Sunday, July 01, 2007

The Economic Fallacies of Desperate Foreign Labor

As Congress deliberates immigration reform, the political pundits are already making claims about the supposed economic necessity of immigrants. I shall highlight the speciousness of these claims in the context of a free market.

Claim #1: The percentage of American citizens without a high-school education is continuously declining, so the American economy needs desperate illegal aliens to do unskilled work. Educated Americans refuse to perform menial labor.

Reality #1: Suppose that 100% of the American population were educated. Would no one do unskilled work? Would we die from starvation because no one would harvest the crops? The free market say, "No!" In an American society with only educated people, some of them would still work as menial laborers. The educational level of a person does not determine her job. Rather, the demands of the labor market determine her job. For example, during the dot-com recession of 2002, former computer programmers worked as waitresses and baby sitters due to a scarcity of high-tech jobs. [1]

That educated people are doing unskilled work is not necessarily a bad outcome. Why? In a prosperous nation having only educated people, menial jobs would actually pay good wages. Since educated people hesitate to do unskilled work, its wages would rise to overcome the hesitation. The wages of skilled jobs would fall due to a massive oversupply of educated people. Thus, the gap between the haves and the have-nots would be quite small!

So, the free market works. Even if all Americans possessed a high-school education, some Americans would still perform menial labor. They will pick the vegetables and dig the ditches. We do not need desperate illegal aliens from Mexico to do such work.

Claim #2: Stopping illegal immigration will worsen the unskilled-labor shortage. This shortage causes unskilled jobs to disappear but does not cause their wages to rise.

Reality #2: The relationship between wages and labor shortages was evidenced by the dot-com boom. At its start in 1997, a computer programmer typically earned $60 per hour as a contractor. At the height of the dot-com boom in 1999, the shortage of high-tech labor boosted contractor wages to $100 per hour. [2] Responding to this increase in pay, American college students flocked to major in computer science. [3]

In the American market for unskilled labor, a shortage similarly boosts wages (and improves working conditions) as employers attempt to attract potential employees. As wages rise, more Americans enter the unskilled-labor market, obviating the need for illegal-alien labor.

When illegal aliens flood the market for unskilled-labor, they destroy this upward pressure on wages. A recent study at Harvard University proved that Mexican aliens (of whom most are illegal) actually reduced the wages of American high-school dropouts by 8%. [4]

Claim #3: Allowing the free flow of labor between Mexico and the United States actually supports the free market here. A guest-worker program facilitates the free market.

Reality #3: Inefficiencies in the non-free market of Mexico include rigid labor laws, monopolies, government ownership of companies, and widespread corruption. [5][6] The poverty resulting from these inefficiencies has driven millions of illegal aliens into the unskilled-labor market of the United States. Their presence here suppresses wages and diminishes working conditions as American employers exploit the limitless supply of desperate Mexican labor.

In other words, the non-free market in Mexico now suppresses the wages of unskilled labor in the American market. When we allow this interference from a non-free market, how can we claim that we are still supporting a free market in the USA?

Many bean counters in American food-processing companies utterly hate the free market. They feel that wages set by this market are too high. So, the companies hire illegal aliens to deliberately lower wages, thus counteracting free-market forces.

Now, the bean counters want a government program allowing them to legally use Mexican aliens to suppress wages. This program is called "the guest-worker program". Greased by political donations, Congress has eagerly obliged American agribusiness by setting the guest-worker program as the centerpiece of immigration reform.

Before Washington intervenes in the free market and reduces the wages of unskilled American labor, Congress should first reduce wages in the federal government. With tongue firmly planted in cheek, I propose a guest-politician program. First, we cap the annual salaries of civil servants and politicians at $10,000. Since Americans would hesitate to work for such a low wage, civil service and politics will become "the jobs that Americans just will not do", thus justifying the importation of desperate Mexican labor. Many illegal aliens would be thrilled to earn $10,000 by working as an American civil servant or politician. These newly cheap wages in government would greatly reduce the annual budget deficits.

Claim #4: We need the H-1B program to inject desperate but skilled workers from non-free markets (like India [7] and China) into the American market in order to eliminate a shortage of high-tech labor.

Reality #4: Supposed shortages of high-tech labor exist for the very same reason that supposed shortages of unskilled labor exist. Namely, both high-tech companies and low-tech companies refuse to pay adequately high wages to attract American citizens. Note that the free market, not the individual hiring manager, determines whether a wage is "adequately high". The manager may think that $150,000 per year is "adequately high", but if he cannot hire any American citizen at that salary, then the free market considers it to be too low.

These labor shortages, caused by deliberately low wages, provide the perfect excuse for bean counters to clamor for government intervention via a guest-worker program and an H-1B program. Why should Washington intervene to "fix" a labor shortage? Washington never intervenes to "fix" a labor surplus -- like the one leading to massive layoffs in Detroit. Why is government intervention necessary in one instance but not in the other? The free market needs no intervention in either situation.

Here is the bottom line. The right solution to a labor shortage is not government intervention. The right solution is paying adequately high wages to attract American workers.

Claim #5: Company XYZ cannot afford to pay the adequately high salaries to hire American citizens. So, the company needs H-1B workers in order to remain afloat. Without the relatively cheap foreign workers, the company will cease operation.

Reality #5: The free market is a competitive arena. Companies come and go. In order to survive, a company must build a high-quality product that consumers want to buy. If the company fails to do so, then it loses market share and ceases operation. No one will shed a tear.

Consumers know that competition is good. When an uncompetitive company disappears, a better company with a better product replaces it. We see this dynamic in the automotive industry: Toyota will soon replace Ford as the number 2 seller of automobiles in the USA. Commenting on the plight of Ford, President George Bush bluntly stated that a company survives when it creates "a product that's relevant". [8][9]

Yet, building a "relevant" product is only 50% of the competitive landscape. The other 50% is paying "relevant" salaries to hire good workers building the "relevant" products. If a company cannot pay adequately high salaries to get the necessary American workers, the company should cease operation and be replaced by a competitor that can pay adequately high salaries. That is competition. That is the free market.

Washington refuses to help failing companies that consistently build inferior products. Why should Washington use an H-1B program to help companies that pay inferior wages? We should allow the free market to eliminate uncompetitive companies. We are better off without them.

Claim #6: Increasing our population, by increasing immigration, increases our standard of living. So, we must open our immigration doors to illegal aliens, H-1B workers, or any other person who wants to live in the USA.

Reality #6: We can obtain the economic benefit of a large population -- without increasing immigration. Consider the free-trade agreement (FTA) between South Korea and the USA. Without increasing Korean immigration into the USA, the FTA economically links 50 million Koreans to the American free market. In so doing, the FTA will increase our standard of living by about 0.33%. In practical terms, an American earning $100,000 would have an additional $330 to spend. [10][11]

We can increase our wealth further by taking an additional step: integrating all the Western free markets -- the European Union, the USA, and the rest -- into a single free market having about 1 billion people. We would enjoy the elevated wealth generated by 1 billion people even though our population is only 300 million.

In conclusion, there is no economic necessity whatsoever for (1) an open-border policy, (2) a guest-worker program, or (3) an H-1B visa program. Moreover, when Washington "fixes" a supposed labor shortage by importing desperate foreign workers, the government actually suppresses wages and benefits. A study at Harvard University has confirmed that immigration generally suppresses wages across the board. In particular, Mexican aliens have reduced the wages of unskilled American labor by 8%.

Yet, we should not slam the door on immigration. There are many ethical reasons for admitting immigrants. Some foreigners flee to our nation to escape dire economic and political oppression. Others are enamored with American culture and want to be part of it. We should warmly welcome a reasonable number of such immigrants.

However, we should maintain our honesty in discussions about immigration. We should not succumb to specious arguments that the economy needs immigrants. It does not need them; rather, they need our prosperous economy.

note
The essay, "The Economic Fallacies of Desperate Foreign Labor", was originally written in 2006, was substantially revised in 2007 April, and was slightly revised in 2007 July.

reference
1. Rachel Konrad, "From high-tech to blue collar", CNet, 2002 February 8.
2. Katharine Mieszkowski, "Even programmers get the blues", salon.com, 2001 March 13.
3. Andrea L. Foster, "Student Interest in Computer Science Plummets", "The Chronicle of Higher Education", 2005 May 27.
4. George J. Borjas and Lawrence F. Katz, "The Evolution of the Mexican-born Workforce in the United States", Harvard University, 2006 March. (See Table 11 on page 64.)
5. Kerry A. Dolan, "The Mexico That Might Have Been", "Forbes", 2005 September 5.
6. "Poverty in Mexico - Fact Sheet (2002)", The World Bank Group, 2007.
7. "India overheats", "The Economist", 2007 February 1.
8. "Toyota redesigns pickups to compete better with Big 3", Kentucky.com, 2007 March 19.
9. Greg Levine, "Bush: GM, Ford Need 'Relevant' Products To Survive", Forbes.com, 2006 January 26.
10. "Gross Domestic Product", MSN Encarta, 2007.
11. "U.S. Official Sees Strong Prospects for U.S.-Korea Trade Pact", USINFO, 2006 September 28.

5 comments:

M said...

Nice. From an Ivory Tower standpoint. In reality, there are places in the U.S. where labor shortages do exist and viable businesses are closing as a sole result of lack of labor. Americans are either unwilling or unable to move there. See Cape Cod for one - a seasonal economy supporting the wealthy. American workers aren't willing to move there because of the high rents while foreign workers are more accepting of the employer-housing situations.

Anonymous said...

that is over-simplification to a horrific extent. please read some books on economics.

David desJardins said...

There are only a finite number of people in the world with the skills to be really good software engineers. There is a "shortage" of such people in the sense that US companies could easily hire all of them, and more. The problem is not the level of wages---no matter how much you pay a mediocre software developer, that won't turn them into a great one. The question we have is whether we want those people to come to the US to work---where they help build great companies that employ lots of other people---or whether we want them to build those companies overseas.

Anonymous said...

well,this is what gave the DLC some intial momentum. parts of info will support a certain ideal. and large reason WHY HILLARY LOST the NOD.
THANK YOUR GOD FOR THE INCREASE IN YOUNG EDUCATED VOTERS!too bad the author is hard at work undermining the democrats.
even when Hillary is out there supporting OBAMA.

HOW CAN A MINIMUM WAGE WORKER SURVIVE IN SAY NEWPORT BEACH OR SAN FRANCISCO.?

HOW CAN MANY BAD SCHOOLS PRODUCE ENOUGH GOOD SOFTWARE ENGINEERS?

so many real questions and answers to be found..

san said...

What a nonsensical argument. This "Reporter" can't be a PhD in any meaningful subject -- certainly not in economics.

It's the market that sets the wages, not "Reporter".

By his logic, then one could set minimum wage for McDonald's/fastfood industries at $50/hr, and claim that this is for attracting the right workers. I'm sure many minimum wage advocates would like that. "Reporter" would never be able to afford eating at McDonald's again, though.

This guy is dreaming in technicolor. Sometimes he wants to be a socialist, other times he wants to be capitalist, and sometimes something else. What he is in reality, is an ethno-centrist who wants all policies to revolve around his narrow socio-economic group.