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April 30, 2009

The undocumented and business survival in the United States

Based on the severe economic contraction during the past six months, it is obvious why the topic of the economy receives so much attention as the economy directly weighs on the lives of citizens and businesses here and throughout the world. But the weight of the economy can have indirect effects as well, including potentially shifting attention from other policy issues.

For instance, a recent Bloomberg News article describes how economic troubles may affect potential immigration reform legislation.

"The long campaign to overhaul U.S. immigration laws may be derailed for yet another year—this time by the deteriorating economy."

The immigration debate is multifaceted, complex, and, at times, contentious. There are myriad issues to consider when entering into the immigration reform discussion, many of which are best left to the political process to decide. But, as the Bloomberg article describes, there is an important economic component to the immigration discussion. Economists can make a modest contribution to the debate by supplying unbiased research that touches on various aspects of the immigration question.

In that spirit, I offer up the results of research I've done with my colleagues, Julie Hotchkiss of the Federal Reserve Bank of Atlanta and David Brown of Heriot-Watt University in Edinburgh. Our research looks into the potential impact of undocumented workers on firm survival and is based on confidential information from the state of Georgia, which between 2000 and 2008 experienced the fastest growth in the number of undocumented immigrants in the United States, according to the Department of Homeland Security.

In this research, we find that firms employing undocumented workers enjoy a competitive advantage over firms that do not employ undocumented workers. We also observe that firms engage in herding behavior, i.e., firms will employ undocumented workers if their competitors do. The herding behavior is a natural consequence of competitive pressure: Rival firms' undocumented workforce lowers a firms' survival probability, while a firm's own undocumented workforce strongly enhances that firm's survival prospects.

Our analysis suggests that cost savings enjoyed by firms employing undocumented workers is a result of paying these workers wages that are less than what is paid to comparable documented workers. Because the advantage of hiring undocumented workers is cost-related, herding behavior and competitive effects are weaker if firms have the option to shift labor-intensive production out of state or abroad.

Our findings have several implications relevant to the policy discussion. The most straightforward prediction would be that if immigration reform is successful in forcing firms to pay undocumented workers market wages, the competitive advantage of hiring these workers may disappear. As a consequence, the demand for undocumented workers might well dissipate.

In addition, reform efforts that reduced the supply of undocumented workers (e.g., through tougher border and worksite enforcement) would raise firms' production costs, which may have an impact on prices if firms pass through these additional costs to consumers. However, this last point is not a direct implication of our analysis.

One word of caution about this study: Our results are based on the payroll reports of employers. This study does not have information on the activities of undocumented workers that are not recorded on firms' official wage records.

There are, of course, many other aspects of immigration policy to be considered, and we are loath to characterize the results of our research as supporting any particular approach or conclusion. But we do hope it sheds some light on a debate that already has its fair share of heat.

By Myriam Quispe-Agnoli, research economist and assistant policy adviser at the Atlanta Fed

April 30, 2009 in Immigration | Permalink


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And why won't businesses, seeing the advantage of the undocumented as you report here, replace the now documented with new undocumented workers at their earliest convenience?

Second, I know of many businesses that pay under the table to avoid taxes. If the IRS can't find these businesses, why are businesses paying the undocumented under the table suddenly going to find them when these workers are documented?

This is why the enforcement side must be perfected first. Only then can we consider creating a GIGANTIC inducement to more illegal entry.

Posted by: djt | May 01, 2009 at 02:14 PM

As my favorite talk show host Thom Hartmann always says:

"We DON't have an illegal immigration problem, we have an ILLEGAL EMPLOYER PROBLEM."

Start prosecuting the EMPLOYERS and the "illegal" immigrant problem will take care of itself.

Posted by: aaronbav | May 01, 2009 at 02:39 PM

In other words, if another contractor uses undocumented cash labor without paying workers' comp, FICA or other payroll deductions, I'll be forced: a) raise my prices; b) make less profit; or c) hire undocumented cash labor myself. If I don't do one of those things, I'll be out of business.

I'm sorry, but ten years ago most reasonably observant Americans figured this out without an economist's "analysis". We also figured THIS out: the undocumented receiving $10 an hour can send $2 per hour home to support his family. The documented, who is earning $8.50 to compete with the undocumented (because his documentation requires the employer to pay workers' comp, FICA and unemployment insurance), will never be able to support a family on that wage. His family lives here, in a dollar economy.

So the cheat gets a living wage while the legal worker barely gets by. The honest employer is driven out of business while the illegal employer is rewarded.

But wait! There's more! If you complain about this situation, you're labeled a racist or a xenophobe, not a concerned American. And if you're that struggling documented worker who can't support a family on $8.50 an hour, you're derided as not willing to do the "hard work" that immigrants are willing to do.

Bottom line: pay our documented workers enough to support their families and they'll do any work you ask them to do. Enforce laws against hiring illegal workers (very easy to do with social security numbers) and the legal firms will survive. All it takes is political will.

Posted by: Jeffrey Goodrich | May 01, 2009 at 07:21 PM

'As my favorite talk show host Thom Hartmann always says:

"We DON't have an illegal immigration problem, we have an ILLEGAL EMPLOYER PROBLEM."

Start prosecuting the EMPLOYERS and the "illegal" immigrant problem will take care of itself.
nonsense...hartmanns been bashing those of us who want border laws enforced since 'last hours of ancient sunlight'
the problem goes way beyond employers...
do you think drug dealers/ prison guards union/ teachers union want u.s. population to level off?
hartmanns full of it

Posted by: kevin joseph | May 04, 2009 at 07:27 PM

from what i heard on several radio shows 5 MILLION illegals got low income home mortgages thru hud


Posted by: kevin joseph | May 04, 2009 at 07:42 PM

This is a bogus argument. Increased immigration is a sign of a booming economy. The construction business and low level service business was going gangbusters during the greater part of the 2000-2008 timeline. This means that there was a need for undocumented immigrants which flooded this country. This is simple market economics. If you don't like it, swim to Cuba and find out how it works. There was demand for labor and labor came. Who do you think built all the crappy homes in the Atlanta suburbs? Who staffed all the new McDonalds and malls that opened in the exurbs? The illegals. We Americans decided we wanted to spend rather than work hard for a living and now we are complaining about immigrants. Get a grip you all. Business is going to do what it has to in order to increase profits. That's the American way and that's why we are the most powerful country in the world.

Posted by: Michael | May 06, 2009 at 12:21 AM

The analysis and results are, indeed, quite obvious (as noted by JG at 7:21p, 5/1. That may not detract from their usefulness in the debate over immigration reform, however.

Posted by: don | May 12, 2009 at 10:01 PM

1) "Need" and "some people want" are two different things.

2) How come real wages have gone down in professions where illegals mostly work.

3) Doesn't #2 indicate there is no "need" and that it's merely rich people playing the labor arbitrage game.

4) Shouldn't we be importing marketers, lawyers and doctors based on "need"?

5) Can't a modest, legal only, non lawyer hassle, non employer holds the visa system be implemented?

Posted by: joe schomoe | May 14, 2009 at 09:18 AM

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