Academic journal article Contemporary Economic Policy

Restricting Employment of Low-Paid Immigrants: A General Equilibrium Assessment of the Social Welfare Implications for Legal U.S. Wage-Earners

Academic journal article Contemporary Economic Policy

Restricting Employment of Low-Paid Immigrants: A General Equilibrium Assessment of the Social Welfare Implications for Legal U.S. Wage-Earners

Article excerpt

I. INTRODUCTION

Most quantitative work on the economics of immigration in the United States has used partial-equilibrium econometric frameworks. In an earlier paper in this journal (Dixon, Johnson, and Rimmer 2011) we used a dynamic, computable general equilibrium (CGE) model to simulate the effects on the United States of reducing employment of unauthorized immigrants. The CGE method captures mechanisms that are not available in partial-equilibrium frameworks and produces results for the effects of immigration on a wide range of variables including wage rates by occupation. outputs by industry, exports and imports by commodity, and a complete array of macroeconomic variables.

In our earlier paper, we concentrated on average effects. We found that policies to restrict unauthorized immigration reduce the average real income of legal U.S. residents. Here we exploit further the detail available in our CGE model to look at the welfare effects for legal residents of restricting unauthorized immigration taking account not only of the average effect on wage rates but also distributional effects. Distributional effects are potentially important for welfare because restricting unauthorized employment raises the wage rates of some very low-paid U.S. workers (e.g.. Miscellaneous agricultural workers) who compete with unauthorized immigrants while at the same time it lowers the wage rates of high-paid U.S. workers.

The paper is organized as follows. In Section II, we start with a general introduction to our CGE model, USAGE. Then we provide a detailed description of the specification in USAGE of the markets for legal and unauthorized workers. In the final part of Section II we show how the CGE approach to immigration can broaden and deepen insights available from the econometric approach. We do this by reference to econometric work by Borjas, Grogger, and Hanson (2010) on the effects of low-skilled immigration on low-skilled wage rates in the United States. The first part of Section III describes USAGE results for the effects of restricting unauthorized employment on the occupational wage rates of legal workers. Then, we apply a social welfare function to these occupational wage results to compute welfare effects for legal residents. By using a social welfare function we take account of effects on wage rates across all occupations, not just the effect on the average wage rate. Finally in Section III we investigate the sensitivity of our welfare results to variations in key parameters. Concluding remarks are in Section IV.

II. AN INTRODUCTION TO USAGE AND THE CGE APPROACH TO IMMIGRATION

A. The USAGE Model

USAGE is a dynamic CGE model of the U.S. [economy.sup.1] A USAGE simulation of the effects of a shock to the economy (e.g., a change in immigration policy) requires two runs of the model: a baseline run and a perturbation run. The baseline is intended to be a plausible forecast while the perturbation run generates deviations away from the baseline caused by the shocks under consideration.

As in all CGE models, optimizing behavior governs decision-making by firms and households. Industries minimize costs subject to given input prices and constant-returns-to-scale production functions. Households maximize utility subject to their budget constraint. Domestic and imported goods are treated as imperfect substitutes. Export demands for U.S. commodities are modeled as inversely related to their foreign-currency prices. Explicit recognition is given to tax, transport, and other margins that separate purchaser prices from producer prices. The model can be run at various levels of aggregation. For this paper we adopted a version with 38 industries and 50 occupations.

USAGE has three types of dynamic mechanisms: capital accumulation, liability accumulation, and lagged adjustment processes. An industry's capital stock at the start of year t + 1 is its capital at the start of year t plus its investment during year t minus depreciation. …

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