Impact of Mexican Immigration on Wages and Prices in the United States

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As indicated by Figure 6 (page 20), Mexican immigration has significantly increased the supply of workers who lack a high school education, while having a very small effect on the supply of workers in other educational categories. As a result, the primary effect of Mexican immigration will be on unskilled native-born workers. An often-made argument for Mexican immigration is that it holds down labor costs for employers who use unskilled labor. Employers in turn pass the savings on to customers resulting in a reduction in prices. Thus, any reduction in wages for the unskilled should lower prices in the United States for things such as produce, child care, and other goods and services in which unskilled labor is an important input. Of course, if Mexican immigration does not reduce wages for unskilled workers, then there is no benefit. In other words, if wage costs for employers are the same with or without Mexican immigrant labor, then there is no savings to be passed on to consumers.

Most Natives Do Not Face Job Competition from Mexican Immigrants. The often-made assertion that immigrants only take jobs Americans do not want is partly correct, at least in regard to Mexican immigrants. It seems very likely that the vast majority of the jobs held by Mexican immigrants are jobs that would not interest the majority of Americans because they are generally low paying work done by unskilled workers. However, it is also clear that there are millions of Americans who do precisely those kinds of jobs. There are 8.3 million native-born workers 18 years of age or older working full-time who have not completed high school. In addition, there are 3.4 million adult native-born Americans who lack a high school education working part-time. There is a good deal of evidence that these workers are in direct competition with Mexican immigrants.

Unskilled Natives and Mexican Immigrants Hold Similar Jobs. Table 4 reports the distribution across occupations of full-time native workers who lack a high school education and full-time Mexican immigrants. The table indicates that with the exception of agricultural labor, the two groups have similar distributions across occupations. Thus, natives who lack a high school education and Mexican immigrants appear to be doing the same kind of jobs and are therefore in competition with one another. Another way to think about whether Mexican immigrants compete with unskilled native-born workers is to look at their median wages. If Mexican immigrants were employed in jobs that offered a very different level of remuneration than native-born dropouts, then it would imply that the two groups do very different kinds of work. But in fact the median wages of Mexican immigrants and native-born high school dropouts are very similar. The median weekly wage for native-born high school dropouts who work full time is $350, while the median weekly wage for full-time Mexican immigrants is $326. Like their distribution across occupations, the wages of the two groups seem to indicate that they hold similar jobs.

In addition to the evidence discussed above, other research has shown that unskilled immigrants and natives compete with one another for the same jobs. A report prepared by the Bureau of Labor Statistics concluded that native-born and immigrant high school dropouts are almost perfect substitutes for one another in the labor market. That is, they compete directly with one another for the same jobs.8 In a paper published by the Brookings Institution in 1997, Harvard economists George Borjas, Richard Freeman, and Lawrence Katz also found that natives and immigrants who lack a high school education tend to hold similar jobs and concluded that immigration had a significant adverse impact on the wages of natives without a high school education.9 A National Academy of Science report came to the same conclusion — unskilled natives and immigrants tend to compete with one another for the same jobs.10

Previous Research Found That Immigration Harms Unskilled Natives. The Bureau of Labor Statistics study cited above found that, between 1980 and 1990, half of the decline in the wages for high school dropouts in the 50 largest cities was attributable to immigration. In their paper for Brookings, Borjas, Freeman, and Katz estimated that the wages of high school dropouts are about 5 percent lower because of immigration and that immigration accounted for about 44 percent of the decline in wages for dropouts relative to other workers between 1980 and 1994. A study of California done by RAND found that immigration in that state had an adverse impact on the employment opportunities for unskilled natives in the 1980s.11 In a comparison across cities, Cordelia Reimers found that the impact of immigration falls heaviest on African-American and white high school dropouts.12 Other research has come to a similar conclusion.13 Because immigration in general and Mexican immigration in particular increases the supply of high school dropouts, it should come as no surprise that it reduces wages for unskilled workers. Of course, any reduction in wages for unskilled workers does not vanish into thin air. Some or all of it should be passed on to consumers in the form of lower prices.

Impact of Mexican Immigration on Prices. To determine the actual impact of Mexican immigration on wages and thus prices, there are four questions that must be answered: 1) Which types of workers are affected by increases in the supply of labor from Mexican immigration? 2) What is the magnitude of the impact on the affected workers. 3)What share of total costs (labor and capital) to employers do the affected workers account for? 4) How much of this savings is passed on to consumers? The available data can be used to provide reasonable answers to these questions:

  1. Which workers are affected? The answer to this question is straightforward. As we have seen, the impact of Mexican immigration is almost exclusively on unskilled workers. Using post-1989 immigration as the time frame, there were 1.38 million adult high school dropouts from Mexico in the labor force who indicated in the March 2000 CPS that they arrived after 1989, out of a total full-time dropout workforce of 12.78 million.14 This means that absent 1990s Mexican immigration, the dropout workforce would have been 11.4 million. Thus, post-1989 Mexican immigration increased the supply of unskilled labor by 10.8 percent. This figure is reported in the first column of Table 5. As a point of comparison, post-1989 Mexican immigration has increased the supply of all other workers by 0.5 percent

  2. The size of the impact on dropouts. Although previous research indicates that unskilled immigration reduces wages, there is some debate about the size of the wage effects of immigration on unskilled workers. Therefore, Column 2 in Table 5 reports three different assumptions about the elasticity of wages for unskilled workers. That is, it provides three different assumptions about the size of the wage response for each one-percent increase in the supply of unskilled labor. Column 3 reports the total impact of Mexican immigration on labor incomes for unskilled workers by multiplying the elasticity assumptions in Column 2 by the total increase in the supply of unskilled labor found in column 1. Column 3 indicates that the total reduction in wages for dropouts is likely to range from -3.2 to -8.1 percent. While this is a wide range, the most likely impact is probably found in the middle range value of -5.4 percent. Thus, Mexican immigration in just the 1990s is likely to have had a significant impact on the wages of high school dropout workers in the United States.

  3. Percentage of economic output accounted for by dropouts. Based on the March 2000 CPS, I estimate that full-time high school dropouts account for 3.72 percent (Column 4) of total cost to employers.15 This is based on the assumption that in addition to labor, capital accounts for 30 percent and skilled labor accounts for 66.28 percent of employer costs. This estimate is consistent with previous research, which has attempted to measure unskilled labor as a share of the economy.16 The percentage of economic output accounted for by dropouts is so small because their earnings are so much lower than that of other workers and because dropouts account for only about 10 percent of the total workforce. Column 5 reports the total savings to employers from Mexican-induced reductions in the prices of unskilled labor. The middle range value indicates that 1990s Mexican immigration is likely to have reduced costs for employers by 0.2 percent.

  4. The percentage of savings passed on to consumers. At present there is no research to indicate what share of immigrant-induced reductions in labor costs are passed on to consumers. In a perfectly competitive market, competition should force firms to pass on all of the savings to consumers. But in the real world there are always some obstacles to perfect competition and thus it is almost certain that some of the savings will not be passed on. Therefore, Columns 6, 7, and 8 report the effect on prices based on the assumption that businesses pass on 33, 66, or 100 percent of the saving to their customers. Concentrating again on the middle-range value, and assuming that two-thirds of the savings are passed on to consumers, the total impact of Mexican immigration on prices in the United States is estimated at 0.13 percent. But even assuming that the impact on wages is larger and even assuming that all of the savings makes its way to consumers, Mexican immigration in the 1990s could only reduce prices by three tenths of one percent.

The findings in Table 5 indicate that while the impact of Mexican immigration on the wages of unskilled workers in the 1990s may have been significant, the overall effect on prices in the United States must be very small. Therefore, it is unlikely that Mexican immigration is an effective tool for holding wage inflation in check during periods of economic expansion. This is true even if the decline in wages for unskilled workers is substantial and even assuming that a large share of those savings gets passed on to consumers. Moreover, the above analysis probably overstates the impact of Mexican immigration on prices in the United States because it ignores the very real possibility that imports would increase in the absence of Mexican immigration. As already discussed, a large share of Mexicans are employed in manufacturing and agriculture, two sectors of the economy in which import penetration is already very significant. Thus, a reduction in immigration might have been mostly or entirely offset by increased trade.

It should also be noted that Table 5 uses a relatively short time horizon and that this tends to reduce the size of the measured impact. The overall effect on wages using a longer time period, say post-1979 rather than post-1989, would increase the impact of Mexican immigration on prices because there are more post-1979 immigrants in the work force than post-1989 immigrants alone. On the other hand, the longer the time horizon, the more likely that capital substitution would take place and thereby reduce the impact on prices. That is, in the long run employers would likely increase the productivity of their workers by purchasing labor-saving equipment in order to mitigate some of the costs of having to pay workers higher wages. Thus, while Table 5 assumes that capital stocks are fixed, this would make less sense over a longer time period.

It should also be pointed out that Table 5 may understate the benefit to consumers because the presence of Mexican immigrants in the United States probably increases product variety.17 For example, the number of authentic Mexican restaurants is a direct result of Mexican immigration. However, the bottom line from this analysis is that Mexican immigration cannot have a large impact on the U.S. economy or the price of goods and services produced domestically. Because unskilled labor accounts for such a small share of total costs to employers, it is simply not possible for reductions in these workers’ wages to generate large overall gains for consumers. This is true even if one assumes that the effect on wages is large and most or all of the savings are passed through to consumers.18

Mexican Immigrants Account for a Small Share of Economic Output. It may be surprising that the millions of Mexicans holding jobs in the United States have such a small impact on the overall U.S. economy. To understand why the effect of Mexicans must be very small, it may be helpful to examine what share of total economic output Mexican immigrants account for. Based on the March 2000 CPS, which asked about employment in the previous calendar year, there were a total of 4.9 million Mexican immigrants working in the United States for at least part of 1999 — out of a total U.S. workforce of 149 million. This means that Mexican immigrants accounted for 3.3 percent of the total workforce. Of these, 4.4 million worked full time out of a total full-time workforce of 119.2 million, and 500,000 worked part time out of a total part-time workforce of 29.8 million. Mexican immigrants therefore accounted for 3.7 percent of all full-time workers and 0.4 percent of all part-time workers. Despite the fact that they account for 3.3 percent of the U.S. workforce, Mexican immigrants’ total earnings account for only 1.91 percent of all labor income (including, salary, wages, commissions, tips, etc.) paid to workers in the United States because of their lower skill levels and resulting lower average incomes. This breaks down to 1.32 percent of labor incomes going to legal Mexican immigrants and 0.58 percent to illegal Mexican immigrants. Making the standard assumption that capital comprises 30 percent of economic output, this means that Mexican-immigrant labor accounts for 1.34 percent of GDP, with 0.93 percent from legal Mexican immigrants and 0.41 percent from illegal Mexican immigrant labor. Thus Mexican immigrants have only a very small effect on the total U.S. economy.

Although Mexican immigrants account for only a very small share of GDP, the effect on some sectors of the economy may be much larger. Table 6 shows the share of labor costs accounted for by Mexican immigrants. The table reads as follows: Of wages and benefits paid in the fishing, agricultural, and forestry sector, Mexican immigrants account for 14 percent.19 In contrast, in the financial services sector, they account for one-half of one percent. The table shows that in most sectors of the economy, Mexican immigrants account for a very small share of labor costs. Only in the agriculture sector do they account for more than 10 percent of labor costs. The other sectors where they have a larger impact are construction and the personal service sector (which includes maids, butlers, and hotel services), where they comprise about 5 percent of labor costs. The reason that they comprise such a small share of labor incomes is that relatively few immigrants work in managerial and supervisory positions (see Table 2, p. 20). Because they are so heavily concentrated in unskilled positions, their total impact on labor costs is modest for almost all sectors of the economy. It should also be remembered that Table 6 does not include non-labor costs to employers. As already discussed, if the costs of capital were included, the effect of Mexican immigrant labor would be smaller still.

End Notes

8 Jaeger, David A. 1996. "Skill Differences and the Effect of Immigration on the Wages of Natives." Bureau of Labor Statistics Working Paper #274.

9 Borjas, George, Richard B. Freeman, and Lawrence F. Katz. 1997. "How Much Do Immigration and Trade Affect Labor Market Outcome?" Brookings Papers on Economic Activity. Washington D.C.: Brookings Institution Press. Vol 1.

10Edmonston, Barry, and James Smith, eds. 1997. The New Americans: Economic, Demographic, and Fiscal Effects of Immigration. Washington D.C.: National Academy Press.

11 McCarthy, Kevin F., and Georges Vernez. 1997. Immigration in a Changing Economy: California’s Experience Santa Monica, Calif.: Rand.

12 Reimers, Cordelia W. 1998. "Unskilled Immigration and Changes in the Wage Distributions of Black, Mexican-American, and Non-Hispanic White Male Dropouts." In Help or Hindrance? The Economic Implications of Immigration for African-Americans. Daniel S. Hamermesh and Frank D. Bean, eds. New York: Russell Sage Foundation.

13Kposowa, Augustine J. 1995. "The Impact of Immigration on Unemployment and Earnings Among Racial Minorities in the United States." Racial and Ethnic Studies Vol. 18. pp. 605-628. Partridge, Mark D., Dan S. Rickman, and William Levernier. 1996. "Trends in U.S. Income Inequality: Evidence from a Panel of States." The Quarterly Review of Economics and Finance. Vol. 36.

14 The CPS not only asks individuals where they were born, it also asks what year they came to live in the U.S.

15 Earnings and non-wage benefits data in the March CPS aggregated by educational attainment indicate that full-time dropouts (both full and part year) account for 5.3 percent of labor incomes.

16 Autor, David, Lawrence F. Katz and Alan Krueger. 1997. March. "Computing Inequality: Have Computers Changed the Labor Market?" Working Paper 5956. Cambridge, Mass.: National Bureau of Economic Research.

17 Like trade, immigration should also generate benefits to the U.S. economy by bringing in workers who would not otherwise be available. This allows natives to specialize in those things they do well, leaving those things they do less well to immigrants — the concept of comparative advantage. Since workers are doing what they do best, there should be some increase in the overall level of wealth in the United States from immigration. However, since Mexican immigration is providing the United States primarily with increased access to unskilled labor, which the labor market puts a very low value on, the overall benefit from Mexican immigration must be very small. This is especially true because imports and labor-saving devices in many cases could be substituted for Mexican immigrant labor.

18 One of the limitations of this analysis is that the estimated impact of Mexican immigration on the price of goods and services produced in the United States is for all goods and services. It does not tell us the fraction of goods and services consumed by typical consumers that are provided by high school dropouts. For example, more affluent Americans who employ domestic servants are probably in a better position to benefit from reductions in wages for unskilled workers than is the average American. This means the impact of Mexican immigration on prices will not be felt uniformly by all households in the United States.

19 Because forestry and fishing are very small sectors, examining them separately has almost no effect on the results in Table 5. In 1999, Mexican immigrants account for 15 percent of labor costs for employers in just the agriculture sector rather than the 14 percent reported in Table 5.

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