Economy-Wide Effects of Reducing Illegal Immigrants in U.S. Employment

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1. INTRODUCTION

In 2005, there were 7.3 million illegal immigrants working in the United States, 5% of total employment. Public attitudes on illegal immigrants working in the United States, 5% of total employment. Public attitudes on illegal immigrants vary from the view that they are impoverishing low-income legal residents by depriving them of jobs to the view that they are vital to the economy because they perform tasks that legal residents are unwilling to undertake. The illegal-immigrant issue is now a major component of the political debate with policy suggestions ranging from mass deportation to legalization and amnesty.

There is a vast literature on economic aspects of immigration to the United States, dealing with: the causes of immigration flows; (1) the performance of immigrants in the U.S. economy; (2) and the effects of immigrants on the economy. (3) Perhaps reflecting data limitations, the literature on illegal immigrants is small and deals mainly with the causes of illegal flows (4) and the effects on flows of policy interventions such as heightened border security. (5) Apart from estimates of the effects of illegal immigrants on public sector budgets, (6) there is little quantitative analysis of their economy-wide consequences.

The aim of this paper is to contribute to this comparatively underdeveloped aspect of the literature on illegal immigration. Applying USAGE, a multisectoral model, we provide quantitative analysis of the economy-wide effects of three broad approaches to reducing illegal immigrants in U.S. employment: tighter border security; taxes on employers; and vigorous prosecution of employers. In explaining USAGE results, we rely on familiar diagrams and back-of-the-envelope calculations rather than requiring readers to be familiar with USAGE details.

The paper is organized as follows. Section II gives brief background material on USAGE highlighting points that will be useful in interpreting results in later sections. Sections III and IV contain the main results, and Section V provides sensitivity analysis. Concluding remarks are in Section VI.

II. THE USAGE MODEL AND KEY MACRO ASSUMPTIONS

USAGE is a dynamic CGE model of the United States developed in collaboration with the U.S. International Trade Commission. The theoretical structure of USAGE is similar to that of Australia's MONASH model, Dixon and Rimmer (2002). However, most applications of models such as USAGE and MONASH require theoretical adaptations and database changes. For this study, we created a version of USAGE with 38 industries and 51 occupations. The first 50 occupations are used by the 38 industries. The 51st occupation is employment outside the United States of potential illegal immigrants. The introduction of this 51st occupation facilities the specification of flows of illegal immigrants.

A USAGE simulation of the effects of a policy shock requires two runs of the model: a basecase run and a policy run. The basecase is intended to be a plausible forecast while the policy run generates deviations away from the basecase caused by the policy under consideration. As well as policy changes, the policy run introduces macroeconomic and labor-market assumptions. The main assumptions underlying the results in Sections III-V are as follows:

A. Production Technologies and Household Preferences

In our policy runs, all technology and preference variables are exogenous and kept on their basecase paths. Thus, we assume that these variables are unaffected by changes in immigration policy.

B. Inflation

The price deflator for GDP is exogenous in policy runs and set on its basecase path. Thus, we assume that changes in immigration policy have no effect on inflation.

C. Investment and Rates of Return

In policy runs, USAGE allows for short-run divergences in industry rates of return from their basecase levels. Short-run increases/decreases in rates of return cause increases/decreases in investment and capital stocks. …