Illegal immigration is a source of mounting concern for politicians in the United States. In the past ten years, the U.S. population of illegal immigrants has risen from five million to nearly twelve million, prompting angry charges that the country has lost control over its borders.

Congress approved measures last year that have significantly tightened enforcement along the U.S.-Mexico border in an effort to stop the flow of unauthorized migrants, and it is expected to make another effort this year at the first comprehensive reform of immigration laws in more than twenty years.

Legal immigrants, who account for two-thirds of all foreign-born residents in the United States and 50 to 70 percent of net new immigrant arrivals, are less subject to public scrutiny. There is a widely held belief that legal immigration is largely good for the country and illegal immigration is largely bad. Despite intense differences of opinion in Congress, there is a strong consensus that if the United States could simply reduce the number of illegal immigrants in the country, either by converting them into legal residents or deterring them at the border, U.S. economic welfare would be enhanced.

Is there any evidence to support these prevailing views? In terms of the economic benefits and costs, is legal immigration really better than illegal immigration? What should the United States as a country hope to achieve economically through its immigration policies? Are the types of legislative proposals that Congress is considering consistent with these goals?

This Council Special Report addresses the economic logic of the current high levels of illegal immigration. The aim is not to provide a comprehensive review of all the issues involved in immigration, particularly those related to homeland security. Rather, it is to examine the costs, benefits, incentives, and disincentives of illegal immigration within the boundaries of economic analysis.

From a purely economic perspective, the optimal immigration policy would admit individuals whose skills are in shortest supply and whose tax contributions, net of the cost of public services they receive, are as large as possible. Admitting immigrants in scarce occupations would yield the greatest increase in U.S. incomes, regardless of the skill level of those immigrants.

In the United States, scarce workers would include not only highly educated individuals, such as the software programmers and engineers employed by rapidly expanding technology industries, but also low-skilled workers in construction, food preparation, and cleaning services, for which the supply of U.S. native labor has been falling. In either case, the national labor market for these workers is tight, in the sense that U.S. wages for these occupations are high relative to wages abroad.

Of course, the aggregate economic consequences of immigration policy do not account for other important considerations, including the impact of immigration on national security, civil rights, or political life. Illegal immigration has obvious flaws.

Continuing high levels of illegal immigration may undermine the rule of law and weaken the ability of the U.S. government to enforce labor-market regulations. There is an understandable concern that massive illegal entry from Mexico heightens U.S. exposure to international terrorism, although no terrorist activity to date has been tied to individuals who snuck across the U.S.-Mexico border.

Large inflows of illegal aliens also relax the commitment of employers to U.S. labor-market institutions and create a population of workers with limited upward mobility and an uncertain place in U.S. society. These are obviously valid complaints that deserve a hearing in the debate on immigration policy reform. However, within this debate we hear relatively little about the actual magnitude of the costs and benefits associated with illegal immigration and how they compare to those for legal inflows.

This analysis concludes that there is little evidence that legal immigration is economically preferable to illegal immigration. In fact, illegal immigration responds to market forces in ways that legal immigration does not. Illegal migrants tend to arrive in larger numbers when the U.S. economy is booming (relative to Mexico and the Central American countries that are the source of most illegal immigration to the United States) and move to regions where job growth is strong. Legal immigration, in contrast, is subject to arbitrary selection criteria and bureaucratic delays, which tend to disassociate legal inflows from U.S. labor-market conditions.

Over the last half-century, there appears to be little or no response of legal immigration to the U.S. unemployment rate. Two-thirds of legal permanent immigrants are admitted on the basis of having relatives in the United States. Only by chance will the skills of these individuals match those most in demand by U.S. industries. While the majority of temporary legal immigrants come to the country at the invitation of a U.S. employer, the process of obtaining a visa is often arduous and slow. Once here, temporary legal workers cannot easily move between jobs, limiting their benefit to the U.S. economy.

There are many reasons to be concerned about rising levels of illegal immigration. Yet, as Congress is again this year set to consider the biggest changes to immigration laws in two decades, it is critical not to lose sight of the fact that illegal immigration has a clear economic logic: It provides U.S. businesses with the types of workers they want, when they want them, and where they want them. If policy reform succeeds in making U.S. illegal immigrants more like legal immigrants, in terms of their skills, timing of arrival, and occupational mobility, it is likely to lower rather than raise national welfare.

In their efforts to gain control over illegal immigration, Congress and the administration need to be cautious that the economic costs do not outstrip the putative benefits.

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Gordon H. Hanson
COUNCIL ON FOREIGN RELATIONS

CONTENTS
Foreword v
Acknowledgments vii
Council Special Report 1
Introduction 3
Current U.S. Immigration Policy 6
Illegal Immigration and the U.S. Economy 14
Benefits and Costs of Immigration 19
Reforming Immigration Policy 27
Final Considerations 32
References 35
About the Author 39
Advisory Committee 41

FOREWORD
Immigration reform is one of the most divisive issues confronting U.S. policymakers. The rise in the number of illegal immigrants in the United States over the past ten years—from five to twelve million—has led to concerns about the effects of illegal immigration on wages and public finances, as well as the potential security threats posed by unauthorized entry into the country.

In the past year alone, the governors of New Mexico and Arizona have declared a “state of emergency” over illegal immigration, and President Bush signed into law the Secure Fence Act, which authorizes the spending of $1.2 billion for the construction of a seven-hundred-mile fence along the U.S.-Mexico border.

In this Council Special Report, Professor Gordon H. Hanson of the University of California, San Diego approaches immigration through the lens of economics. The results are surprising. By focusing on the economic costs and benefits of legal and illegal immigration, Professor Hanson concludes that stemming illegal immigration would likely lead to a net drain on the U.S. economy—a finding that calls into question many of the proposals to increase funding for border protection.

Moreover, Hanson argues that guest worker programs now being considered by Congress fail to account for the economic incentives that drive illegal immigration, which benefits both the undocumented workers who desire to work and live in the United States and employers who want flexible, low-cost labor.

Hanson makes the case that unless policymakers design a system of legal immigration that reflects the economic advantages of illegal labor, such programs will not significantly reduce illegal immigration. He concludes with guidelines crucial to any such redesign of U.S. laws and policy. In short, Professor Hanson has written a report that will challenge much of the wisdom (conventional and otherwise) on the economics behind a critical and controversial issue.

This Council Special Report is part of the Bernard and Irene Schwartz Series on American Competitiveness and was produced by the Council’s Maurice R. Greenberg Center for Geoeconomic Studies. The Council and the center are grateful to the Bernard and Irene Schwartz Foundation for its support of this important project.

Richard N. Haass
President, Council on Foreign Relations
April 2007

ABOUT THE AUTHOR
Gordon H. Hanson is the director of the Center on Pacific Economies and professor of economics at University of California, San Diego, where he holds faculty positions in the Graduate School of International Relations and Pacific Studies and the department of economics.

Professor Hanson is also a research associate at the National Bureau of Economic Research and coeditor of the Journal of Development Economics. He obtained his BA in economics from Occidental College in 1986 and his PhD in economics from MIT in 1992. Prior to joining UCSD in 2001, he was on the economics faculty at the University of Michigan (1998–2001) and at the University of Texas (1992–1998).

Professor Hanson has published extensively in the top academic venues of the economics discipline. His current research examines the international migration of high-skilled labor, the causes of Mexican migration to the United States, the consequences of immigration on labor-market outcomes for African-Americans, the relationship between business cycles and foreign outsourcing, and international trade in motion pictures.

In recent work, he has studied the impact of globalization on wages, the origins of political opposition to immigration, and the implications of China’s growth for the export performance of Mexico and other developing countries. His most recent book is Why Does Immigration Divide America? Public Finance and Political Opposition to Open Borders (Institute for International Economics, 2005).

About the Council on Foreign Relations

Founded in 1921, the Council on Foreign Relations is an independent, national membership organization and a nonpartisan center for scholars dedicated to producing and disseminating ideas so that individual and corporate members, as well as policymakers, journalists, students, and interested citizens in the United States and other countries, can better understand the world and the foreign policy choices facing the United States and other governments.

The Council does this by convening meetings; conducting a wide-ranging Studies Program; publishing Foreign Affairs, the preeminent journal covering international affairs and U.S. foreign policy; maintaining a diverse membership; sponsoring Independent Task Forces and Special Reports; and providing up-to-date information about the world and U.S. foreign policy on the Council’s website, CFR.org.

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