An Economic Case for Allowing More Highly Skilled Immigration

By John A. Litwinski

Conservatives tend to be somewhat ambivalent about immigration. The deal to increase the number of H-1B work visas brokered in the summer of 1998 between Congress and America's high tech industries illustrates the point well. During that typically Washington summer, Republicans were torn between traditional fealty to business and a reluctance to up the immigration ante. The economy's white hot technology sector eventually prevailed over some Congressional Republicans' (and many Democrats') hostility. But it took threats by the leaders of major technology companies to make the breakthrough. The quota of new visas was filled in mid-1999, and although wages in Silicon Valley continue to rise to fill the gap, experts predict that it is only a matter of time before the economics of labor shortages forces more technology jobs to be shipped overseas.

It wasn't always this way, of course. At one time, America's immigration policy was almost as laissez-faire as its business laws. Until the 1920's, immigrants from Europe poured in almost without restriction, first into the slums of New York and Baltimore and Chicago, and as any student of history knows, soon into the nation's suburbs, boardrooms, and top universities. At the time of their arrival, the Chinese, Irish, Jews, Italians, and Poles caused social commotion the likes of which few today can appreciate. But if they hadn't come, there is no question the nation would be poorer for their loss. Immigrants built this nation, and they and their offspring have often defended traditional American values with zeal often absent among the comfortably native born. The story of America is the story of immigrants, and the story of the future--if it is to continue to be America's--must include new immigrants as well. Without a doubt, America would not be the populous, wealthy giant it is today if it had not adopted both lax immigration laws and entrepreneurial capitalism. One need only look north to Canada to how America might have turned out had its immigration and business policies developed differently between 1880-1925. Today immigrants occupy places throughout this society, from Intel's CEO Andrew Grove to the waitresses at local diners. Fully one in ten Americans is foreign born, one of the highest proportions in the nation's history. And although a final accounting is always impossible, few would deny that immigrants add to the intellectual wealth and moral complexity of American society.

But immigration is hardly today's ideal. With the comfort of prosperity and a relatively large population (although a very low population density by industrial nation standards), Americans have been less willing to put up with the travails that immigrants bring. In part this hostility might be traced to the development of America's welfare state. Once many Americans began to expect the federal government to provide everything from prescription drug benefits to surplus cheese, immigrants began to be seen as threats to native born Americans' state-sponsored well being. But immigrants had always been seen as threats to America's social stability; from their strange religions and tongues to their manners of dress and behavior, immigrants have always embodied the real fears of movement, dislocation, and chaos. Problems with immigrant anarchists, communists, and labor unionists in the early part of the 20th century only deepened Americans' suspicion. But prior to the New Deal, immigrants assumed most of the risks of coming to America. They could rely on family, a church, a local ethnic organization, or even Tammany Hall to help them in times of need, but ultimately they bore all the real costs of immigrating here. In the early part of the century, when the federal government was little more than a Post Office to most, native Americans saw no threat to their government benefits from immigrants. And as it stood, there was no extensive web of public benefits for immigrants to threaten. All of this changed, of course, when the federal government got into the business of ensuring everyone's well being. Today, paradoxically, government welfare benefits seem to draw some irresponsible immigrants to America, just as the fear of immigrants using up social spending creates laws that keep out other immigrants who want only to come here work hard and live the American dream.

To be sure, there are many things to fear from more immigration. Immigration critics on the Left fear that immigrants will take jobs away from blue collar workers, labor unions, and other low wage employees. Liberals fear the effects of immigration on the economic income distribution of those most likely to be affected, the lower middle class and among the working poor. Immigration critics on the Right, with some exceptions, mostly fear the social consequences of immigration. Xenophobia is probably too strong a word to describe most conservatives' worry; fear of the unknown probably better explains what is going on. Fear of immigrants is often fear of the strange and unknown (and in some cases, fear of the strange and known.) And lurking in the back of everyone's mind is the suspicion that more immigration will exacerbate divisions between rich and poor, causing social disruption. Conservatives fear they will be unable to withstand calls for more social welfare if working class workers' wages are pushed down by immigrants. The fear of a political realignment occasioned by immigration, legal and illegal, is also quite real. Republicans fear, with some validity, that a flood of voting by legal immigrants will only weaken the party's chances of controlling statehouses and Congress.

But to paraphrase Senator John McCain (it is, after all, an election season), what's good for American is good for the Republican Party. Conservatives' ambivalence to immigration is largely unfounded. There are some very good reasons why the Republican Party should be the party of immigration and the party of expanding the American dream to more and more people. The economic case for more immigration of highly skilled workers is a strong one. If it turns out to be true that an effective and generous immigration policy can do a lot of good things for America, perhaps the Republican Party should rethink its ambivalence and sometime hostility to immigration.

There are many reasons that people come to America, including primarily freedom and economic factors. From the point of view of American immigration policy, there is little that immigrants can do to make American more free. But there is much immigrants can do to make America more prosperous. The most important thing new immigrants provide is labor. But not all labor is identical. An effective immigration policy must control the ratio of low skilled to highly skilled workers permitted to enter.

Consider first what would happen if Congress tripled the H-1B visa limit to allow in more skilled, foreign born computer programmers. The effect of more immigration by highly skilled foreign computer programmers upon American programmers would be to somewhat push down the wages of American-born computer programmers. In the short run this would result in a transfer of real income from American computer programmers to American consumers. But economics isn't a zero-sum game--after an initial bump, the lower wages would translate into lower prices, which would spur more demand and more production. The economy would benefit from producing more goods at relatively lower prices. Lower prices in turn make everyone better off, because the products that programmers make cost less. It would then be easier for companies to achieve economies of scale; consumers will see lower and lower real prices. The same dynamic could be applied to every industry in which highly skilled labor is tight, from computer programmers to engineers to rural medical doctors. The first important effect, then, would be to spur more output at lower prices.

But more output alone is not a good enough reason to want more immigration, since immigrants are paid (and consume and save) just as surely as they produce economic output. It is important, then, to distinguish between highly skilled and low skilled workers. Although there is not a precise definition for "highly skilled workers," a rough category includes those jobs for which a specific advanced degree is required, or jobs requiring copious on-site training and paying more than, say, $35,000 per year at the time of hiring. By contrast, low skilled workers jobs do not usually require very much specific training and can be performed by many people without the need for advanced degrees or years of experience. Such jobs tend to produce and pay relatively little.

Increasing the immigration quota for highly skilled workers has positive social effects beyond the aggregate economic output discussion sketched above. Consider the social effects of allowing only more highly skilled workers into the country. Immigration opponents' big fear is an influx of low skilled workers, those better suited to the low wage economy than to high value-added work and likely to drain government benefits. But a wise immigration policy can readily accommodate their concerns by allowing only highly skilled workers to enter.

The most important effect of such a policy is on the distribution of incomes in society. If the Congress decides to grant substantially more immigrant work visas to highly skilled workers and professionals of all stripes, there will be a surprisingly positive side impact for low skilled workers. Insofar as low skilled workers produce things that highly skilled workers buy--like child care, pizza delivery, haircuts, etc. (goods and services which cannot be imported from abroad, or what economists call "non-traded goods")--the wages of many low skilled American workers will rise if a substantial number of highly skilled immigrants arrive (assuming, of course, that they take work in their professions and not in low skilled professions, and that they consume or save their wages domestically.) Under such circumstances, which are fairly realistic, one could expect two positive effects to occur. First, low skilled workers' wages would rise in absolute terms, which means that they would be better off than they were before. And second, low skilled workers wages would rise relative to highly skilled workers, whose wages would be expected, for the reasons described above, to fall somewhat. In other words, by implementing a wise immigration policy--letting highly skilled workers in and keeping low skilled workers out--America could narrow the gap between rich and poor. And it could do so without harming economic output; in fact, overall economic output would rise.

Another side benefit of increasing the immigration of highly skilled workers is that America's per capita GDP will increase, a result reflecting the increased quality of what economists call America's "human capital stock." The quality of the average American worker would increase just as surely as if Michael Jordan and Charles Barkley joined some NBA team tomorrow. And there is little fear that highly skilled immigrants will merely come to drain social welfare benefits. Studies have confirmed that immigrants in the long run tend to pay as much (or more) in taxes as they receive in benefits; and this is truer for highly skilled immigrants. An immigrant's transition and relocation costs are nothing compared to what it costs to educate a child, and the benefits, from an economic point of view, are on average surely at least as promising. The investment seems well worth the initial money down. And if highly skilled immigrants tend to vote within their social strata, Republican lawmakers have little to fear from an impregnable, Democratic immigrant block.

Increasing the amount of highly skilled legal immigration will also take pressure off of American workers today obliged to devote more and more of their paychecks to Social Security and Medicaid due to the steadily decreasing ratio of workers to retirees. And the benefit of bringing more highly skilled workers into the country doesnŐt stop when they retire. Because Social Security is only partly "insurance," and has a substantial redistributive component, highly skilled, high-wage foreign-born workers will pay relatively more and receive relatively less than similar, low skilled American workers. This assumes, of course, that they become citizens and pay the same taxes as Americans. A wise policy would prevent immigration except on such terms, and on others, such as strict limits on welfare benefits for adult immigrants. And finally, because other countries will have absorbed the cost of educating these immigrant workers, America will be able to reap where it has not sown. (For readers wondering about the ethical propriety of such a policy, consider that if it is implemented, other countries will be pressured to make their markets more competitive to give their high value-added workers at home. If those countries donŐt make such adjustments, they will (and should) suffer; and if they do make these reforms from within, by creating more open and competitive markets, America will have achieved through immigration policy what it could not through years of multilateral trade talks: substantially open and transparent world goods markets.)

It is standard knowledge among economists that the free flow of capital, labor, and price information is necessary for creating the most efficient allocation of resources. For a long time, conservatives supported free trade as a means of promoting wealth creation. But free trade in goods and services alone cannot bridge the gap between productive capacity and underutilized human capital talent. For that, immigration policy must step in. A wise immigration policy would promote both wealth creation and social stability. A careful policy can accomplish two very difficult goals: creating prosperity and distributing it in a way that doesnŐt disturb the delicate social balance inhering in capitalist societies. Of course, few social policies are undertaken merely because they are wise or good. But a discussion of the comparative costs and benefits of changing immigration policy might eventually spur action. It might take a few more typical Washington summers and pressure from businesses, but at least with the narrow proposal described above, almost everyone will get something for his wait.