One of the more interesting aspects of the president’s 2014 State of the Union address is that he called both for a substantial increase in the federal minimum wage and immigration reform. Though President Obama didn’t specify the kind of immigration reform he has in mind, it is safe to assume that he favors an immigration reform that will grant unauthorized immigrants currently residing in the United States a path to citizenship and that will increase future legal immigration, including less-skilled legal immigration. This brought to mind research by Jesse Rothstein on the differences between an earned-income tax credit and a negative income tax, which we discussed at the end of 2011. The following is drawn from “Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence”:
A basic result in the economics of taxation is that the economic incidence of taxes depends on the elasticities of supply and demand for the good being taxed and not on their statutory incidence. If demand is less than perfectly elastic, supply-side taxes are partially passed through to the demand side via changes in the equilibrium price. Effects on prices are of the opposite sign as those on supply, so any program that increases labor supply will lead to reduced pre-tax wages. This implies that employers of low-skill labor capture a portion of the intended EITC transfer. Moreover, because EITC recipients (primarily single mothers) compete in the same labor markets as others who are ineligible for the credit, wage declines extend to many workers who do not receive offsetting EITC payments. These unintended transfers limit the EITC’s value as a tool for income redistribution. Recognizing the endogeneity of wages thus reduces the attractiveness of work-encouraging transfers like the EITC. But the practical importance of incidence effects is unclear.
In this paper, I show that incidence effects are extremely important to the evaluation of the EITC. With plausible labor supply and demand elasticities, the unintended consequences of the EITC operating through the pre-tax wage are large relative to the direct, intended transfers. Neglecting these wage effects leads to misleading assessments of the impact of a hypothetical EITC expansion on labor supply, incomes, and welfare.
It seems reasonable to suggest that if immigration reform increases less-skilled labor supply, it will tend to reduce pre-tax wages for less-skilled workers. To be sure, if less-skilled immigrants prove complementary to less-skilled natives with strong English language skills, as seems plausible, this effect might not be particularly pronounced, and the less-skilled immigrant influx might increase wages for some categories of less-skilled native workers. But new less-skilled immigrants will presumably compete with old less-skilled immigrants with limited English proficiency, a group that is, as we have discussed, quite large, and overrepresented at the low end of the labor market.
Recently, a number of advocates of large minimum wage increases have been arguing that low-wage employers are free-riding on taxpayers, as low-wage workers often rely on SNAP, Medicaid, and other transfer programs to maintain a decent standard of living. Though I don’t find this argument convincing (Greg Mankiw does a good job of making the case against it), it might actually make more sense when we’re discussing recent immigrants than when we are discussing natives. There is a coherent case for redistribution to the native-born poor, and poor people who arrived in the United States as minor children, that rests on the fact that these are people who had no choice in the matter of living under U.S. political and economic arrangements, and so it is important that the people U.S. political and economic arrangements leave worst-off should see them as legitimate. Redistribution that benefits the U.S. poor is not just a reflection of a charitable impulse; it reflects an effort to shore up the legitimacy of our legal-institutional order. The notion that low-wage employers are free-riding on taxpayers neglects the possibility that the well-being of low-wage workers is not the exclusive, or even the primary, responsibility of low-wage employers, who establish business (and other) enterprises to achieve a wide variety of objectives, from maximizing profit to delivering high-quality social services at the lowest possible cost. (There is a reasonable argument that the right to incorporate is a privilege that the government might choose to bestow only on firms that meet various social objectives, like paying high wages. David Ciepley’s “political theory of the corporation” is insightful on this point. But this presumably wouldn’t apply to non-corporate business enterprises, like sole proprietorships and partnerships. Moreover, it is not obvious that limiting the right to incorporate in this manner would yield the desired social benefits.) Rather, that responsibility lies with the individuals themselves, first and foremost, and with the government that claims their allegiance. That, in a nutshell, is my case for why regulating business enterprises shouldn’t be our option of first resort for achieving redistributive goals — that it is the government that has the burden of justifying its existence to the U.S. poor, not business enterprises.
But it is difficult to understand why this justificatory burden would apply to those who voluntarily choose to live under U.S. social and economic arrangements. (Note that some immigrants represent ambiguous cases, e.g., Iraqi or 1970s-era Vietnamese or Hmong refugees, etc.) There is a far stronger case that low-wage employers ought to take more responsibility for the well-being of immigrant workers, as immigrants have (implicitly or explicitly) chosen to offer their allegiance to the U.S. government. If low-wage employers are employing immigrants at wages that leave them in need of SNAP, Medicaid, and other transfer programs, they are leaving taxpayers with a burden that has nothing to do with establishing the justness of our system of government. The burden in question really is about charity in this case. It seems entirely reasonable that the the U.S. should require that business enterprises that employ immigrants should bear this burden on their own.
So let’s consider the immigration debate through this lens. The Migration Policy Institute has found that only 14 percent of unauthorized immigrant adults have family incomes above 400 percent of the poverty level, and only 8 percent of unauthorized immigrant children can say the same. (The 400 percent of poverty threshold is noteworthy because the Affordable Care Act uses it as a benchmark to determine who is eligible for exchange subsidies.) If we assume that the debate over unauthorized immigration is essentially settled, or that it is at least settled for unauthorized immigrants who arrived in the United States as minor children, the U.S. will take on a substantial burden to integrate this population. This integration process will also create opportunities, as many of the immigrants in question are (obviously) talented and hard-working people. Yet it is commonly understood that less-skilled adults “earn significantly less money than their better-skilled counterparts, have poorer health outcomes, are more likely to depend on public assistance, and their children are less likely to achieve academically.”
During the years it will take to integrate the current unauthorized population, we ought to consider seeing to it that future immigrants are recruited on the basis of whether or not they can facilitate this process. New less-skilled immigrants with limited English proficiency will, as a general rule, compete with older immigrants in the same boat, and so it stands to reason that this influx should be limited to the extent possible. To guarantee that new immigrants have family incomes that are at least 400 percent of the poverty level or above, and thus will not become a burden on taxpayers, we could establish a higher minimum wage for immigrants arriving in the United States after 2015 and require that immigrants secure such a job offer before settling in the United States. Alternatively, we might require that immigrants purchase a comprehensive medical insurance policy and demonstrate that they will be able to adequately provide for themselves and their dependents for a period of several years with the resources at their disposal, drawing on the resources of their families, civil society groups, or private individuals rather than employers.