Abstract

The Hamilton Project seeks to advance America's promise of opportunity, prosperity, and growth. We believe that today's increasingly competitive global economy demands public policy ideas commensurate with the challenges of the 21st Century. The Project's economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. Our strategy calls for combining public investment, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers -based on credible evidence and experience, not ideology or doctrine -to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation's first Treasury Secretary, who laid the foundation for the modern American economy. Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that "prudent aids and encouragements on the part of government" are necessary to enhance and guide market forces. The guiding principles of the Project remain consistent with these views. MISSION STATEMENT The Hamilton Project • Brookings 1 Rationalizing U.S. Immigration Policy: Reforms for Simplicity, Fairness, and Economic Growth Giovanni Peri Professor of Economics, University of California, Davis May 2012 NOTE: This discussion paper is a proposal from the author. As emphasized in The Hamilton Project's original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project's broad goals of promoting economic growth, broad-based participation in growth, and economic security. The authors are invited to express their own ideas in discussion papers, whether or not the Project's staff or advisory council agrees with the specific proposals. This discussion paper is offered in that spirit. Abstract This paper proposes market-based reforms to our immigration system to tie employment-based inflows to labor market demand. A goal of the proposal is to create an immigration system that is easier to operate and simpler to navigate for employers, foreignborn workers, and their families, and that increases the economic benefits of employment-based immigration for the U.S. economy. The economic consensus is that, taken as a whole, immigrants raise living standards for American workers by boosting demand and increasing productivity, contributing to innovation, and lowering prices-while also improving their own wellbeing and that of their families. The proposed system uses market-based auctions to allocate employment-based permits to employers and visas to immigrants that have the greatest propensity to contribute to economic activity and thus to generate the largest benefits for the U.S. economy. These auctions would also generate revenue for the federal government; the government could use that revenue to compensate local communities that deliver social services to immigrants, or to invest in the skills of American workers. The essential features of the proposal would be implemented in a series of incremental phases starting with a pilot program that uses an auction-based system to allocate temporary employment visas. After a successful pilot with the existing classes of temporary employment visas, the second phase would expand the auction to permanent labor-sponsored visas. A final phase would provide a reassessment of the balance between employment-based and family-based visas, as well as a broad simplification of complicated rules in the current system such as country quotas. As under the current system, the worker would have the option to bring her spouse and minor children to this country under her visa. The number of permits would be prescribed by Congress, and the permit fee would subsequently be determined in the auction. Small businesses and family businesses, including those run by immigrants, would also be eligible to purchase permits. Employers would have the ability to resell or trade permits, and foreign-born workers would have the flexibility to move between permit-holding employers. This added flexibility on both sides provides a strong element of protection for the workers via competition. The new system would thus eliminate the cumbersome ex ante labor verification procedures for employers who intend to hire immigrants. This proposal also recommends improvements in immigration enforcement through the use of technology-based enforcement in the workplace and measures to address the current population of undocumented workers. The Hamilton Project • Brookings 3 Chapter 1: Introduction T he increase in productivity that workers achieve when they migrate to work in the United States provides one measure of the global economic gains from immigration. In 2010, high-school-educated immigrant workers moving to the United States from less-developed countries increased their yearly salaries by an average of $22,000. The average gain for college graduates was $57,000 per year. Those immigrant workers, in turn, bring benefits to the U.S. economy. They bring a diverse set of skills, human capital, abilities, and ideas. Highly-educated immigrants generate economic opportunities for U.S. firms and workers by contributing to innovation, science, and productivity growth. In fact, the college-educated are overrepresented among immigrants relative to the U.S. population (see Less-educated immigrants also supply useful skills. They provide much-needed labor to perform manual non-tradable services, filling jobs in agriculture, construction, and personal services where local demand from employers is often not matched by a supply of American workers. As a result of their work, immigrants significantly increase the aggregate economic productivity of the country. Highly-educated immigrants contribute substantially to technological and scientific innovation, to entrepreneurship, and to economic productivity. 1 Less-educated immigrants fill high-demand manual and personal service jobs that most U.S.-born citizens shun, and keep the prices of those services more affordable. In both cases, immigrants are more likely to complement the job prospects of U.S.-born citizens than they are to compete for the same jobs as U.S.-born citizens. Overall, economists do not find that immigrants cause any decrease in the wages and employment of U.S.-born citizens at the local level. Recent estimates of the effects of immigrants on national wages are also quite small. They reveal that the average U.S. worker as well as the average worker with low schooling levels Note: The yearly salary in the United States is calculated as the average yearly salary earned by a worker from the specified country and with the specified education in year 2010. The surplus created is obtained by applying the percentage gains from immigration reported in Clemens and colleagues (2009) to the 2010 yearly salary. 6 Rationalizing U.S. Immigration Policy: Reforms for Simplicity, Fairness, and Economic Growth experiences wage effects that are close to zero, and possibly positive, from immigration. Aggregate employment effects on U.S.-born citizens were even smaller. 2 Finally, immigrants increase population growth, slow the aging of the population, and have a positive net fiscal impact on entitlement programs like Social Security. An important goal of immigration policies is to make the best use of these extremely valuable human resources and to ensure that they are directed towards the economic success of the country and of the immigrants themselves. Of course, economic considerations are only one part of the goals of U.S. immigration policies. Family unity, humanitarian relief, fairness, and ethical values are also pillars of U.S. immigration policy. In order to achieve all of these goals, the United States needs an effective and efficient system. However, it has become evident that America's outdated immigration system is not up to the task. The proposal suggested in this paper envisions a deep reform to be implemented in incremental phases. Two broad and far-reaching problems plague the current immigration system. The first is complexity arising from a system that has been patched up incrementally over time, and that has grown increasingly cumbersome and costly. The second is the economic inefficiency and inflexibility of the current system, which has proven unable to adapt to changing global economic circumstances. These problems inhibit economic and productivity gains from high-skilled immigration while restricting opportunities for lower-skilled workers to fill areas of high demand. The general principles behind today's immigration system have remained largely unchanged since the Immigration and Nationality Act of 1965, but the manner in which these principles are implemented has grown excessively complex as a result of accumulating legislative changes, special laws, and limited provisions. The main path to immigration within this system is governed by rigid, arbitrary, and overlapping quotas on permanent residence visas. In addition, more than twentyfive categories and subcategories of temporary visas have accumulated over time, each subject to restrictions, rules, and sometimes cumbersome conditions. The result is bottlenecks that force individuals who have valid claims to residence in the United States to wait in lines, sometimes for decades. For example, family members of U.S. residents from Mexico, China, India, and the Philippines have to wait for up to fifteen or twenty years to obtain a visa. Because of the complexity of the system, employers and immigrants may need costly legal and expert assistance at any step of the process. These delays are inefficient and often unfair to immigrants and employers who play by the rules. The current immigration system also leads to undesirable economic outcomes. Many highly-educated temporary immigrants who contribute significant value to U.S. companies and generate local economic activity and tax revenues are forced to return to their countries of origin because they are unable to obtain permanent residence visas. At the same time, less-educated manual workers in agriculture, construction, and personal services have extremely limited options for legal entry-despite being in high demand from U.S. employers. These restrictions produce formidable economic incentives to employ undocumented immigrants, and have contributed to the larger problem of undocumented immigration with costs and risks for the immigrants as well as higher costs for employers who follow the rules. THE caSE FoR IMMIGRaTIon REFoRM The economic case for immigration reform rests on the evidence that there are significant benefits from immigration unrealized by the current immigration system. There are also other distributional issues generated by immigration and not addressed by the current system. The first major failure of the existing system is that it does a poor job of identifying, admitting, and rewarding workers whose skills bring the greatest value to the American economy. The basic reason for this failure is that the system for allocating visas is not related to the needs of the market. For instance, in spite of the formidable contributions of highly-educated immigrants to science, technology, and entrepreneurship, and their related positive effects on productivity and employment opportunities of U.S.-born citizens, the U.S. system restricts the admittance of highly-educated immigrants. Since 2004, the quota on temporary admissions of highly-skilled persons with H-1B visas has been only 65,000 annually. 3 In several years that quota was exceeded almost instantly, with the result that visas were allocated via a random lottery to potential employers. Even in the post-recession year of 2011, applications for visas exceeded the quota before the end of the year. Another aspect of the H-1B visa rules that is hard to justify on economic grounds is the fact that only private companies (but not public and nonprofit companies) are subject to the quota. These limitations reduce economic opportunities in the United States because some companies may move part of their research, development, and business services abroad when constrained by the number of highly-educated potential workers they can find domestically. 4 Such responses deprive the United States of jobs and innovation, reduce local demand, and have other negative effects. Similarly, the exceptional quality of U.S. universities and educational institutions attracts numerous brilliant international students, and the institutions invest considerable resources in building the students' human capital. But the current immigration system does not provide international students who have finished Innovation and technological progress are the engines of economic growth. Hence, human capital and very high levels of skills are central to continuing economic success in technologically advanced countries. Several economic analysts have emphasized that the inflow of highly-educated immigrants is a valuable competitive edge that the United States has over other advanced and competing countries such as Japan and Germany. 5 Another interesting dynamic effect of highly-educated immigrants is that, because they tend to concentrate in urban areas, they stimulate local virtuous cycles by creating spillover effects on the productivity of local economies, which creates local jobs and promotes growth. Moretti (2010) finds that a high-skill job in a city created 2.5 additional jobs in the local nontradable sector through linkages of production and local demand effects. Moretti (2004) finds that an increase in the share of college-educated immigrants by 1 percent increases productivity and wages for everybody in a city by 1 percent. These channels also imply that college-educated immigrants contribute to increase the value of land and housing in those cities (as found by Saiz 2007). This makes homeowners, who are in large part U.S. citizens, wealthier.