Why Does Immigration Divide America?: Public Finance and Political Opposition to Open Borders (Working Paper #129)

Gordon H. Hanson, University of California – San Diego and National Bureau of Economic Research

Summary: In this manuscript, I consider the interplay between public finance and U.S. immigration policy. Immigration is making the U.S. population larger and more ethnically diverse and the U.S. labor force more abundant in low-skilled labor. One consequence of these changes has been lower wages for low-skilled U.S. workers. More generally, the benefits and costs of immigration appear to be distributed quite unevenly. Capital owners, land owners, and employers capture most of the benefits associated with immigration, which they enjoy in the form of higher factor returns. Taxpayers in highimmigration U.S. states shoulder most of immigration’s fiscal costs, which they bear in the form of higher taxes that go to pay for public services used by immigrant households. On net the economic impact of immigration on the United States is small. However, small net changes in national income mask potentially large changes in the distribution of income. These distributional changes appear to be an important ingredient in how individuals form opinions about immigration policy.

Survey data suggest that individuals are more opposed to immigration if they (a) are more exposed to immigration’s labor-market consequences, as are low-income workers living in states with large immigrant populations, or (b) are more exposed to the immigration’s public-finance consequences, as are high-income workers living in states with high immigrant uptake of public assistance. Policies that have reduced the fiscal costs of immigration, such as welfare reform in the 1990’s, appear to have softened political opposition to immigration. Generating greater political support for open immigration policies would require reducing immigration’s adverse effects on the labormarket earnings and on the fiscal burdens of U.S. residents.

Currently, there is political gridlock in the United States regarding immigration policy. This gridlock makes it difficult to address pressing issues related to illegal immigration, such as what to do about the 10 million illegal immigrants living in the United States, and national security, such as how to get immigration authorities and intelligence agencies to coordinate meaningfully with each other.

One strategy for reforming U.S. immigration policy would be to change the skill composition of those admitted. By shifting to a system that favors high-skilled immigrants, the United States would attract individuals with high income potential. A skills-based immigration policy would help raise the wages of low-skilled workers and reduce the fiscal burden on taxpayers. However, it would have the disadvantage of having its effects on U.S. labor markets blunted by other aspects of globalization. An alternative (but not mutually exclusive) strategy would be to expand temporary immigration programs and to phase in immigrant access to public benefits more slowly over time. A rights-based immigration policy would help alleviate the negative fiscal consequences of immigration and free immigration policy to be used for meeting U.S. labor needs or achieving other objectives. To be effective, any change in immigration policy must address enforcement against illegal immigration.

Working Paper #129 »