CONTEMPLATING ILLEGAL IMMIGRATION. Here's another catch-up post, now that grades are in and Ph.D.s have been hooded. (Or is it a jump-start post for another research paper, now that there's a month of thinking time.)

I'll start, however, with recent empirical evidence that illegal immigration provides a cheap labor subsidy.

When hordes of police and immigration officials stormed meatpacking plants in six states this week, the illegal workers arrested may not have been the only victims.

Consumers and the industry itself may be feeling the repercussions in a shortage of meatpackers, higher wage costs and, ultimately, higher prices for the beef that lands on America's tables at home and in restaurants.

I'm not sure what this crackdown says about the model immigration policy makers are using. In my theoretical research, "probabilistic amnesty" refers to illegal immigrants devoting their entire working lives to work in the rich country's underground economy. I suppose the model could refer to periodic and unpredictable raids of employers hiring in that underground economy. In that case, the following paragraphs from the news report make sense.

Some analysts see the current emphasis on enforcement in the meatpacking industry as the precursor to getting an immigration bill through Congress - by demonstrating the government's capability to enforce laws at the work site.

"The meatpacking industry has become dependent on an unauthorized labor force, and it is not good government to destroy an entire industry. In some way, there is going to be a meeting of the minds," said Mark Reed, a former immigration regional director who now runs his own consulting business, Border Management Strategies, in Tucson, Ariz.

We're looking at precisely my modeling efforts. (.pdf) Employer sanctions lower the subjective probability of an amnesty, which reduces the flow of illegal immigration for rich-country welfare benefits. At the same time, the cheap labor subsidy in relatively unpleasant jobs (anybody else remember when beef boning was a skilled trade?) becomes one of the benefits the U.S. government has to consider in defining its immigration policy. But, contrary to what editorial writers at USA Today assert, the policy is a success.

Those who favor a rigid approach argue that the traditional immigration-reform bargain — amnesty for those already here coupled with rigorous enforcement forevermore — has proved to be a lie. And so it has. In 1986, for example, a congressional compromise gave amnesty to 2.7 million illegal immigrants and set up a new enforcement scheme. Today's illegal immigrants are eloquent evidence of its failure.

The reason it failed, however, was not the amnesty. It was Congress' unwillingness to create and fund a viable enforcement system.

No, Congress has to balance the potential burdens on social services against the cheap labor subsidies and the admission of entrepreneurial people who might not possess the verifiable credentials of a university graduate. Representative Mike Pence, offering the counterpoint at USA Today, still has that to learn.

Some argue that putting border security first and asking millions of illegal immigrants to leave the country is unrealistic. I submit that it is unrealistic to assume that another round of amnesty will not result in another wave of illegal immigration in the years ahead. We must address illegal immigration, but we must do so in a way that reasserts the principle that the only way to enter the United States is under the law.

Is it cheaper to build the fence (using the underground economy?) or to revise the laws? The existence of a rich country with both ample opportunities for entrepreneurial people and generous social services is in itself temptation to residents in countries less rich.

That's not to deny the existence of serious tradeoffs in any change in immigration policy, as the concluding paragraph of Heather Mac Donald's "Seeing Today's Immigrants Straight" in City Journal notes.

Many of the costs imposed by Mexican immigrants are a function of their lack of education, their low incomes, and their own and their children’s behavior, not their legal status. Without question, we must balance those costs against the immigrant generation’s admirable work ethic. But immigration reform that institutionalizes the present immigration mix—or, worse, increases its volume by three to five times—is certain to expand the Hispanic underclass. There are many educated foreigners patiently waiting for permission to migrate to the United States. The United States can better honor its immigrant heritage by accelerating their entry rather than by continuing to favor the most low-skilled of our neighboring populations.

Her essay favors a tougher stance on border enforcement; she might also be making the case for instilling the Habits of Highly Effective People, rather than Gang Nation, in immigrant children. The tough part, however, is that nowhere else in the world does a rich country have so long a border with a country relatively much poorer. (There are gradations of poverty as one proceeds from the European Union countries east into Siberia, southeast into the Middle East, and across the Mediterranean Sea.)

Also in City Journal, Steven Malanga suggests that the cheap labor subsidy is relatively small.

America does not have a vast labor shortage that requires waves of low-wage immigrants to alleviate; in fact, unemployment among unskilled workers is high—about 30 percent. Moreover, many of the unskilled, uneducated workers now journeying here labor, like Velasquez, in shrinking industries, where they force out native workers, and many others work in industries where the availability of cheap workers has led businesses to suspend investment in new technologies that would make them less labor-intensive.

That induced-innovation hypothesis is a topic of research in progress. Stick around.

NOT OF THEORETICAL INTEREST ONLY. Seasonal foreign workers in short supply this year.

For four generations, Robin Hall's family overcame competition, bad weather and shifting economic tides that threatened to swamp their Chesapeake Bay crab-processing business.

Why is this year different?

But 2005 could be the year the Maryland business goes under — vanquished not by the forces the Halls managed to outlast, but by a U.S. labor visa program they viewed as salvation in their battle.

Fierce competition claimed all the available visas by Jan. 3, creating a crisis that's blocked G.W. Hall & Son Seafood from rehiring foreign workers who had returned season after season.

It's not just crab-shuckers, either.

From Hamptons resorts to Western foresters, from Midwestern tourist centers to Sun Belt landscaping firms, thousands of businesses are being squeezed by the same, unprecedented labor crunch this year as they scramble to hire employees needed for busy spring and summer seasons.

For more than a decade, they have relied on foreign workers with H-2B visas, a 1990 immigration program that allowed businesses to look outside U.S. borders for workers to fill temporary, non-agricultural jobs Americans increasingly shun.

But in 2005, amid rising business demand, the 66,000 visas authorized each federal fiscal year were gone by Jan. 3, barely three months after the program's annual start. The door slammed shut so early that many business owners say they are unable to hire the foreign workers they recruit to shuck oysters, plant trees, cut lawns, staff kitchens, wait tables and fill dozens of other jobs.

You think there isn't going to be a temptation for some of these companies to make deals with the smugglers of illegal immigrants? And that, with more oyster-shuckers and foresters in the pool of illegal immigrants, there won't be more reason for the government to regularize those illegals?

Perhaps there are some unexplored avenues by which high-technology can be used to complement skilled domestic workers with better opportunity costs as oyster-shuckers and tree-planters. But if you've just won the Chicago-Mackinac regatta those victory drinks might be a bit slow in coming.

On Michigan's Mackinac Island, a Midwest vacation mecca, Patti Ann Moskwa says she didn't get approvals for the 15 visas she'd sought for workers to fill jobs at Horn's Gaslight Bar before the federal program maxed out.

"It's not like we're not trying to hire U.S. citizens. I would if I could," Moskwa says.

But in 10 years of running newspaper ads for seasonal jobs, Moskwa says she has received only three applications. Her recruiting trips to colleges came up dry. "It probably means I'll be washing a lot more dishes," Moskwa says.

Remind me again ... college students are an oppressed proletariat burdened by excessive tuitions and overpriced textbooks, providing employers with an elastic supply of dishwashers. (Oh, that's a different rant.) The article provides good capsule summaries of the principal differing perspectives in the immigration policy debate.

Mark Krikorian, executive director of the Center for Immigration Studies, a Washington think tank that favors tighter borders, says allowing firms to use cheaper, low-skilled foreign workers in place of American workers represents a questionable government subsidy. "Immigration represents a thumb on the scale on the side of employers," he says. "Are these businesses a compelling national interest that deserve a federal subsidy?"

That leads to the induced-innovation argument: does the cheap labor subsidy hamper economic growth by preserving more labor-intensive methods of production?

Joanna Hedvall, an analyst at the American Immigration Lawyers Association, says the visa program is a business issue, not an immigration matter. She says the foreign workers who participate enter the country legally, stay temporarily and pay taxes on their earnings. There have been few complaints about workers overstaying visas, Hedvall says.

And, to the extent that such workers can be vetted, and can enter and leave without let or hindrance, they're less likely to become illegal migrants by overstaying. It would be useful to know the proportion of illegal immigrants that remain in the underground economy in the U.S. rather than risk repeated border crossings.

"This is a far better system than having businesses hiring undocumented workers," says Melinda Rubin, a New York immigration lawyer seeking visas for temporary foreign workers hoping to return to summer jobs in the Hamptons, on Long Island's East End. "It puts more money in our tax coffers, and it's a good form of foreign aid because the people who work here bring money home."

Yes, immigrant remittances provide substantial resources to many developing countries. Catch that location, though ... evidently working ones way through the Ivies is just Not Done in the East End any more.

TODAY'S IMMIGRATION ROUNDUP: Econ Log looks at two dimensions of the underground economy. One dimension is the provision of domestic services to rich working moms, the effect Mother Jones may or may not have complained about. The other is the induced innovation problem, wherein part of the underground economy is technologically backwards account the ready availability of labor that is cheap relative to capital. Mr Kling takes a page out of Gary Becker's book, asking about the effect of illegal immigration on the labor force participation of women.

Max at Common Sense and Wonder has some related cultural observations.

INDUCED INNOVATION IN SMUGGLING?

Interesting post by Bob at Truck and Barter about the effect of stronger border enforcement on illegal-immigrant smuggling.

Unfortunately O’Reilly has failed to take into account the fact there will still be millions of people who want to cross the border. Think of immigration as a market. Safe border-crossings are the commodity, “coyotes” are the suppliers, and those who wish to come into America are the buyers. The National Guard may reduce the amount of safe crossings that are produced in the short-run. However, given the huge demand for safe crossing, “coyotes” are more likely to innovate new ways to sneak across undetected than they are to quit altogether. Furthermore, while I have extremely little knowledge of oceanic smuggling operations (about as much as O’Reilly, I’d guess), I know that if the price people are willing to pay is high enough, someone will figure out how to make it worth the costs. Remember, 70 years ago commercial air travel was thought to be unfeasible too.

Trying to reduce the incidence of a specific transaction, if both parties are voluntary participants, is pretty darn close to impossible. We can see that fact in the market for illicit drugs. America has focused on reducing the supply of drugs. Yet considering the quantity of the resources devoted to stopping the supply, most experts would agree that we don’t capture even half of the drugs that are sold in America (I believe 10%-15% is a more accurate estimate). Similarly, even if we reduce the supply of safe border-crossings we have done nothing to decrease the desire of people to enter the United States.

This is true, up to a point. The demand by illegal immigrants to enter the United States is a derived demand, in this case derived from the willingness of employers to pay for illegal immigrant services. To be sure, any interdiction of the supply of illegal immigrants will raise the wages that successful entrants receive. But those migrants might also be motivated by the possibility of a subsequent regularization, with the accompanying opportunity to participate in the legal economy. More stringent border controls have the effect of inducing migration by individuals who expect to do better in the legal market, holding the expectation of regularization constant. Details here, or just read the abstract.

INCENTIVE, OR CRUSHER?

Digging into the archives again.  Here, from the fall of 2011, are the late Gary Becker along with the very-much alive Richard Posner and Kevin Murphy, on income inequality and populist politics.  Occupy and the Tea Party might be dated references, and yet the emergence of independent senator Bernie Sanders and tycoon Donald Trump as possible presidential nominees might be continued manifestations of what University of Chicago's deep thinkers were tackling four years ago.  First, Professor Becker contemplates the persistence of populism after the winter makes camping out in the financial district unpleasant.

Although, on the whole, I believe that most members of the top 1% provide useful services to society, I share the concern of “occupiers” and Tea Party members about many of the bailouts. The rich bankers and others who took large risks should have taken much larger haircuts. I have also supported from the beginning of the recession higher capital requirements for banks, especially for the large “too big to fail banks” that will be bailed out if they get into financial difficulties.

Nevertheless, the overall earnings inequality has far greater relevance for the vast majority of occupiers and Tea Party supporters than do the earnings of men and women at the very top of the financial sector. The most effective way for the US to reduce overall inequality that will help the largest number of young persons is by finding ways to bring American high school and college graduation rates up to the levels achieved by the other nations, such as South Korea and some European nations, that have replace the US as worldwide leaders in education achievements.

It helps to have high schools that behave like high schools, and colleges that behave like colleges, but one component of rising income inequality surely is more employers of high-end skills chasing fewer holders of those skills (at least until labor-augmenting technical change permits less-skilled people to do some of those jobs.)

But where an idea gains traction, a leader, charismatic or not, might emerge.  Here's Judge Posner.

Railing against income inequality, job loss, and banking abuses is thus understandable, but it doesn’t do any good. The “Occupiers” are anarchic and disruptive, and the solid middle of American society, which rejects the Tea Party because of its goofy ideas, is likely to reject the Occupy movement because of its style, while broadly sympathetic to its antipathies. But if the movement attracts charismatic leaders amidst a stagnant or worsening economy, it may become a force in American politics.

We'll see how that plays out.  But, Professors Becker and Murphy argue, messing around with the tax code (a border fence wasn't a hot topic in 2011, and much of the illegal immigration is by way of people overstaying their visas) is less effective than, well, ideas that might be familiar to regular readers here.

Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavor­able development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human cap­ital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

Yes. Supply curves slope upward, long-run supply elasticities exceed short-run supply elasticities, and induced innovation can expand employment opportunities for people with smaller portfolios of human capital.  Provided those portfolios include discipline and persistence.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital. Yet this conclusion should not produce complacency, for the response so far to these higher returns has been disturbingly limited. For example, why haven’t more high school graduates gone on to a college educa­tion when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.)[7] And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant?

The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—particularly individuals from broken households. Cognitive skills tend to get developed at very early ages while, as our colleague James Heckman has shown, noncognitive skills—such as study hab­its, getting to appointments on time, and attitudes toward work—get fixed at later, although still rel­atively young, ages. Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital.

Thus, it may seem simpler to tinker with the tax code.  But it's not.

For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same indi­viduals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

A more sensible policy is to try to take greater advantage of the opportunities afforded by the higher returns to human cap­ital and encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—human capital.

Yes, provided the common culture reinforces the life-management skills of the middle class, and the schools don't dumb down and call it inclusion.