Political Economy of Immigration Policy: Lecture 6

1. Political Economy of Immigration Policy:Lecture 6 Gordon H. Hanson UCSD and NBER

2. Introduction • What we’ve done so far • Scale, selection and sorting in international migration • Labor markets impacts of emigration and immigration • Public finances and international labor flows • Illegal migration • Final lecture • Political economy of immigration policy • Why do receiving countries restrict labor inflows?

3. Immigration Policy Regimes • Governance of immigration policy • Regulation of entry • By quantity (quota on visas) or price (entry fee) • By ex ante or ex post selection criterion • Scope of residency rights • Broad (path to citizenship) or narrow (temporary admission) • Immigration policy regimes • Legal immigration • Combination of quantity regulation (quotas), ex ante selection criteria (family, skills, asylees), broad residency rights • Illegal immigrants • Combination of price regulation (implicit entry fee), ex post criterion (behavior), minimal residency rights

4. Political Economy of Immigration Policy • Why do countries restrict labor inflows? • Protect income of median voter or specific factors • Benhabib, de Melo et al • Facchini and Willmann, Scheve & Slaughter, Hanson & Spilimbergo, Mayda, Facchini and Mayda • Address distortions due to welfare state • Wellisch & Walz, Sinn et al, Boeri and Brücker, Facchini & Mayda, Hanson, Scheve & Slaughter • Scholten & Thum, Razin & Sadka, Poutvaara • Preserve cultural or ethnic homogeneity • Huntington, Dustmann and Preston

5. Design of Immigration Policy Regimes • Actual policy regimes have at least three dimensions • (1) entry regulation, (2) selection criterion, (3) scope of residency rights • Basic tensions in policy design • National welfare gain from free immigration vs. loss in income of favored groups (focus of literature to date) • Providing incentive to assimilate versus obtaining information on the “desirability” of an immigrant • Do bilateral migration treaties address these issues?

6. Why are poor consigned to illegal migration? • Whom do rich countries admit as legal immigrants? • Where do rich countries govern entry through quantity regulation, ex ante selection, broad rights? • Use for immigrants whose type (eg, skill, family) is observable • Ex ante screen + broad rights = strong incentive to assimilate • Whom do rich countries admit as illegal immigrants? • Where do rich countries govern entry thru price regulation, ex post selection, & narrow residency rts? • Use where type (eg, motivation) is unobservable • Mix of entry price, ex post screen, narrow rights selects desirable types (but reduces incentive to assimilate) • Narrow rights also lower fiscal cost, softening opposition

7. Trade versus immigration policy • Many countries appear to have adopted relatively liberal trade policies but relatively illiberal immigration policies • This pattern is replicated in public opinion data with support for liberal trade policies being stronger than support for liberal immigration • Why does freer immigration seem to be less politically palatable that freer trade?

8. Some Answers • Non-economic concerns such as attitudes toward foreign cultures and minority groups are more influential for immigration than trade • Pat Buchanan, Samuel Huntington (2005) • Economic concerns about immigration and trade differ and may favor trade over immigration as a strategy for international economic integration

9. Foreign-born share of the US population is rising Immigrants in the US, Number and Share of Population Percent of Population Millions Year

10. Education levels of US immigrants, natives

11. Concerns about immigration • In the US, immigrants are concentrated at the extremes of the skill distribution • Strongly over-represented among the least educated • Moderately over-represented among the most educated • Economic consequences of immigration: • Changes relative supplies of labor • Expands US tax base, increases demands on public services • Expands cross-border flows of ideas, capital, trade • Are consequences of immigration reflected in individual attitudes toward immigration policy?

12. The argument • In the absence of distortionary tax and spending policies, free immigration and free trade would often be supported by similar groups thanks to similar labor-market effects • Either tends to depress relative wages for low-skilled US natives • Borjas, Freeman & Katz (1997), Feenstra & Hanson (1999), Scheve & Slaughter (2001), Borjas (2003), Mayda (2004), Card (2005) • However, government policies that redistribute income alter the distributional consequences (and so the politics) of globalization • Immigrants pay taxes, use public services, and vote – imports do none of these things • The net fiscal impact of immigration appears negative (at least in short run), especially in high-immigration states and for high-income citizens who pay most of the tax bill for public services to immigrants • Smith et al. (1997) $200 net transfer per HH in US, $1200 in CA • Smaller fiscal effects are expected as a result of international trade

13. Views on fiscal consequences of immigration • "California's addiction to 'cheap' illegal alien labor is bankrupting the state and posing huge burdens on the state's middle class tax base." Dan Stein, Federation for American Immigration Reform • “It uses tax dollars to provide illegal workers with educational services, medical care, and unemployment compensation for those that are injured on the job. They are a drain on the taxpayers of Canyon County, the state of Idaho, and the US in general.“ Robert Vasquez, Commissioner of Canyon County, Idaho • "The bottom line is that businesses are benefiting from the cheap illegal labor. They're making extra profits and they're shifting the whole benefits package over on to the taxpayer.“ Rick Oltman, Yuma County, Arizona • “Federal immigration policies should ensure that new immigrants do not become a public charge to federal, state, or local governments.”National Governor’s Association

14. A tale of two governors • In the 1990s, California and Texas both had Republican governors • Governors Bush and Wilson were fiscal conservatives and rising stars within the national Republican party • Both supported NAFTA and free trade, but took very different approaches toward immigration • Bush courted the Latino vote (even campaigning in Spanish) and tried to appear pro-immigration • Wilson endorsed Proposition 187, a ballot measure to deny access of illegal immigrants to public services in California (later blocked by the courts)

15. A tale of two governors • What accounts for these different approaches toward immigration? • California provides generous public benefits to immigrants financed by progressive income taxes • This may have given high-income voters in the state an incentive to join the anti-immigration coalition • Texas provides meager public benefits financed by a regressive state sales tax • This may have made high-income voters in the state more pro-immigrant and created political space to attract socially conservative Latino immigrants to the Republican party

16. A simple model of policy preferences • Let V(p, Ii) be indirect utility received by individual i, as a function of commodity prices, p, and after-tax income, Ii • Consider change in indirect utility due to immigration: • Expressed in monetary terms this is: • Immigration changes commodity prices (1st term), pre-tax income (2nd term), and net fiscal transfer (3rd term)

17. Welfare effects of immigration • Let V(p, yi) be indirect utility received by individual i, as a function of commodity prices, p, and income, yi • Change in aggregate welfare due to change in low skilled labor supply of dL is (where αi is share of group i in the pop. for two groups, skilled (H) and unskilled (L)) • If marginal utility of income (λ) is constant across people • where

18. Welfare effects of immigration • Change in welfare as share of GNP (Y) is • where is the elasticity of income for factor type i w.r.t. the supply of low skilled labor, θi is the share of factor i in GNP, and M is inflow of L • y is post-tax income, given by • where wi is the pre-tax wage for group i, ti is the tax rate for group i and gi are gov’t transfers for group i

19. Welfare effects of immigration • How does post tax income respond to immigration? • Elasticity of post tax income w.r.t. supply of factor i is • where ρv,I is share of income type v for factor i and ηv,iL is the elasticity of income type v w.r.t. the supply of low skilled labor for factor i • We expect: • ηw,LL < 0, ηw,HL > 0 (immigration of L raises wH and lowers wL) • ηt,LL > 0, ηt,HL > 0 (immigration of L raises tax rates) • ηg,LL < 0, ηg,HL > 0 (immigration of L lowers gov’t transfers)

20. Estimating equation • Assume pre-tax income and the net fiscal transfer are linear functions of individual characteristics • (where X is defined such that β>0) • Assume ∂β/∂M=θ, in which case we expect: • With low-skilled immigration: • ∂yi/∂M=Xiθ+∂εi/∂M > 0 for high-skilled labor • ∂yi/∂M=Xiθ+∂εi/∂M < 0 for low-skilled labor • Assume ∂γ/∂M=λ • λ will vary across US states according to their spending and tax policies and the size of their immigrant populations

21. Estimating equation • Putting this together, we obtain • Preferences on immigration policy depend on individual characteristics, state characteristics, and their interactions (use categorical variables to allow for non-linearities) • All else equal, • Overall, the low-skilled will be more opposed to immigration (than the high-skilled) and their opposition will be stronger in states with larger immigrant populations • The opposition of the high-skilled to immigration will be stronger in states that (a) make larger fiscal transfers to immigrants, or (b) have more-skilled immigrant populations • Policies that weaken redistribution will also weaken high-skilled opposition to immigration

22. Identification • Empirical estimation • We estimate the correlation between opposition to immigration (or trade) and schooling and how this varies with size of state immigrant population, skill mix of state immigrant population, and state fiscal exposure to immigration • Given controls for state fixed effects, our focus is on how slope coefficient on schooling varies across states – identification is based on cross-state variation in how opposition to immigration responds to schooling (and whether this is conditional on the fiscal regime of the state)

23. Identification • Estimation issues (and partial corrections) • Endogeneity of state of residence, state welfare policies • Issue is possible correlation between unobserved determinants of individual attitudes toward immigration and size of state immigrant population (or nature of state welfare policies) • Would likely cause us to understate cross-state variation in opposition to immigration (since those more opposed to immigration or to generous welfare policies would be more likely to settle in low-immigration, low-welfare states) • Over sample period, few individuals change states and ranking of states in terms of welfare generosity to immigrants is stable – issue may be ameliorated by controlling for state fixed effects • Measurement error in preferences (Bertrand & Mullainathan) • Issue is that measurement error in stated preferences may be correlated with individual characteristics (eg, education) • Exploit information on other opinions (including those seemingly irrelevant to immigration) to absorb idiosyncratic error terms

24. Data • Examine public opinion across US states, for which there there is variation in fiscal costs of immigration • Define US states as tax jurisdiction (states set income, sales, and property taxes, provide many public benefits) • Sources • National Election Studies Surveys, 1992 and 2000 • Census of Population and Housing, Census of Governments, CPS

25. Immigrants are geographically concentrated

26. But recent immigrants follow job growth

27. Fiscal costs of immigration vary by state

28. Since 1996, immigrant-native differences in welfare use have declined for all categories except Medicaid

29. Differences remain in welfare uptake across US states (% of households receiving assistance by type)

30. Percent of school children with immigrant mothers, 2000

31. Expenditures and revenues by foreign-born and native households in California (1996)

32. State generosity in welfare benefits

33. Ranking of US states in terms of generosity toward immigrants is stable over time

34. Data • Measuring fiscal exposure to immigration (start with 4 categories per measure, test down to 2) • Immigration fiscal exposure measures: • Fiscal Exposure 1: Equal to 1 if state welfare spending per native is above ‘90 national mean and if high-immigration state (immigration population share is above ‘90 national mean), 0 o/w • Fiscal Exposure 2: Equal to 1 if ratio of state immigrant HHs on welfare to number of native HHs above ‘90 national mean, 0 o/w • Other fiscal exposure measures (for trade policy analysis): • Fiscal Exposure 3: Equal to 1 if state welfare spending per native is above ‘90 national mean • Fiscal Exposure 4: Equal to 1 if state welfare spending as share of state GDP is above ‘90 national mean • Interactions with schooling (No High School, High School, Some College, College) or income quartile

35. High immigration and generous welfare states • High immigration states • 1992: AZ, CA, CT, FL, IL, MA, NJ, NY, TX • 2000: ‘92 states plus CO, DC, MD, NV, NM, OR, VA, WA • States with high immigrant uptake of welfare • 1992: CA, CT, FL, MA, NJ, NY • 2000: ’92 states plus WA • States with high welfare spending • Per native household • 1992: CA, CT, NH, IL, LA, MD, MA, MI, MN, NJ, NY, OH, PA, TN, WA, WV, WI • 2000: CA, CT, DC, IL, KY, ME, MD, MA, MN, MS, NH, NJ, NM, NY, ND, OR, PA, SC, TN, WA, WV • As share of state GDP • 1992: AZ, AK, CA, CT, LA, MA, MI, MN, NH, NJ, NY, OH, PA, TN, WV, WI • 2000: AL, AK, CA, IA, KY, LA, ME, MA, MN, MS, NM, NY, ND, OH, OR, PA, SC, TN, WV

36. Data • NES immigration policy question • “Do you think the number of immigrants from foreign countries who are permitted to come to the US to live should be increased a little, increased a lot, decreased a little, decreased a lot, or left the same as it is now?” • Immigration Opinion is coded a 1 for those individuals favoring immigration be decreased a little or a lot and 0 for those individuals favoring immigration be maintained or increased.

37. Data • NES trade policy question • “Some people have suggested placing new limits on foreign imports in order to protect American jobs. Others say that such limits would raise consumer prices and hurt American exports. Do you favor or oppose placing new limits on imports, or haven't you thought much about this?” • Trade Opinion is coded a 1 for those individuals favoring protection and 0 for those opposing it

38. Native support for decreased immigration by education and fiscal exposure to immigrants, 2000

39. Native support for trade restrictions by education and fiscal exposure to immigrants, 2000

40. Probit results on native opposition to immigration • Estimation • Sample is native respondents • Regressors: • Dummies for schooling category alone and interacted with size of state immigrant population, state fiscal exposure to immigration • Other controls: gender, quadratic in age, race, ethnicity, state unemployment rate, state dummy variables, year dummy variable • Additional controls: Isolationist sentiment, union membership, public sector employment, partisanship, ideology • Standard errors clustered by state

42. Impact of education on attitude toward immigration (Facchini & Mayda, 2006)

43. Impact of income on attitude toward immigration (Facchini & Mayda, 2006)

44. Trade policy preferences

45. Additional results • Results are robust to: • Including interactions between education and skill mix of state-immigrant population (measured continuously or discretely) • Including state share of Latinos in immigrant population, individual attitudes toward minorities, other individual opinions • Substituting schooling with reported income, measured by quartile • Dropping individual high-immigration states (CA, NY, FL, TX, IL, NJ) • Dropping those who self identify as very conservative or very liberal • Using continuous measures of immigrant population, fiscal exposure • Re-estimating using ordered probit instead of bivariate probit

46. Summary • Puzzle of why we tend to see free trade but restrictionist immigration policy is usually posed as if their distributional politics are the same • While this may be true before taxes, transfers, it is unlikely to be true after taxes, transfers • The distributional consequences and thus politics of immigration and trade appear to differ