tracking of those who legally enter the country on temporary visas, and steps to assure that employers can reasonably be held accountable for when they hire illegal immigrants.

Many of the writers in the Cato Journal special issue are not enamored of strong efforts to enforce limits on immigration. For example, the Alden essay is insightful on costs and problems of border enforcement, while Jim Harper discusses potential problems with the e-Verify system that lets employers check on the immigration status of potential workers.  However, contributors to the symposium seem often willing to entertain all sorts of alternatives, without a lot of practical skepticism. For example, Bryan Caplan suggests the possibility that how we could allow in very large numbers of immigrants, but make them ineligible to vote? We could also make their descendants ineligible to vote! Or we could not let them vote until their lifetime tax payments reach $100,000. We could impose special higher taxes on immigrants. We could make immigrants ineligible for welfare benefits. We could require tests of English fluency and cultural literacy for immigration. A number of other authors in the issue emphasize the possibilities of large but temporary flows of immigrants, who would sweep back and forth across the border in waves.

I understand the intellectual rationale for these sorts of proposals, but they seem to me overly clever, and thus likely to be impractical. Jagdish Bhagwati likes to quote the Swiss novelist Max Frisch on the subject of how western Europeans let in lots of guestworkers, on the explicit understanding that they could be sent home, but then found that in practical and political terms they could not be deported. Frisch said: \”We imported workers and got men instead.\” The idea of making immigrants and their descendants unable to vote works fine if the immigrants are just \”workers,\” but not so well if they are also human beings. A vision of crowds of immigrants arriving and departing as needed by the economy views those people solely in their role as workers, not as people with a wide range of goals–like falling in love with people and communities, or getting a better education for their children. Ultimately, it does not seem credible to me that such policies will be enforced in the long term. When it comes to practical enforcement, I place my trust in good old-fashioned policies like continued border security, along with visa enforcement and mechanisms for employers to be able to check whether they are hiring U.S. citizens.

conversableeconomist

Government Budgets: Immigration Policy #3

This is the third of five posts on immigration policy. For the first post and an overview, start here.

A common and plausible concern about immigration is that many immigrants don\’t pay much in taxes, but the government faces costs for education of the children of immigrants, health care of those with low incomes, and law enforcement. Thus, it is feared that immigrants contribute to the fiscal problems of government. To be clear, this concern over the effect on government budgets is really about immigrants with low skill levels and about illegal immigrants. Everyone accepts that legal high-skilled immigrants are on average a net plus for government in terms of the taxes they pay and the government benefits they receive. Daniel Griswold tackles this question head-on in \”Immigration and the Welfare State.\”

Griswold points out that immigrants–even illegal immigrants–do typically have taxes withheld from paychecks, as well as paying sales and property taxes. Recent legal immigrants aren\’t eligible for welfare benefits, and many illegal immigrants don\’t dare try to claim such benefits. For the federal government, immigration is almost certainly a net plus. However, certain state and local governments with high levels of immigration do face high costs of education, health care, and law enforcement related to immigration. He notes the straightforward policy fix: \”If Congress wants to more equitably share the fiscal benefits of immigration, it could distribute funds to states and localities based on the impact of immigration on health and education spending. This need not, and should not, require an overall increase in government spending and taxation, but merely a transfer of resources from the federal level, where immigration represents a net fiscal gain, to state and local governments, where it often imposes a net fiscal loss.\”

Griswold also makes the insightful point that low-skill immigrants are not choosing to locate primarily in high-benefit states–which strongly suggests that gaining access to such benefits is not their primary motivation. (Citations and references to tables omitted from the quotation.)

\”If we consider changes in the foreign born populations in individual states, for example, we can see that the largest gains have generally been in states that are relatively stingy in offering public assistance. … The 10 states with the largest percentage increase in foreign-born population between 2000 and 2009 spent far less on public assistance per capita in 2009 compared to the 10 states with the slowest-growing foreign-born populations—$35 vs. $166 …. In the 10 states with the lowest per capita spending on public assistance, the immigrant population grew 31 percent between 2000 and 2009; in the 10 states with the highest per capita spending on public assistance, the foreign-born population grew 13 percent. If immigrants were primarily concerned with collecting welfare, they would not be flocking to such states as Kentucky, Tennessee, North Carolina, South Carolina, and Georgia. Instead, they would be drawn to such states
as Michigan, Rhode Island, and Vermont, which in fact have seen very slow growth in their immigrant populations.

Undocumented immigrants are even more likely to self-select states with below-average social spending. Between 2000 and 2009, the number of unauthorized immigrants in the low-spending states grew by a net 855,000, or 35 percent. In the high-spending states, the population grew by 385,000, or 11 percent. One possible reason why unauthorized immigrants are even less drawn to high-welfare spending states is that, unlike immigrants who have been naturalized, they are not eligible for any of the standard welfare programs. A second reason is that illegal immigrants are less likely to be well-educated and thus are not as attracted as more highly skilled immigrants to higher-income urban centers in such states as New York, Illinois,
and California. The higher-skilled immigrants gravitate to those states, not because of the higher social spending, but because of the higher rewards for skilled labor.\”

conversableeconomist

The Low-Skilled: Immigration Policy #2

This is the second in a series of five posts on immigration policy. For the first post and an overview, see here.

The effect of immigration on wages seems as if it must be obvious from Econ 101: increase the supply of something and you drive down its price. So immigration must reduce wages, right? The issues isn\’t that simple, for a number of reasons. Four such reasons are laid out by Giovanni Peri in \”Immigration, Labor Markets, and Productivity.\” Peri points out that immigrant labor is often focused on providing home services, in a way that has tended to free up high-skilled native women to enter the workforce or to work more hours.

\”In the United States (and in many European countries) one sector in which the presence of the foreign-born has been large and growing fast is that of home services (cleaning, food preparation, gardening, and similar) and personal services (child and elderly care). These are often characterized as “household production” services. This has allowed a significant share of female workers, often highly educated, to afford these services and to join the formal labor force outside the home or to increase their hours worked.\”

But even if low-skilled immigrant labor may be complementary to high-skilled native labor, surely it must depress wages of low-skilled native workers? Peri argues that this conclusion need not follow, because of ways in which firms and the economy respond to an influx of immigration. He writes (citations omitted): \”In summary, an economy will respond to immigration along several margins—through increased investment by firms, specialization of natives, complementarities between natives and immigrants, technological response by firms, and job creation. …This explains why a long tradition of empirical economic studies has found very small to no effect of U.S. immigration on native wages and employment at the national and at the local level.\”

Here is a bit more detail on each of Peri\’s four margins for economic adjustment in response to low-skilled immigration.

1) Investments

\”As a consequence of the availability of more workers firms invest: existing firms expand their capacity, and new firms are born. Returns to capital increase when more workers are available, and firms take advantage of this by investing.\”

2) Differences among Workers: More and Less Educated

\”Workers are not homogeneous. In terms of their labor market skills and productive activity there is a large difference between workers with high levels of schooling (tertiary education) and those with secondary or less. They use different skills and take different jobs. … In the United States as a whole, however, because of the combination of immigrants at the top and at the bottom of the schooling distribution, if we consider two groups of workers (more and less educated), immigrants have a distribution similar to that of natives. Hence their inflow did not alter much the relative supply of the two groups.\”

3) Specialization and Technology: Job Upgrades

\”Even more interesting is the differentiation of skills and productive characteristics between natives and immigrants within each of the two schooling groups. One very strong tendency among immigrant workers with low schooling is to concentrate in manual jobs. In manufacturing, construction and agriculture, for instance, they work as farm laborers, construction workers, roofers, drivers and so on. In services they work in food preparation, house services, child and elderly care. In contrast, similarly educated natives work in jobs which
use more intensively communication and interaction skills such as cooks, construction supervisors, farm coordinators, or clerks. In Peri and Sparber (2009) we show that, due to the limited knowledge of the language, immigrants have a comparative advantage in manual type of jobs. Hence they specialize in those, and in firms and sectors that hire immigrants, this produces higher demand for jobs of coordination and interaction typically staffed by natives, whose language skills are superior. This dynamic specialization in tasks according to skills pushes natives to upgrade their jobs (as communication-intensive occupations pay better than manual intensive ones) and protects their wages from competition with immigrants. By taking the manual jobs that natives progressively leave, immigrants often push a reorganization of production along specialization lines that may also increase effectiveness and efficiency of labor  … In some studies the mechanism described here, combined with the other effects described earlier in this section, results in a small positive effect of immigration on wages of less educated native workers.\”

4) Lower Wages of Immigrants: An Opportunity for Cost Cutting and Job Creation

\”One common empirical finding in the literature is that immigrants are paid less than natives with similar characteristics and skills. This is in part due to the fact that many immigrants, because of less attractive outside options (such as having to go back to their home country), have lower bargaining power with the firm. In this case firms pay immigrants less than their marginal productivity, increasing the firms’ profits. Such cost-savings on immigrants act as an increase in productivity for firms. Ottaviano, Peri, and Wright (2010) show that if a firm can cut costs in some productive tasks by hiring immigrants, this allows the firm to expand production and employ more people in the complementary tasks, many of which are supplied by natives.\”

In short, the economy is not a static mechanism with a fixed number of jobs that require a predetermined set of skills. Instead, the number of jobs moves over time. Even among those with low skills as measured by education, there can be vast differentiation of skills between, say, those who are proficient in English and those who aren\’t. Low-skilled native workers can in many ways be complements with low-skilled immigrants, not substitutes. Firms can and do adjust their methods of production in many ways. An economy is a flexible organism. That flexibility can be difficult for workers, who need to change and adapt, and will sometimes find their old jobs altered or even ended. But the flexibility is also the source of a gradually rising standard of living over time.

conversableeconomist

The High-Skilled: Immigration Policy #1

U.S. Immigration policy  is a combustible topic, so I\’ll just list five of my main beliefs up front.

  1. Allowing substantially higher immigration from high-skilled labor–in particular, by finding ways to let those who complete science and technology degrees or graduate programs in the United States remain in the country–should be a no-brainer. 
  2. Allowing higher levels of low-skilled immigration is admittedly a tougher call, although I would favor this as well. 
  3. When it comes to government budgets, immigration is an overall benefit to government budgets, but certain state and local governments that suffer losses.
  4. Increasing enforcement at the border may have reached diminishing returns–that is, high costs for relatively little benefit in limiting enforcement. However,  but other ways of enforcing immigration limits could be increased, like keeping better tabs on those with temporary visas and discouraging employers from hiring illegal immigrants. 
  5. Immigration is a much smaller policy issue for the United States than it potentially could be for the world as a whole.

    For some additional background, see my post of July 29, 2011, Thoughts on Immigration. But here I take my text from the most recent issue of the Cato Journal, which is devoted to the subject \”Is Immigration Good for America?\” The essays go beyond my five points, to tackling issues like birthright citizenship and future U.S. demographic trends. There is reasonable support for my points 1-3 and 5, but some disagreement when it comes to enforcement issues. To avoid making this post of encyclopedic length, I\’ll divide it into five parts: one for each of my five themes.

    The U.S. higher education system is widely acknowledged as the best in the world, and especially at the graduate level, it attracts top-notch students from all over the world. We invite them in, we provide financial support for their education, we often connect them to industry–and then we make it hard for them to stay. In a world economy where future economic growth depends largely on science and technology, U.S. immigration policy essentially chases away tens of thousands of highly qualified workers each year. Whatever one thinks about reducing illegal immigration or overall immigration, this policy of chasing away the high-skilled is hugely counterproductive.

    Here is Gordon Hanson making the point in \”Immigration and Economic Growth\” (references omitted for readability):

    \”Each year, U.S. universities conduct a global talent search for the brightest minds to admit to their graduate programs. Increasingly, foreign students occupy the top spots in the search. Data from the National Science Foundation’s Survey of Earned Doctorates show that between 1960 and the late 2000s, the share of PhDs awarded to foreign students rose from one fifth to three fourths in mathematics, computer science, and engineering; from one fifth to three fifths in physical sciences; and from one fifth to one half in life sciences. U.S. university departments that have more foreign graduate students produce more academic publications and have their work cited more frequently. Once they graduate, U.S.-educated foreign workers patent at a significantly higher rate than U.S.-born workers. As a consequence, U.S. cities that attract these workers produce larger numbers of patents in electronics, machinery, pharmaceuticals, industrial chemicals, and other technology-intensive products. Simply put, high-skilled immigration promotes innovation. An additional benefit is that high-skilled immigrants are likely to pay far more in taxes than they use in public services, generating a positive net contribution to government fiscal accounts. …

    \”Today, the difficulty is not in attracting top foreign students to America but in keeping here them after they graduate. High-skilled immigrants have three primary channels for obtaining permission to work in the United States. The H-1B visa, which targets highly trained professionals, permits holders to work in the United States for a period of three years. It is renewable once, with the annual number of visas capped at 65,000. Employer-sponsored green cards permit holders to live and work in the country indefinitely. The annual number of new visas is capped at 150,000. The third channel is a family-sponsored green card, which requires marrying a U.S. citizen (visas for which there is no cap) or having a close relative already in the country legally (visas for which are capped at 640,000). Because of the limited number of work-based visas, the family visa route remains the most common path to legal residence for skilled workers. Rosenzweig (2007) reports that in the early 2000s among immigrants who entered the United States on student visas and ultimately obtained green cards, 55 percent did so by marrying a U.S. citizen. To make it in America, foreign students not only need to be smart enough to get into a U.S. university. They also need to be proficient at dating.\”

    Hoping for proficiency in dating is not a well-conceived immigration policy. It used to be, not that long ago, that foreign graduate students from places like India or China or Brazil would remain in the U.S. after graduation in part because they didn\’t see attractive professional opportunities back in their home countries. Those days are behind us. The U.S. is highly attractive to footloose global talent–it just needs to make it straightforward for that talent to locate here.