What Trump Won’t Tell You About Illegal Immigrants And The Economy

One of the great things about having an intelligent, articulate, and cultured leader is that it reduces the need for the electorate to conduct their own due diligence on the issues that matter.

Illegal immigration is a great example. It’s a complex issue that has implications for the economy, demographics, and society in general. Fortunately, Donald Trump has come up with a handy Cliffs Notes guide as it relates to Mexican immigrants.

You can delve into the boring statistics if you like, but why waste your valuable time when there are only three things you really need to know? To wit, from the leader of the free world:

 

There you go. Everything you need to know about immigration in 9 seconds.

Now I don’t know why, but it turns out some folks are interested in finding out if there’s more to the story than that.

Folks like the economists at BofAML.

If you, like them, suspect that maybe there are important subtleties and nuances that Donald Trump didn’t manage to capture in the clip above, you might find the following excerpts from a note out Monday to be of interest.

Via BofAML

While we and other economists have written at length on trade, taxes and spending policy, we have spilled relatively little ink on the immigration question. Here we first take a step back and outline the role undocumented immigrants play in the US labor market. Then, armed with that knowledge, we look at the potential economic impact of three scenarios: (1) a modest increase in enforcement, (2) a policy that reduces the number of undocumented workers by one million per year and (3) a policy that deports essentially all estimated 8 million undocumented workers over a four year period.

For obvious reasons, it is hard to get precise data on undocumented immigrants. We believe the best sources are from Pew Research, the Department of Homeland Security and the Labor Department. According to their data, some of the key demographic characteristics of this group are as follows:

  • Undocumented workers are estimated to make up about a quarter of the overall immigrant population (Chart 1).
  • Roughly three-fourths are believed to be Hispanic and about half believed to be Mexican, although the Mexican share has been falling.
  • An estimated 53% are male, most are in the prime working age of 25 to 54 and there are few over the age of 55.
  • Most are believed to have been in the country for many years. In 2014 the median undocumented person had been in the US for an estimated 13.6 years, up from an estimated 8.0 years in 2005 (Chart 2).
  • Estimates suggest roughly a quarter live in California, 16% in Texas, and 6% in Florida. The highest concentration as a share of the overall population is 10% in Nevada.
  • Using estimates by metro area, New York leads the list (1.2 million), followed by Los Angeles (1.1), Houston (0.6), Dallas (0.5) and Miami (0.4).

immigrantsbofaml

Over the long term the unemployment rate is not determined by the growth in the labor supply—regardless of the source—but by “frictional unemployment” and Fed policy.

Relative to these powerful demographic trends, undocumented workers have been a small driver of the ups and downs in labor force growth. For example, during the surge from 1995 to 2005 the estimated number of undocumented workers rose from 3.6 to 7.3 million or by 3.7 million while the overall labor force grew by 17.0 million. The average unemployment rate during that 10 year period was just 5.0% and the natural rate trended downward. Digging deeper, unemployment rates are relatively high for parts of the population that tend to compete with undocumented workers, but this seems to be a chronic problem unrelated to undocumented inflows.

Armed with this understanding of the undocumented economy, what would happen if there was a decline in the number of undocumented workers? From an economic perspective this is a “supply shock”—a reduction in the productive potential of the economy via a smaller labor force. Let’s consider three scenarios:

  1. Improved border security and more aggressive deportations that lower the number of undocumented workers by 200,000 per year. This could be achieved by increasing annual deportations from about 400,000 to 500,000 and stopping 100,000 more people per year at the border.
  2. Cut the number of undocumented workers in half over a four year period through tougher enforcement.
  3. Effectively eliminate all undocumented workers over a four year period

In the first scenario the economic impacts are likely to be very small. The economy has already adapted to the leveling off and slight dip in this part of the labor supply. All else equal a cut of 200,000 per year lowers the unemployment rate by 0.125 per year. This in turn means a slightly faster rise in wage and price inflation and a slightly faster Fed.

The story is very different under the second and third scenarios. Undocumented immigrants tend to specialize in certain kinds of jobs. Hence cutting the labor force in these areas could hurt the productivity of complementary workers causing indirect loses beyond the direct labor force reduction. Consider the impact on agriculture. According to U.S. Department of Agriculture “about half of the hired workers employed in U.S. crop agriculture were unauthorized.” It is hard to see how these workers would be replaced as these are very low paying jobs and there is already a shortage of such workers. A similar less dramatic story holds for construction, restaurants and other industries with high concentrations of undocumented workers.

With full deportation an outright recession seems plausible, as output would be disrupted and as the Fed may be unwilling to act because a labor shortage would mean a surge in wage and price inflation.

In case you didn’t catch the message there, it’s this: most of the rhetoric that suggests undocumented immigrants are responsible for the ebb and flow of the labor force and thus unemployment is bullsh*t. And further, deporting all the undocumented workers in the country would plunge the US economy into recession.

So think about that when you listen to Trump’s bombast.

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