The economic case for immigration reform

Charles Mostoller | Reuters Undocumented immigrant Angela Navarro and her husband Ermer Fernandez (L), along with other immigrants and supporters, watch President Barack Obama announce executive action on immigration, at the West Kensington Ministry church, in Philadelphia, Nov. 20, 2014.

Charles Mostoller | Reuters
Undocumented immigrant Angela Navarro and her husband Ermer Fernandez (L), along with other immigrants and supporters, watch President Barack Obama announce executive action on immigration, at the West Kensington Ministry church, in Philadelphia, Nov. 20, 2014.

The loud, ongoing debate over immigration reform often overlooks one very important impact from letting more foreigners come to live and work in the U.S.

Many researchers believe it’s good for the economy.

The U.S. economy can use all the help it can get these days. Though the American job and housing markets continue their halting recovery, the engines of growth are slowing in the rest of the world. From Europe to China to Japan, global growth has so far resisted efforts to shake off the lingering effects of a massive debt hangover that followed the credit crisis of 2008.

“A return to the ‘good old days’ of 2003-2007 does not appear to be in the cards,” Wells Fargo Securities economists wrote last week in a note on the slowing global economy.

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While U.S. growth appears to be bucking the trend of the rest of the developed world in the short run, it shares the same long-term demographic headwind now confronting policymakers in Europe and Japan. As the population ages, their younger people aren’t entering the labor force fast enough to replace the older workers who are retiring. And there are fewer younger taxpayers to cover the cost of providing retirement income and health care for those older workers.

“Immigrants do not typically compete with Americans for jobs,” U.S. Chamber of Commerce President and CEO Tom Donohue wrote last week in an op-ed piece in The Washington Times. “The reality is that they create more jobs through entrepreneurship, economic activity and tax revenues.”

Expanding the U.S. workforce with younger immigrants would also help offset the rising cost of Social Security payments and health care for a retiring baby boom generation.

President Barack Obama‘s executive order last week would allow an estimated 4 million undocumented immigrants to apply for a program that protects them from deportation, and another 1 million people will be protected from deportation under other provisions.

Those include expansion of an existing program for young immigrants who came to the United States as children. The order lifted the age limit for people who qualify.

While Republicans in Congress oppose the measure, some business groups—including the U.S. Chamber—argue that the move doesn’t go far enough and urged Congress to enact a complete overhaul.

Much depends on exactly how the current immigration policy is reformed.

One widely cited study by the Congressional Budget Office last year found that—if enacted into law—the comprehensive immigration reform package approved by the Senate last year would boost economic output by an additional 3.3 percent in 2023 and by 5.4 percent in 2033.

The Senate reforms would boost the size of the labor force and increase employment, though the expansion of the workforce would raise the jobless rate in the short run. The researchers predicted median wages would drop in the short run but begin rising by 2025. The reforms outlined in the Senate bill would also raise productivity and boost capital investment, the CBO found.

Immigration reform would also boost the U.S. population—by about 10 million people (or 3 percent) by 2023 and by 16 million (about 4 percent) by 2033. That added population would increase the cost of a variety of government services. But those would be more than offset by the higher taxes collected on the increased wages earned by newly arrived workers.

The CBO estimated that the reforms called for in the Senate bill would shrink the federal budget deficit by $197 billion over the coming decade and by roughly $700 billion in the decade after that.

Regardless of the benefits of comprehensive reform, the economic drag of an aging workforce can be very costly.

In the developed world, those effects are most pronounced in Japan, where the government of Prime Minister Shinzo Abe recently announced snap elections amid growing voter impatience with his “three arrows” plan to rescue the nation from two lost decades of economic stagnation.

The first two arrows—massive government spending and borrowing, coupled with a central bank eager to buy up the government’s new bonds—have left the country saddled with a debt pile that’s more than twice the size of its gross domestic product.

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Abe’s “third arrow”—reforms to domestic regulations and trade barriers that protect Japanese industries but stifle growth—has yet to be fully unleashed.

One of those reforms seeks to expand Japan’s workforce by encouraging more young women to go to work. The policies include increased funding to eliminate waiting lists for government sponsored day care, among others.

More workers would generate more wages and taxes, helping Japan care for its aging population without borrowing to pay the bill. Earlier this year, Abe’s government tried to offset those costs with a higher sales tax—which clobbered consumer spending and helped send Japan back into recession.

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