The Labor Market and the Tragedy of Illegal Immigration

By Mariano Escobedo, Ph.D.

“No human being is illegal”—–Elie Wiesel, Nobel Peace Prize 1986

This article explains the rational economics of illegal immigration, its implications for an immigration reform, and the future of illegal immigration in the U.S. Its main purpose is to add to the discussion, not to have the last word on the issue. The discussion and conclusions are summarized for space constraints and are based on public information, most of them available online. I believe that most average readers have arrived intuitively to the same conclusions but they do not dare to express them openly, either because they do not have confidence on the accuracy of their conclusions or because they are just too politically correct (I would not dare to assume that it is out of hypocrisy or because of open bigotry).

In a competitive market economy, to stay in business firms need to be cost-efficient. On average, labor accounts for about two-thirds of production costs. Firms who can outsource their manufacturing processes will do so to reduce the cost of labor (outsourcing is not illegal). This is how the U.S. is losing jobs to China. However, firms who cannot outsource the production of goods and services will employ immigrants to reduce labor costs, so they can stay competitive. The alternative available to some firms who cannot outsource nor employ immigrants will be most likely to go out of business. So, thanks to illegal immigration some American firms who cannot outsource can still create jobs in the U.S. and not only for immigrants. As the supply of unskilled labor by immigrants goes up, the market wage rate goes down and American firms can profit from this. Low wages for unskilled labor also helps to keep the inflation rate low and both domestic consumers and businesses benefit from this. Competition between American unskilled workers and immigrants is almost nonexistent, since immigrants usually take the jobs and wages with no benefits that American workers usually do not want. To pursue these meager jobs and wages, illegal immigrants may even fall in the hands of human traffickers and employers in the U.S. who keep them in conditions of slavery. Who may want a job like this?

The market economy is subject to periodic business cycles during which the level of economic activity goes up and down. When the economy is booming, illegal immigrants are not only welcomed by business firms who cannot outsource, but also overlooked by the border authority. The IRS has even designed a Tax Identification Number (TIN) that allows workers who do not have a Social Security Number (SSN) to be hired and taxed. So, contrary to the common belief, illegal immigrants pay income taxes! However, illegal immigrants usually do not seek medical or social services out of fear of being identified and deported to their home countries. Additionally, most illegal immigrants do not file tax returns; as a result, they do not receive tax refunds either. According to the IRS, the Earnings Suspense File (ESF) grows every year at a rate of $39.4 billion in wages with no beneficiaries.

On the other hand, during an economic recession illegal immigrants are the favorite villains and the perfect scapegoats. They are the favorite villains because the high rates of unemployment affecting the economy during a recession and the hardships that this imposes on domestic households creates the perfect climate to put the blame on illegal immigrants for taking the jobs that U.S. citizens did not want to take in the first place. They are the perfect scapegoats because they can be disposed of without previous warning or severance payments. Since officially they do not exist, they cannot complain either. Since they are not like us, nobody would care if they are abused. Since they cannot vote, politicians will get tough on immigration issues to obtain the votes of hard-core, right-wing voters and to divert the attention from the real problems that they have helped to create. This is how illegal immigrants become the recurrent sacrificial victims -welcomed while useful, disposable when convenient-. What a beautiful country! I wonder whether president Obama still believes that “we are better than this”.  Are we?

A main conclusion is that the U.S. economy needs immigrants, but it needs them to be illegal in order to keep wages low. Some may find this point of view outright cynical. However, economic theory and the cold hard facts show that this is how the market system really works, when it does. The root of illegal immigration is the economic incentive created by wage differentials between countries or regions in which the host country (the U.S.) prefers to keep immigration illegal for economic gains. The reason for the heated debate against illegal immigration in the U.S., (two-thirds of those interviewed approved the Arizona Immigration Law, SB 1070) fueled by some members of the media, is only a smoke screen that hides special interest groups, ranging from the firms who directly benefit from illegal immigration and, therefore, have no incentive to fix the problem, to outright racists disguised with legal and economic arguments.

A market solution to the illegal immigration problem is only temporary and lasts as long as the economy is booming, before another recession demands another temporary solution to the same old problem. A more permanent solution to the illegal immigration problem must be political in its nature and involves an immigration reform with a guest worker program that must be human in its nature. It must follow the guidelines of the International Labor Organization (ILO) to prevent the exploitation of women and men who can supply productive work in conditions of freedom, equity, security, and human dignity. The market system by itself cannot provide this solution.

By Mariano Escobedo, Ph.D.

“No human being is illegal”—–Elie Wiesel, Nobel Peace Prize 1986

This article explains the rational economics of illegal immigration, its implications for an immigration reform, and the future of illegal immigration in the U.S. Its main purpose is to add to the discussion, not to have the last word on the issue. The discussion and conclusions are summarized for space constraints and are based on public information, most of them available online. I believe that most average readers have arrived intuitively to the same conclusions but they do not dare to express them openly, either because they do not have confidence on the accuracy of their conclusions or because they are just too politically correct (I would not dare to assume that it is out of hypocrisy or because of open bigotry).

In a competitive market economy, to stay in business firms need to be cost-efficient. On average, labor accounts for about two-thirds of production costs. Firms who can outsource their manufacturing processes will do so to reduce the cost of labor (outsourcing is not illegal). This is how the U.S. is losing jobs to China. However, firms who cannot outsource the production of goods and services will employ immigrants to reduce labor costs, so they can stay competitive. The alternative available to some firms who cannot outsource nor employ immigrants will be most likely to go out of business. So, thanks to illegal immigration some American firms who cannot outsource can still create jobs in the U.S. and not only for immigrants. As the supply of unskilled labor by immigrants goes up, the market wage rate goes down and American firms can profit from this. Low wages for unskilled labor also helps to keep the inflation rate low and both domestic consumers and businesses benefit from this. Competition between American unskilled workers and immigrants is almost nonexistent, since immigrants usually take the jobs and wages with no benefits that American workers usually do not want. To pursue these meager jobs and wages, illegal immigrants may even fall in the hands of human traffickers and employers in the U.S. who keep them in conditions of slavery. Who may want a job like this?

The market economy is subject to periodic business cycles during which the level of economic activity goes up and down. When the economy is booming, illegal immigrants are not only welcomed by business firms who cannot outsource, but also overlooked by the border authority. The IRS has even designed a Tax Identification Number (TIN) that allows workers who do not have a Social Security Number (SSN) to be hired and taxed. So, contrary to the common belief, illegal immigrants pay income taxes! However, illegal immigrants usually do not seek medical or social services out of fear of being identified and deported to their home countries. Additionally, most illegal immigrants do not file tax returns; as a result, they do not receive tax refunds either. According to the IRS, the Earnings Suspense File (ESF) grows every year at a rate of $39.4 billion in wages with no beneficiaries.

On the other hand, during an economic recession illegal immigrants are the favorite villains and the perfect scapegoats. They are the favorite villains because the high rates of unemployment affecting the economy during a recession and the hardships that this imposes on domestic households creates the perfect climate to put the blame on illegal immigrants for taking the jobs that U.S. citizens did not want to take in the first place. They are the perfect scapegoats because they can be disposed of without previous warning or severance payments. Since officially they do not exist, they cannot complain either. Since they are not like us, nobody would care if they are abused. Since they cannot vote, politicians will get tough on immigration issues to obtain the votes of hard-core, right-wing voters and to divert the attention from the real problems that they have helped to create. This is how illegal immigrants become the recurrent sacrificial victims -welcomed while useful, disposable when convenient-. What a beautiful country! I wonder whether president Obama still believes that “we are better than this”.  Are we?

A main conclusion is that the U.S. economy needs immigrants, but it needs them to be illegal in order to keep wages low. Some may find this point of view outright cynical. However, economic theory and the cold hard facts show that this is how the market system really works, when it does. The root of illegal immigration is the economic incentive created by wage differentials between countries or regions in which the host country (the U.S.) prefers to keep immigration illegal for economic gains. The reason for the heated debate against illegal immigration in the U.S., (two-thirds of those interviewed approved the Arizona Immigration Law, SB 1070) fueled by some members of the media, is only a smoke screen that hides special interest groups, ranging from the firms who directly benefit from illegal immigration and, therefore, have no incentive to fix the problem, to outright racists disguised with legal and economic arguments.

A market solution to the illegal immigration problem is only temporary and lasts as long as the economy is booming, before another recession demands another temporary solution to the same old problem. A more permanent solution to the illegal immigration problem must be political in its nature and involves an immigration reform with a guest worker program that must be human in its nature. It must follow the guidelines of the International Labor Organization (ILO) to prevent the exploitation of women and men who can supply productive work in conditions of freedom, equity, security, and human dignity. The market system by itself cannot provide this solution.

1 thought on “The Labor Market and the Tragedy of Illegal Immigration”

  1. I hope that every American, regardless of where he lives, will stop and examine his conscience about this and other related incidents. This Nation was founded by men of many nations and backgrounds. It was founded on the principle that all men are created equal, and that the rights of every man are diminished when the rights of one man are threatened. All of us ought to have the right to be treated as he would wish to be treated, as one would wish his children to be treated, but this is not the case.

    I know the proponents of this law say that the majority approves of this law, but the majority is not always right. Would women or non-whites have the vote if we listen to the majority of the day, would the non-whites have equal rights (and equal access to churches, housing, restaurants, hotels, retail stores, schools, colleges and yes water fountains) if we listen to the majority of the day? We all know the answer, a resounding, NO!

    Today we are committed to a worldwide struggle to promote and protect the rights of all who wish to be free. In a time of domestic crisis men of good will and generosity should be able to unite regardless of party or politics and do what is right, not what is just popular with the majority. Some men comprehend discrimination by never have experiencing it in their lives, but the majority will only understand after it happens to them.

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