Federal Reserve District, 12th ; Emigration and immigration ; Labor market ; Immigration Reform and Control Act of 1986

Laura Leete-Guy

English

Research Papers in Economics

FRBSF
December 25,1987 WEEKLY LETTER
Immigration Reform and The West
When President Reagan signed the Immigration
Reform and Control Act of 1986 last November,
forthe first time in the history of the United
States, it became illegal to hire an undocu-
mented foreign worker. Formal enforcement of
the new legislation began on July 1 following an
eight-month grace period.
The majority of undocumented workers are
believed to reside in the western and south-
western parts of the country, and half of them
are estimated to live in California alone. Thus,
labor markets in states comprising the Twelfth
Federal Reserve District (Alaska, Arizona, Cal-
ifornia, Hawaii, Idaho, Nevada, Oregon, Utah,
and Washington) are expected to be among
those most affected by the legislation.
Last summer, farmers in Oregon and Wash-
ington reported produce rotting in the fields,
while apparel manufacturers in southern Califor-
nia complained of empty factories and unfilled
orders. Will these shortages disappear once
immigrants and employers learn to comply with
the new law, or do they indicate real change in
the supply of labor to the western industries
most dependent on undocumented workers?
This Letter investigates the impact of immigrants
on U.5. labor markets. It concludes that some of
the shortages seen so far are likely to persist and
raise wages permanently in some industries,
possibly leading some manufacturing firms to
relocate to lower-wage countries. Agriculture
may be less affected by the new law because of
special amnesty provisions for seasonal agri-
cultural workers and a temporary worker
program.
New legislation
The new immigration law requires all employers
to document each employee's status in this
country upon hire. The penalties for not doing
so are severe. Fines for failing to keep records of
employee residency documents can go up to
$1,000 per worker. Fines for knowingly hiring
an undocumented worker range from $250 to
$2,000 per worker on a first offense to $10,000
per worker for a third offense. Employers
demonstrating a "pattern or practice" of hiring
undocumented workers can receive prison terms
of up to six months.
The new law also provides for amnesty for some
foreigners currently residing illegally in the U.S.
Any foreign-born person who can prove contin-
uous residence in the U.5. since 1982 is eligible
for permanent residency - a status that even-
tually can lead to citizenship.
In addition, the Act contains two provisions
designed to ensure a continued supply of inex-
pensive agricultural labor. First, amnesty will be
granted to as many as 350,000 seasonal agri-
cultual workers if they can prove that they have
been residents of the U.5. for at least three years
or that they worked on perishable agricultural
crops for at least 90 days in the year ending May
1, 1986. Additional workers will be admitted to
replace those granted amnesty as they leave
agriculture to pursue opportunities in other sec-
tors. Second, the legislation establishes a tempo-
rary worker program that allows agricultural
employers to apply for permits to bring workers
to this country for sixty days if they also guaran-
tee to pay the workers certain wages, benefits,
and travel costs.
Undocumented labor
The 1980 Census of Population counted 14 mil-
lion foreign-born individuals in the U.5., with
4.4 million in the Twelfth District. While Census
data do not distinguish between the legal and
illegal status of immigrants, it is estimated that
about 2 million of those counted entered this
country illegally. In addition, the Census is esti-
mated to have missed another 1 to 1.7 million
illegal immigrants. Thus, 3 to 3.7 million for-
eign-born persons were thought to be residing
illegally in the U.5. in 1980, of whom 2 million
are believed to be Mexican. Of Mexican immi-
grants counted in the Census (legal and illegal),
60 percent lived in California (64 percent in the
Twelfth District).
Because of repeated border crossings, these
counts are likely to understate the influence of
undocumented Mexican labor. Nevertheless,FRBSF
they do imply a concentration of predominantly
Mexican undocumented workers in the West.
This Letter therefore focuses primarily on the
effects of Mexican immigrants on western labor
markets. This focus is further justified by the
higher labor force participation rate for Mexican
immigrants than for immigrants from other
countries
To speculate about the effects of the new immi-
gration legislation on labor markets in the West,
one must know what effect the presence of
undocumented workers has had on labor mar-
kets here in the past. Two common perceptions
need to be refuted. The first is that the competi-
tion presented by undocumented workers will-
ing to work for low wages depresses the wages
received by native workers for the same jobs.
The second is that employers would substitute
immigrants for native workers, thereby increas-
ing the number of native-born workers without
jobs.
Effects on wages
The extent to which the presence of immigrants
reduces natives' wages depends on how well
immigrant labor can substitute for native labor.
Where the presence of some immigrant groups
appears to lower the wages of some native
workers, the magnitude of the effect has been
found to be very small.
According to a study by economist George
Borjas using data from 1980, the largest of these
effects is that of white immigrants on white
native workers' wages. Borjas found that a 10
percent increase in the labor force share of
white immigrants is associated with a 2.5 per-
cent drop in the wages of their native counter-
parts. This reflects the fact that white
immigrants, largely European, have education,
skill levels, and language abilities comparable to
white native workers, and so represent a com-
petingsource of labor.
Non-European groups (Hispanic, Black, and
Asian) are not likely to compete for the same
jobs and their effects on wages are generally
much smaller than those of European groups. A
10 percent increase in the share of a metro-
politan labor force of any of these non-European
immigrant groups was found to induce at most a
0.2 percent drop in thewages of natives. Similar
results obtained by economist Jean Grossman
using 1970 data imply that the roles of different
immigrant groups in labor markets may be fairly
constant over time.
Other studies have detected an effect on the
wage of natives only when foreign-born workers
accounted for more than 20 percent of all man-
ufacturing production workers in a metropolitan
area. Five metropolitan areas in California had
reached this threshold in 1980: Los Angeles with
46 percent, and Anaheim/Santa Ana, San Fran-
cisco/Oakland, San Jose, and San Diego with
shares between 20 and 30 percent. Only four
other cities in the U.S had such high shares:
Miami, New York, Newark and Chicago.
Since undocumented workers have lower levels
of education and skill than the immigrant popu-
lation in general, their effect on wages is
undoubtedly even smaller. Most undocumented
immigrants have little education or training, and
speak little English. Data on apprehended,
undocumented Mexican workers indicate that
about half of them come from a background as
agricultural laborers and have an average of
only 4.9 years of education. In contrast, U.S.
natives have an average of 12.4 years of
education.
Effect on unemployment rate
Furthermore, there is no evidence that the pres-
ence of Mexican-born workers raises the unem-
ployment rates of the groups of native workers
that exhibit the highest unemployment rates. In
particular, a study by Urban Institute researchers
Thomas Muller and Thomas Espenshade using
1980 data suggests that, in southwestern metro-
politan areas, the proportion of the population
that was Mexican-born had no effect on the
unemployment rate ofblack native workers.
Instead, it found that the most important explan-
ation of black unemployment is the level of edu-
cational achievement in the black population.
More importantly, simple "impact"studies
ignorethe generally beneficial effect that econo-
mists believe undocumented labor has on over-
all standards of living. Evidence that immigrants
compete little with native workers is broadly
consistent with the view that a large supply of
undocumented workers may provide an impetus
for growth.In Los Angeles during the 1970s, for instance,
manufacturing employment growth far exceeded
the national average, while wage growth in the
area remained below national levels. Although
other factors may have been at work, this simple
observation supports the idea that the supply of
low-wage labor may have attracted industries,
such as apparel manufacturing and product
assembly, and thereby contributed to the health
of the Los Angeles region.
Changes in labor supply
Undocumented workers are particularly concen-
trated ina few industries. For example, the
Federal Reserve Bank of Dallas estimates (based
on 1980 Census data) that 12 percent of all
undocumented workers in the U.5. are
employed in apparel and textile manufacturing,
while 8 percent areemployed in agriculture, 7
percent in restaurants, and 6.5 percent in con-
struction. The effect of the new immigration leg-
islation on labor supply will undoubtedly vary
across industries depending on the extent to
which an industry relies on undocumented
workers. Amnesty provisions in the new law also
could mitigate against effects on the labor sup-
ply to various industries.
Agricultural employers, who have depended
heavily on undocumented workers in the past,
benefit from specific provisions for amnesty that
are more generous than those for the economy
as a whole. If effective, amnesty provisions for
350,000 seasonal agricultural workers should
provide an agricultural labor force close in size
to that available in previous years. California, for
instance, is estimated to employ about 250,000
seasonal immigrants in agriculture during the
summer season.
Furthermore, under the new law, farmers may
apply for permits to bring additional temporary
workers to this country. While growers are con-
cerned that the special provisions for agricult\-]ral
workers may not be sufficiently flexible to
accommodate seasonal crop labor needs, the
law has at least addressed those needs.
The more general amnesty provisions, however,
may be less effective in guaranteeing a sufficient
supply of legal, low cost labor to industries other
than agriculture. Already there are signs that
fewer applications for amnesty will be filed than
originally expected. The Immigration and Natu-
ralization Service (INS) had prepared to handle
3.9 million applications, but received only
800,000 applications in the first five months of
the year-long program. INS analysts have since
revised downward the number they expect to 2
million.
A survey of undocumented workers from Mex-
ico apprehended during the 1970s found that
they had been in the U.S. an average of 2.4
years and taken an average of 4.5 trips in and
out of the country between 1970 and 1975. If
illegal immigrants in the 1980s followed this
behavior, many of those employed here prior to
enactment of the new law would not be eligible
for amnesty. After years of living underground,
many more would be unable to prove residency
regardless of how long they have lived here.
Other eligible immigrants are not applying for
amnesty for fear of exposing ineligible family
members to the risk of deportation.
Conclusion
A tightening of labor markets in industries other
than agriculture may well result from the Immi-
gration Reform and Control Act of 1986.
Employers may have to raise wages to attract
legal immigrants and native workers whol
because of their higher skill and. education levels
and better language abilities,have better job
opportunities than the undocumentedworkers
who will have departed.
Firms in highly competitive industries may have
difficulty absorbing this increase in cost.
Affected manufacturing firms may consider mov-
ing production overseas (or to Mexico) where
they can regain their cost advantages by using
inexpensive labor there. Prices may rise in ser-
vice businesses unable to relocate - fast-food
restaurants, domestic service and construction,
for example.
In sum, the new legislation will reduce the
advantages enjoyed by those employers who
historically have relied on ready supplies of
undocumented, low-skilled, low-wage workers.
laura leete-Guy
Opinionsexpressed in this newsletterdo not necessarily reflect the views ofthemanagementofthe federal Reserve Bank ofSan
francisco, orofthe BoardofGovernorsofthe federal Reserve System.
Editorial commentsmaybeaddressedtotheeditor(GregoryTong) ortotheauthor.•..freecopiesoffederal Reserve publications
can beobtained from the Public Information Department, federal Reserve Bank ofSan francisco, P.O. Box 7702, Sanfrandsco
94120. Phone (415) 974-2246.uo~6U!ljsom ljo~n uo6:1lJO OpOA:1lU
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollaramounts in millions)
Selected Assets and liabilities
largeCommercial Banks
Amount
Outstanding
12/2/87
Change
from
11/25/87
Change frorr~ 12/3/86
Dollar Percent?
Loans, Leases and Investmentsl 2 207,631 234 1,745 0.8
Loans and Leases1 6 183,726 352 - 1,668 - 0.8
Commercial and Industrial 51,309 167 - 448 - 0.8
Real estate 72,504 77 5,509 8.2
Loans to Individuals 37,129 236 - 4,391 - 10.5
Leases 5,423 - 7 - 164 - 2.9
U.S. Treasury and Agency Securities 16,574 - 65 3,614 27.8
OtherSecurities2 7,331 - 52 - 202 - 2.6
Total Deposits 209,342 2,470 - 2,082 - 0.9
Demand Deposits 53,900 1,727 - 3,611 - 6.2
Demand Deposits Adjusted3 36,645 - 1,221 - 3,370 - 8.4
OtherTransaction Balances4 20,512 648 1,477 7.7
Total Non-Transaction Balances6 134,930 94 52 0.0
Money Market Deposit
Accounts-Total 44,372 293 - 2,204 - 4.7
Time Deposits in Amounts of
$100,000 or more 31,399 - 449 - 1,364 - 4.1
Other Liabilities for Borrowed MoneyS 24,605 1,959 - 3,964 - 13.8
Two WeekAverages
of Daily Fi~ures
Reserve Position, All Reporting Banks
Excess Reserves (+)jDeficiency(-)
Borrowings
Netfree reserves (+)jNet borrowed(-)
Period ended
11/30/87
105
9
96
Period ended
11/16/87
18
6
12
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U.5. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
s Includes borrowingvia FRB, TT&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percent change

Immigration reform and the West

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Immigration reform and the West

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