A Borderline Question

To bring some lucid, new perspectives to this snarl of conflicting ideas and heated rhetoric, David Besanko, the Kellogg School’s Senior Associate Dean for Academic Affairs: Planning and External Relations, visited Mexico to share some unique analyses of Mexican-U.S. immigration with groups of Kellogg alumni and their colleagues. These lively and popular sessions, held in November 2007 in Monterrey and Mexico City, were among the first installments of the new Kellogg Insight Live: Global Edition.

“This situation isn’t completely unique, but it’s the most studied example of immigration along a fairly large border,” said Besanko, the Alvin J. Huss Professor of Management and Strategy. “There are some other cases—for example immigration from Eastern Europe or Turkey into Western Europe. But right now, it’s certainly the most important in terms of absolute magnitude, and because the enormous differences in economic circumstances between the U.S. and Mexico make the attraction to immigrate as great here as anywhere.”

U.S. Immigration Policy

For over forty years, U.S. immigration policy has been governed by the Immigration and Nationality Act of 1965. Also known as the Hart-Celler Act, this law places an extremely high priority on unifying families, permitting preferential admission of immigrants whose kin are already in the United States. In 2006 more than 800,000 thousand people—immigrants followed by their families—were admitted to the United States on this basis, while only about 135,000 were admitted or granted temporary visas based on their work skills (Chua 2007). A generation after Hart-Celler, the Immigration Reform and Control Act of 1986 (IRCA) strengthened border enforcement, made it illegal to employ undocumented immigrants, created visas for seasonal workers, and granted amnesty to immigrants who were in the United States prior to 1982.

The ink had barely dried on IRCA when Congress passed another major immigration law. The Immigration Reform Act of 1990 capped the number of admitted immigrants to 700,000 per year. It also created H-1B temporary visas, which have become more valuable than gold to the skilled foreign workers for whom the visas are reserved, and to the growing legions of U.S. companies whose continued existence depends on amassing technically skilled talent. Immigration once again became a central part of the U.S. political agenda in 2005 and 2006. President George W. Bush pushed for comprehensive immigration reform, and the House and Senate each passed complex bills that were so different that Congressional leaders did not even attempt to reconcile them. In 2007 an attempt to achieve bipartisan consensus in the Senate on a bill co-sponsored by Senators McCain and Kennedy also ended in failure. Given the U.S. federal system of government, a portion of the financial burden of Washington’s gridlock is borne by state and local governments, which must provide education and healthcare to populations that have increased—in some cases significantly—due to immigration. As a result, more and more state houses and town councils see no choice but to work on their own solutions. What will these next landmark U.S. immigration policies look like?

“We know what’s not going to happen: attempts to round up and deport undocumented immigrants on a mass basis. The American people aren’t likely to tolerate that sort of extreme solution,” said Besanko. “In Mexico, this is the most important issue in terms of its relationship with the United States. But right now, U.S. policy on immigration is not popular in Mexico. President Calderón has accused the United States of being hypocritical. So for the foreseeable future, the current stalemate on immigration policy in the United States will add a degree of tension to U.S.-Mexican relations.”

The Flow of Immigrants

Agree with them, or disagree with them, America’s immigration policies have kept its borders busy. From 2001 to 2005, the United States added roughly five new immigrants for every one thousand residents, bringing the total U.S. immigrant population to an estimated 37 million. Roughly one of every eight people in the United States is an immigrant, about 12.5 percent of the U.S. population. That percentage is over four times higher than the portion of the total global population who live as immigrants, only 2.9 percent. More than a third of the immigrants living in the United States, 34.1 percent, are from Mexico, eclipsing by far the next largest group, Indians, who comprise 4.6 percent of the U.S. immigrant population.

Table 1: Source countries of U.S. foreign-born population

Source: Table 2 (p. 14) in Hanson, 2005.

“Traditionally, our borders have been fairly open. With the exception of the 1920s, 1930s, 1940s, and 1950s, when U.S. law imposed restrictive immigration quotas, the U.S. borders have been very much open to immigrants,” said Besanko. But migration from one country to another is never easy, no matter how open the borders are, so immigrants must be motivated to come to the United States. The U.S. economy, to millions worldwide, has been powerful motivation. Said Besanko, “The best economic opportunity in the world is in the U.S.”

But even the best economic opportunity in the world cannot help everyone. About 20 percent of foreign-born non-citizens live below the poverty line in the United States, about twice the rate of U.S. citizens, both native- and foreign-born. In the increasingly knowledge-based U.S. economy, many immigrants are educationally impoverished as well. Less than half of Mexican and Central American immigrants, only about 45 percent, have completed high school. Roughly 95 percent of U.S. natives have their high school diplomas, as do about 90 percent of those who emigrated from places other than Mexico or Central America.

Undocumented Immigration in the United States

Much agitation and angst among Americans, ostensibly about immigration broadly defined, seems actually to focus on the narrow but significant subset of undocumented immigration. It is estimated that a quarter to a third of all immigrants who have entered the United States since 2000 have been undocumented. That is about 500,000 people per year, just under one person per minute, during that span. The population of undocumented immigrants has grown by about 40 percent during that time, reaching 11.1 million in 2005, or about 30 percent of the U.S. foreign-born population. Roughly 60 percent of the undocumented immigrant population is thought to be from Mexico.

Figure 1: Immigrants by legal status in 2005

Source: Figure 3 (p. 4) in Passel, 2006

“Some people argue that there’s a possibility that this problem may stabilize,” said Besanko. “One thing we know about undocumented immigration is that people who come over the border in an undocumented way are very young, often 18 to 25 years old. But Mexico’s fertility rate has gone down dramatically over the past ten to twenty years. So one could wonder whether the issue of undocumented immigration might resolve itself and thus not be a problem that we need to worry about.”

While the fertility argument is an interesting one, Besanko harbors doubts. “This issue is not going away,” he said, further asking, “So what are our options?”

To some, the hands-down, single best option is obvious: seal the border. Since the Immigration Reform Act passed in 1990, the United States has funded a sevenfold increase in spending on border enforcement. The results have been mixed. From 1990 to 2000, spending quadrupled from around $500 million to roughly $2 billion (in real 1990 dollars), and illegal immigrant apprehensions doubled, from around 800 thousand to about 1.6 million. But since then, while real spending increased to about $3.5 billion in 2006, apprehensions actually dipped back to 1990 levels before increasingly slightly, to about 1.2 million in 2006.

These mixed results “could mean a couple of things,” said Besanko. “It could show that enforcement has been ineffective. We spent more in real terms, but apprehensions haven’t changed, or have even gone down. Or it could show that enforcement is effective. Fewer people are risking coming to the border, thus there are fewer people to apprehend, so apprehensions go down.”

While a tightened border can pinch the supply of cheap labor, it does little to stem U.S. demand for that labor. For many years, little effort was put into penalizing U.S. businesses that employed undocumented immigrants. In 2003 only 72 employers were convicted, even though a significant portion of the eight to ten million undocumented immigrants thought to have lived in the United States at the time were in the workforce. Since 1986, less than two dozen employers have paid fines exceeding $75,000.

“For a long time, it was thought that the existing law on this, the Immigration Reform and Control Act of 1986, was relatively ineffective,” said Besanko. “If you were a business owner, and I came to work for you, you looked at my papers, my social security card, my driver’s license, my visa. Under that law, if you concluded that those documents looked real and hired me, then you were pretty much absolved of any legal responsibility. If you were penalized, it was just by fines.”

Since 2003, however, the U.S. Department of Homeland Security has stepped up efforts to enforce employment regulations, dramatically increasing arrests of both undocumented workers and those who employ them.

“Now the government is getting more creative,” said Besanko. “If you’re an employer suspected of hiring undocumented workers, it’s quite possible that you’re also involved in colluding with other intermediaries, like coyotes.” (Coyotes are smugglers who charge to help sneak people across the border.) He continued, “So now you’re not just indicted for hiring workers, but also for human smuggling. The government targets companies they can get on multiple dimensions, and they come down very hard, often with a threat of criminal penalties. This acts as a deterrent for other companies.”

Given the increased attention on workplace enforcement and border security, and the correspondingly heightened risk of apprehension, one might expect the flood of undocumented immigrants to slow to a trickle. But this does not seem to be the case.

“There’s just such a high return on investment from migration,” said Besanko, explaining the results of a simple microeconomic model that showed the huge financial incentive driving people, at great risk, across the border. “Even if you double the apprehension rate, the economic incentive to migrate northward is still extremely high.”

To appreciate the return—the reward—that a Mexican might enjoy as a result of “investing” in illegal entry and employment in the United States, one must understand a profound difference between opportunities in the Mexican and U.S. economies. In Mexico in 2006, the average worker with an eighth grade education made roughly $5,000. That same average worker, in that same year, would have made about 4.5 times more, $22,500, in the United States.

“There were a couple of alumni in the audience who said, ‘Look, what the U.S. is doing may be good for Mexico,’ ” said Besanko. “By aggressively enforcing the border, the U.S. may force Mexico to address its economic problems. The head of Banco de México, Governor Guillermo Ortiz Martínez, has expressed that very idea.”

Given that most undocumented immigrants come to the United States from rural, impoverished regions of Mexico, some economists have estimated that the U.S.-Mexico earnings ratio is far higher than 4.5 to 1, and may be closer to 10 to 1. So in return for about $2,200, the average amount spent to enter the United States illegally from Mexico, as well as the few months of time and wages needed to establish a home in America, an undocumented Mexican worker can earn several hundred percent more than in her native country.

“I was surprised at how large the return on investment seems to be for immigration from Mexico,” admitted Besanko. “That was one of my most favorite parts of the presentation to the alumni, seeing them react to how potentially large the return on investment could be.”

With the promise of earning in a U.S. day what could take a Mexican week, motivated Mexicans are more willing to part with some money upfront in order to improve their chances of successful emigration, convinced that they will recoup that cost in no time north of the border. Coyotes follow that money, like moths to light. The size of the coyote market and the lengths to which coyotes will go to help Mexicans cross the U.S. border is another indication of the impressive return on the immigration investment.

The Economic Impact of Immigration on the U.S. and Mexico

This model shows that a large number of individual Mexicans and Central Americans stand to benefit from finding a way to work illegally in the United States. But does Mexico as a whole benefit? And does the overall U.S. economy suffer? Some economists have concluded that the impact of undocumented workers on native-born U.S. workers is minimal, pointing to data that suggest that such immigrants take jobs that would otherwise be unfilled. Careful econometric evidence (Borjas 2003) suggests, however, that the influx of immigrants reduces wages paid to U.S. workers, particularly among high school dropouts.

A fairly straightforward model of supply and demand shows that workers’ wages decrease in the United States as the workforce grows via immigration. From 1994 to 2006, the number of U.S. workers who were immigrants from Mexico and Central America increased by 98 percent. During that same period, the amount of immigrant workers from the rest of the world grew by only 68 percent, and the native-born U.S. work force grew by a mere 9 percent. But a wage decrease for workers does not mean that the overall impact on the U.S. economy is negative. The massive amounts of capital goods in the United States, such as factories, machinery, and shipping vehicles, can only reach their greatest productivity if there is ample labor to put them to use. So while U.S. wages drop as immigration grows, capital owners see more available labor, thus more productive use of their property. The overall net impact of immigration (not just from Mexico, but from all over the world) on the U.S. economy is positive but small, according to Besanko: likely on the order of $13 billion in 2005, or about 0.11 percent of U.S. GDP that year.

But this benefit (known as the immigration surplus) is by no means shared equally among all Americans. Almost $260 billion, or 2 percent of the U.S. economy, is redistributed from native laborers, whose wages are lowered, to owners of businesses and households that employ labor. So the modest, overall economic benefit of immigration is masked by a large redistribution that leaves native workers less well off, especially those with lower levels of educational attainment.

Figure 2: Immigration surplus—United States labor market

Though native workers in the United States are worse off, immigrant workers are better off than they would have been had they not migrated to the United States. Immigrants share some of this benefit with friends and relatives back in their home country. In the case of Mexican immigration, this effect is significant. Since 2000, while the Mexican-born population in the United States increased by 20 percent, the money they sent back to Mexico, known as remittances, increased by 170 percent, totaling $23 billion in 2006. The flow of those dollars out of the United States and into Mexico is so large that it makes up almost 2 percent of the entire Mexican economy.

“Your jaw should drop,” said Besanko, describing this stunningly massive driver of Mexican prosperity. “This is enormous, and has been going up. Within a few years it will probably be Mexico’s second biggest source of foreign exchange earnings, after oil revenue.”

This immense impact of money sent from Mexicans in the United States is more than enough to offset the drag on the Mexican economy created by the emigration-induced decrease in the labor supply. As a result, the migration of Mexicans to the United States benefits those who remain in Mexico by about $190 per person annually.

Where Do We Go From Here?

Considering the big picture on both sides of the border, free flowing immigration—like free trade—allows more efficient use of resources. Both the United States and Mexico are able to reap some overall economic benefit. But in the United States, the immigration surplus is small, the benefit is somewhat masked by the relatively larger redistribution of benefits away from U.S. workers, and the burden placed on social services is increased due to the fact that immigrant households tend to be more intensive recipients of public benefits (such as Medicaid) than U.S. native households. Thus it is not surprising, believes Besanko, that Americans are divided on the question of immigration. Some Americans benefit economically from immigration and some are hurt. The winners’ gains are bigger than the losers’ losses, but not by much relative to the scale of the overall U.S. economy. While the gains are not particularly noticeable, the costs are easier to see—such as the burdens placed on the education and health care system in cities and towns that have seen surges in immigrant populations.

Said Besanko, “When applying the lens of economics to the issue of immigration, we can begin to see why the United States has reached an impasse on how to deal with undocumented immigration.” Which brings us back to the question posed by Besanko and countless others: “What are our options?”

Unfortunately, recognizing a problem is often easier than enacting a remedy. “We could focus all our efforts on sealing the border completely. But that will require hundreds of millions of dollars, probably billions of dollars, more than we are currently spending, and the border probably won’t ever be fully sealed,” said Besanko. “Would such militant enforcement even be acceptable to the American people? And that wouldn’t deal with undocumented immigrants who are already here. The only sensible remaining options for the U.S., in my view, are to combine enforcement with some well defined path to citizenship, and to continue experimenting with something along the lines of a guest worker program.”

“While the U.S. spends billions to enforce the border to lower the return on investment for immigrating, Mexico must work on its economy and create jobs to increase the return on investment of staying,” offered Besanko. “Mexico has done a lot to put its economy on a solid footing. But it must go further to build an economy that will make it less attractive to go north.”

The annual Global Competitiveness Index, released in late 2007 by the World Economic Forum, recognized Mexico’s efforts at reform, ranking them thirty-fifth out of 131 countries on a composite measure of macroeconomic stability. That represented an improvement of twenty spots from the previous year’s rankings. However, an abundance of weaknesses in other critical areas kept the overall ranking much lower, fifty-second, unchanged from 2006. The U.S. ranked first overall in both 2006 and 2007. Said Besanko, “Mexico must work on its regulatory climate, make it easier for people to start new businesses, and make progress on contract enforcement, to allow entrepreneurship to flourish so that jobs can be created. So there’s a lot of economic reform work that Mexico must continue to do.”

Given the magnitude of these issues, it is safe to say that there is a lot of work that we all must continue to do.

Further reading:

Borjas, George J. (2003). “The Labor Demand is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market,” Quarterly Journal of Economics, 116(4): 1335-1354

Chua, Amy (2007), “The Right Road to America?” Washington Post, December 16.

Hanson, Gordon (2005). Why Does Immigration Divide America? Public Finance and Political Opposition to Open Borders. Washington, DC: Institute for International Economics.

Passel, Jeffrey S. (2006). The Size and Characteristics of the Unauthorized Migrant Population in the U.S.. Estimates Based on the March 2005 Current Population Survey. Pew Hispanic Center, Research Report, March 7. (visit site, accessed April 4, 2008.)