Know the flow.

To find a way to maximize the benefits of immigration and minimize thte costs, we have to get beyond the prevalent misconceptions about theimpact of our current immigration policies.

Mr. Borjas is a professor of economics at the University of California, San Diego, and the author of Labor Economics, forthcoming from McGraw-Hill. His article ``The Economics of Immigration,'' in the December 1994 issue of the Journal of Economic Literature, offers a detailed summary of evidence from the academic literature.

THE FLOW of legal immigrants has increased steadily since the 1930s, when only 500,000 immigrants were admitted during the entire decade. In the 1950s, 250,000 legal immigrants entered the United States each year. By the 1990s, nearly 900,000 legal immigrants were being admitted every year. A large number of people also enter the country illegally, despite the enactment of the Immigration Reform and Control Act of 1986. Last year the Border Patrol apprehended 1.1 million illegal aliens, more than two per minute. We have also witnessed a radical change in the national-origin mix of immigrants. Over two-thirds of immigrants during the 1950s originated in Europe or Canada. By the 1980s, only about 12 per cent originated in Europe or Canada, as against 37 per cent who originated in Asia and almost 50 per cent who originated in Latin America.

In view of these historic changes, it is not surprising that immigration has resurfaced as a pivotal issue. The debate has blurred the traditional lines between the Left and the Right, leading to odd political alliances: Bill Bennett siding with Fidel Castro and the California Teachers Association in proclaiming the evils of Proposition 187, Pat Buchanan siding with environmentalist groups to argue that the flow of legal immigrants must be reduced.

For the most part, the immigration debate focuses on economic issues. The stakes are high, and so it is not surprising that the participants use facts, factoids, and outright distortions to champion their point of view. For instance, depending on whose numbers we believe, immigrants either pay $27 billion more in taxes than they take out of the welfare system or take out $42 billion more than they pay. A number of myths permeate the field. Before we can engage in a serious debate, it is worth contemplating a simple question: What do we know about the economic impact of immigrants on the United States?

Myth: By historical standards, immigration today is not all that high.

In 1910, 14 per cent of the American population was foreign-born; by 1990, only 8 per cent was. This trend causes some observers to argue that immigration fears are blown out of proportion because, by historical standards, immigrants now make up a small proportion of the population. Yet by several measures immigration today is at or near record levels. Between 1901 and 1910, at the height of the Great Migration, 8.8 million legal immigrants entered the United States. If present trends continue, as many as 10 million legal immigrants, and perhaps another 3 million illegals, will have entered the country in the 1990s. The United States, therefore, will probably have admitted more immigrants in this decade than in any other decade in its history.

Moreover, because of the decline in the number of children borne by American women, immigration now accounts for nearly 40 per cent of the growth in population, compared to about 50 per cent at the beginning of the century. At least one of every three new workers who enters the U.S. labor market during the 1990s will be an immigrant. By this yardstick, immigrants play a crucial role in determining demographic and economic trends in the United States.

Myth: Immigrants do well in the labor market.

If the typical new immigrant were a highly skilled worker, we would be engaged in a very different discussion over immigration policy. Imagine the nature of the debate about Proposition 187 if the flow of illegal aliens was composed mainly of teachers, academics, and journalists. The country's intellectual elite would probably be manning the barricades to prevent the illegal entry of competing workers.

Most of the immigrants now entering the United States, however, are less skilled workers who have little hope of reaching economic parity with native workers during their lifetimes. Recent immigrants are not as skilled, in comparison to the native-born population, as earlier waves.

The typical immigrant who had just arrived in the U.S. in 1970 had 11.1 years of schooling, compared to 11.5 years for the typical native worker at that time. By 1990, the typical new arrival had 11.9 years of schooling, compared to 13.2 years for natives. In view of the widening gap in educational attainment, it is not surprising that the wage differential between immigrants and natives rose dramatically. The most recent arrivals enumerated in the 1970 census earned 16.6 per cent less than natives. By 1990, the wage disadvantage was 31.7 per cent.

The poor economic performance of recent immigrants at the time of entry would not be a cause for concern if the economic disadvantage diminished over time, as immigrants assimilated. The available evidence, however, suggests that the gap will not narrow substantially during the immigrants' working lives. The process of economic assimilation takes place mainly in the first two decades after arrival and narrows the wage gap by about 10 percentage points. This rate of assimilation allowed earlier immigrants, for whom the initial gap was less than 20 per cent, to almost catch up with natives, but it is not sufficient to permit recent immigrants, for whom the gap starts at more than 30 per cent, to reach economic parity.

Myth: Immigrants use welfare less than natives do.

Less skilled workers, whether immigrants or natives, are more likely to qualify for and participate in welfare programs. There is little doubt that immigrant use of welfare programs is on the rise. In 1970, immigrants were slightly less likely to receive cash benefits (such as Aid to Families with Dependent Children and Supplemental Security Income) than natives. In 1970, 5.5 per cent of newly arrived immigrant households received welfare, compared to 6 per cent of native households. By 1990, 8.3 per cent of newly arrived immigrant households received public assistance, compared to 7.4 per cent of native households.

Moreover, the welfare-participation rate of a given immigrant wave increases over time. The wave that arrived between 1965 and 1969 had a welfare participation rate of 5.5 per cent in 1970. By 1990, the participation rate of this cohort had risen to 9.8 per cent. It seems that assimilation involves not only learning about labor-market opportunities but also learning about the income opportunities provided by the welfare state.

The dollar benefits received by immigrant households that are on welfare have also increased rapidly. The typical native household on welfare received roughly $4,000 in cash benefits each year (in 1989 dollars) throughout the 1970 - 1990 period. In contrast, the typical immigrant household on welfare received about $3,800 in 1970 and about $5,400 in 1990.

As a result of the increasing participation of immigrants in welfare programs and the larger benefits they are collecting, immigrants now receive a disproportionate share of cash benefits. In 1970, 6.8 per cent of U.S. households were headed by an immigrant, and these immigrant households received 6.7 per cent of all cash benefits, so that immigrants were slightly under-represented in the distribution of these welfare benefits. By 1990, the situation had changed drastically: 8.4 per cent of households were headed by an immigrant, and these households received 13.1 per cent of all cash benefits. Put differently, the cash benefits received by immigrant households in 1990 were 56 per cent higher than they would have been if immigrants had used the welfare system to the same extent as natives.

By contrast, immigrants do not receive a disproportionately high share of non-welfare income. In 1970, they received approximately 6.3 per cent of all non-welfare income, slightly less than their proportion of the population. By 1990, they received 8.3 per cent of all non-welfare income, about the same as their proportion of the population. Because immigrants do not get a disproportionately high share of income, they also do not pay a disproportionately high share of taxes.

Myth: Immigrants pay their way in the welfare state.

A widely publicized 1994 study by the Urban Institute concluded that immigrants pay over $27 billion more in taxes than it costs to provide them with schooling and welfare services. On the other hand, Donald Huddle (in a study conducted for the Carrying Capacity Network, an anti - population-growth group) concluded that the net costs of immigration exceeded $40 billion. These accounting exercises inevitably incorporate many hidden and questionable assumptions.

To illustrate, let's conduct a simple, back-of-the-envelope calculation of the costs and benefits of immigration. As noted above, the 1990 census indicated that immigrants received about 13.1 per cent of all cash benefits distributed in the United States. At that time, roughly $181.3 billion was spent on all means-tested entitlement programs (including Food Stamps, Medicaid, etc.). If we assume that immigrants received 13.1 per cent of these expenditures, they accounted for $23.8 billion.

How much do immigrants pay in taxes? According to the census, the total non-welfare income of immigrant households was $284.7 billion. If the total tax rate (including federal, state, and local taxes) was 30 per cent, immigrant households paid about $85.4 billion in taxes. The calculation thus indicates that immigrants pay more in taxes ($85.4 billion) than they take out of the welfare system ($23.8 billion).

Changing the Assumptions

BUT this comparison assumes that immigrant taxes are used only to fund their use of entitlement programs. One can justify this assumption by arguing that all other government programs provide pure ``public goods,'' so that spending on these programs is the same regardless of immigration. Immigrants, however, increase the congestion of amenities provided by government (e.g., parks, freeways, schools, jails). The cost of providing these public goods to the immigrant population is not zero.

Obviously, different assumptions about the cost of providing these goods will lead to different conclusions about whether immigrants pay their way in the welfare state. If the cost is zero, immigrants make a substantial contribution to the treasury. If, on the other hand, the average cost of providing services to immigrants equals the average cost of providing services to natives, immigrants should be charged for the various government programs as if they were natives. In 1990, 91.1 per cent of taxes were used to pay for programs other than means-tested entitlement programs. If we charge immigrants 91.1 per cent of their tax payments for using these other programs, then only 8.9 per cent of immigrants' taxes are left to fund their use of means-tested entitlement programs. Immigrants would then contribute only $7.6 billion (or 8.9 per cent of the $85.4 billion they pay) to the funding of these programs. The tax burden resulting from immigration would be on the order of $16 billion.

The Urban Institute's claim that immigrants create a $27-billion ``net surplus'' for the United States assumes that immigrants do not increase the cost of any programs other than the ones included in the Institute's calculations (mainly welfare and education). Because we do not know by how much immigrants raise the cost of freeways, national parks, and even defense, accounting exercises that claim to estimate the fiscal impact of immigration should be viewed suspiciously.

Furthermore, the typical accounting exercise does not consider the long-run impact of immigration on government expenditures. For instance, some argue that immigrants make a net contribution to the Social Security system because they are paying into the system now and are not collecting benefits. But immigrants are on average about 30 years old when they enter the United States. As a result, many immigrants pay into the Social Security system for a much shorter time than natives, yet collect roughly the same benefits. In other words, a sizable bill will come due some day, and our children (as well as the immigrants' children) will have to pay it.

The accounting exercises also take a myopic view of expenditures on education. In California alone, it is estimated that roughly $1.7 billion was spent on educating the children of illegal aliens in 1993. These costs, however, must be weighed against the benefits of having a more educated work force later on. Moreover, immigrants who enter the United States after they have completed their education import ``free'' human capital, from which substantial benefits might accrue.

Myth: Refugees and illegal aliens are the source of the immigration problem.

There are huge differences in educational attainment, earnings, and welfare propensities among groups of different national origins. In 1990, immigrants from France and Germany earned about 25 per cent more than natives, those from China and Peru earned 21 per cent less than natives, and those from El Salvador and Mexico earned 40 per cent less than natives. Similarly, only about 2 to 4 per cent of the households originating in South Africa, Taiwan, or the United Kingdom received public assistance, as opposed to 11 to 12 per cent of the households originating in Ecuador or Mexico and nearly 50 per cent of the households originating in Laos or Cambodia. In view of these

differences, it is tempting to blame a relatively small number of groups for the disturbing trends in the economic impact of immigration.

The Urban Institute's study offers a typical example of this blame game. The data presented by the Institute's researchers indicate that 41 per cent of recent immigrants were high-school dropouts, compared to only 23 per cent of natives. Nevertheless, they conclude that the ``low educational attainment or poor `quality' of recent immigrants . . . is directly attributable to illegal immigrants and refugees, not to legal immigrants.''

The researchers reach this conclusion by manipulating the data. In defining ``legal immigrants,'' the study omits refugees, presumably because they are admitted under a different set of rules. The researchers also want to omit illegal aliens. The census, however, does not provide any information on who is legal and who is not, so they simply omit immigrants from Mexico (and several Central American countries). The rationale is that a large number of illegal aliens are Mexicans. It is also true, however, that a very large number of legal immigrants are Mexicans. In fact, Mexicans are the largest group in the legal immigrant flow, accounting for almost a quarter of the immigrants admitted legally in the 1980s. By excluding Mexicans from the calculation, the Urban Institute can conclude that ``legal'' (read:

non-Mexican, non-refugee) immigrants don't look quite so bad. In other words, there is no immigration problem once we get rid of the ``problem'' immigrants.

The blame game also shows up in the Manhattan Institute's recent ``Index of Leading Immigration Indicators,'' which dismisses the high propensity of immigrants to receive public assistance by noting that ``immigrants are more likely than natives to receive welfare, but that is due mainly to very high rates of welfare use among refugees and the elderly.'' How we define both the native and the immigrant populations influences what we conclude about the economic and social benefits from immigration. The bar graph reports the welfare-participation rates for various groups of native and immigrant households in 1990. Over all, immigrants are more likely to be on welfare than natives. If one looks only at the non-refugee population, however, the welfare gap between immigrants and natives essentially disappears. If we also omit the elderly, we find that non-refugee, non-Mexican immigrants are less likely to be on welfare than natives.

But before we conclude that we have found the source of the immigration problem (that is, the refugees, the presumed illegals, and the elderly), there are two points that are worth remembering. Just as we can minimize the immigration problem by getting rid of the problem immigrants, we can play a similar game with the native population. As the graph also illustrates, even highly ``select'' groups of immigrants are more likely to be on welfare than non-Hispanic white natives. More important, even if we were to find that these select groups of legal immigrants have the same propensity to be on welfare as a similarly select group of natives, we would still have a problem. After all, shouldn't our immigration policy strive to admit workers who do more than just replicate the social and economic problems of our native population? Yet, instead of considering the economic potential of applicants when handing out entry visas, our current policy awards entry visas mainly to applicants who have relatives already residing here.

Myth: Immigrants do not hurt the earnings of native workers.

Another reason to be concerned about the impact of unskilled immigrants is that they probably reduce the economic opportunities of unskilled natives. Economists have typically estimated the impact of immigration on native earnings by comparing the earnings of natives who reside in ``immigrant'' cities (such as Los Angeles and San Diego) with the earnings of natives who reside in cities where few immigrants live (such as Atlanta and Pittsburgh). These cross-city comparisons suggest that the average native wage is lower, but only slightly, in labor markets where immigrants tend to cluster. If one city has 10 per cent more immigrants than another, the native wage in the city with more immigrants is only about 0.2 per cent lower.

But this correlation does not necessarily indicate that immigrants have a negligible impact on native workers. Suppose immigration into Los Angeles lowers the earnings of natives in L.A. substantially. Native workers are not likely to stand idly by and watch their economic opportunities evaporate. Many will move out of the Los Angeles basin into other cities, and people who were considering moving to L.A. will now move elsewhere instead. As natives respond to immigration by voting with their feet (creating ``the new white flight''), the adverse impact of immigration on the L.A. labor market is transmitted to the entire economy. In the end, all competing native workers are worse off from immigration, not simply those residing in cities where immigrants cluster.

There is some evidence that this ``macro'' effect of immigration on native earning opportunities is significant. The 1980s witnessed a substantial increase in the wage gap between workers who did not have a high-school diploma and workers with more education. The decade also witnessed the entry of large numbers of less skilled immigrants. Recent evidence suggests that perhaps a third of the 10-percentage-point decline in the relative wage of high-school dropouts between 1980 and 1988 can be attributed to the flow of less skilled immigrants.

Myth: Americans gain a lot from immigration.

A number of observers claim that immigration is very beneficial for natives. It is typically argued that immigrants spur economic growth, lower prices for American consumers, and increase the demand for goods and services produced by native-owned firms. It is telling that these claims are seldom, if ever, backed up by numbers. It is simply taken as a tenet of faith that Americans gain from immigration and that these benefits are substantial.

The belief that immigration spurs economic growth arises from the fact that there is a positive correlation between the number of immigrants in a particular city and the rate of economic growth in that city. This correlation is interpreted to mean that when immigrants enter a locality, economic growth follows. This interpretation, however, assumes that immigrants are not very smart. Why would anyone migrate to a city with a stagnant economy? Immigrants (like natives) look at economic conditions before deciding where to settle. The positive correlation between economic growth and immigration, therefore, might simply indicate that immigrants are smart in choosing where to live.

Redistribution of Wealth

IN ANY case, the numbers do suggest that natives, as a group, gain from immigration. Immigration, however, does more than just raise the national income that accrues to natives; it also induces a substantial redistribution of wealth. In particular, wealth is redistributed from native workers who compete with immigrant workers to those who employ immigrants and use immigrants' services. I have recently estimated that native workers, on the whole, lose about $133 billion a year, or 1.9 per cent of GDP in a $7-trillion economy, mainly because immigrants drive down the wages of competing workers. At the same time, employers and other users of immigrants' services, such as owners of large farms and the Zo -- Bairds of the world, gain substantially. These gains are on the order of $140 billion, or 2 per cent of GDP. The net gain, therefore, is only on the order of 0.1 per cent of GDP, or about $7 billion. But although the net gain is small, some Americans gain very much. This simple fact explains why a small, well-financed, and powerful segment of the population finds it difficult to understand why most other Americans are so concerned about immigration.

Myth: Immigrants are more likely to be entrepreneurs, and these entrepreneurs are very successful.

It is often claimed that immigrants create more jobs than they take because a large number of them become successful entrepreneurs. Asserting that ``immigrant companies have generated hundreds of thousands of good jobs in California,'' Ron Unz uses Silicon Valley and the computer industry to illustrate how immigrant entrepreneurship benefits our country [``Value Added,'' NR, November 7].

Sentimentality aside, it simply is not true that the entrepreneurial spirit burns more brightly among immigrants than among natives. The Census Bureau's statistics indicate that only 6.8 per cent of immigrant workers in 1990 were self-employed, compared to 7 per cent of native workers. Although entrepreneurship is an important economic activity among some immigrant groups (15 per cent of Greek and 18 per cent of Korean immigrants were self-employed), it does not characterize the bulk of the immigrant population. Only 6 per cent of Vietnamese immigrants, 5 per cent of Mexican immigrants, and 3 per cent of Filipino immigrants were self-employed.

We should not use these statistics to denigrate the significant entrepreneurial contribution made by some immigrants. For instance, it might be that even though most immigrants do not become entrepreneurs, those who do are wildly successful and contribute significantly to the American economy. The proponents of this argument typically do not back up their assertion with data (since none exist) but instead rely on anecdotes. However, for every Philippe Kahn (an illegal alien who founded Borland International), there is a Bill Gates. Moreover, on average, the self-employed do not do very well in the labor market, regardless of whether they are immigrants or natives. Small firms have very high failure rates, and self-employed workers often earn less than wage-and-salary workers who have comparable skills.

Myth: The melting pot works fast.

In 1990, 10 per cent of the people living in America were ``second generation'' (that is, were born here but had at least one parent born elsewhere). By 2050, if current trends continue, the share of second-generation Americans will increase to about 14 per cent, and an additional 9 per cent of the population will be the grandchildren of current immigrants. The impact of immigration depends not only on how immigrants perform in the U.S. economy but also on the economic performance of their offspring. Despite this, the current debate almost completely ignores the implications of immigration policy for the economic and social well-being of this country in the twenty-first century.

We ignore these implications at our peril. The experience of the children of earlier immigrant waves suggests that, although second-generation workers earn more than their immigrant parents, on average the intergenerational improvement is not that large. At best, the children of immigrants earn about 10 per cent more than their parents. Because recent immigrant waves are relatively unskilled and earn about 20 per cent less than natives throughout much of their lives, this pattern would imply that second-generation workers in the next century may also have a substantial economic disadvantage.

There is also evidence that the huge wage differentials among different national-origin groups in a given generation are transmitted to their children. For example, in 1940 immigrants from the Philippines earned about 41 per cent less than immigrants from Italy. In 1970, second-generation Filipino-Americans earned 17 per cent less than second-generation Italian-Americans. Today's skill differentials among foreign-born groups become tomorrow's skill differentials among American-born ethnic groups. It might take up to four generations for the ethnic differences in economic status introduced by current immigration to disappear.

The Need for Action

WE DO not yet know how the welfare state and the multicultural agenda favored by many segments of the intellectual elite will alter the speed at which the melting pot does its job. A prudent observer can only conclude that these misguided policies will retard the forging of Americans. This factor, combined with the relatively low skills of recent immigrant waves and their high rates of welfare recipiency, might mean we are already witnessing the creation of a large new underclass. As other countries have learned at a very high cost, ethnicity matters, and it matters for a long time.

The debate over immigration policy is much too important to be guided by ignorance or by a distortion of the facts. The available evidence suggests reasons for conservatives, and even for open-border libertarians, to be worried about immigration. Perhaps if we can agree on the essence of the problem, we can proceed to a more rational discussion of the policy solutions.

Time is running out, however. The failure of the political system to address the problems caused by illegal aliens led to the enactment of Proposition 187, a proposition that many of us (even if we believe that illegal aliens create problems) view as ill-advised and ill-crafted. The longer the politicians bury their heads in the sand, the more likely that the Proposition 187 movement will spawn a ``Proposition 188'' to control legal immigration.

This resolution to the debate would be unfortunate, because it would probably lead to far more draconian measures than are justified. If we wish to pursue a more rational policy that nourishes some forms of legal immigration, that upholds the traditions that made America an ``immigrant nation,'' and that takes advantage of the many economic, social, and cultural contributions that a well-chosen immigrant flow can confer upon the U.S., we will have to act soon and decisively.