The Fiscal Impact of Low-Skill Immigration

Low-skill immigrants have low wages and thus don’t pay much in taxes but they do use some government services, especially education for their children. What’s the net fiscal impact? The National Academy of Sciences did a detailed scenario analysis looking at the impact over 75 years, thus including second and third generations. Overall the NAS concluded that the net fiscal impact of the average immigrant was positive. The impact was negative, however, for immigrants with just a high school education and even more so for immigrants with less than a high-school education.

Two recent papers qualify this conclusion. The NAS study estimated the direct fiscal effects of an immigrant–what do they pay in taxes and what do they take out in services? Immigration, however, has indirect effects on the native born population. In the The Case for Getting Rid of Borders I wrote:

The immigrant who mows the lawn of the nuclear physicist indirectly helps to unlock the secrets of the universe.

More prosaically, low-skill immigrants can complement higher-skilled native labor, increasing native productivity. Go to any fine restaurant in DC, for example, and you will typically see a native-born front of the house and a Mexican born back-of-the house. As Tyler quipped at lunch recently, all restaurants in the United States are Mexican restaurants only the type of food they are cooking changes. The opportunity to hire Mexican cooks increases the number of restaurants and the opportunities and wages of the native-born front of the house. Higher native wages mean higher taxes so there is a beneficial indirect fiscal effect of low-skill immigration.

A recent paper by Colas and Sachs, The Indirect Benefits of Low-Skilled Immigration finds that under plausible assumptions the indirect effects are large enough to make the net effects of immigration positive for almost all US immigrants.

My excellent colleague Michael Clemens makes another similar point about capital. When a profit-maximizing firm hires more labor it also hires more capital. Capital pays taxes. Thus, immigration raises the taxes paid by capital and when you add that indirect effect to the calculation it also shows that the net fiscal impacts of low-skilled immigration are plausibly positive.

The fiscal benefits of low-skilled immigration aren’t a big reason to support low-skill immigration but the new literature on the indirect effects should take one worry off the table.

As a takeaway, it’s important to recognize that the fiscal benefits arise because low-skilled immigrants are gainfully employed. The U.S. excels at integrating people into the workforce. We need to keep this in mind when thinking about labor policy including minimum wages, occupational licensing, E-Verify, access to banking, education, and driver’s licenses and so forth. We could easily turn fiscal benefits into fiscal costs by making it more difficult to employ immigrants (and workers more generally). Employing immigrants benefits both them and native citizens. America’s open markets play a pivotal role in this success. Let’s keep it going.