The Economic Impact of S. 744, the Border Security, Economic Opportunity, and Immigration Modernization Act

June 18, 2013 - CBO

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The Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744) would revise laws governing immigration and the enforcement of those laws, allowing for a significant increase in the number of noncitizens who could lawfully enter the United States permanently or temporarily. The bill also would create a process for many currently unauthorized residents to gain legal status, subject to their meeting conditions specified in the bill. The Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) have prepared an estimate of the cost of that legislation to the federal government, including projections of the bill’s effects on both federal spending and federal revenues.

That cost estimate reflects some, but not all, of the effects that S. 744 would have on the economy. This supplemental report provides estimates of the overall economic impact of the legislation and of the incremental federal budgetary effects of changes in the economy that the cost estimate does not reflect. Ascertaining the effects of immigration policies on the economy and the federal budget is complicated and highly uncertain, even in the short run, and that task is even more difficult for longer periods; for that reason, this report addresses the next 20 years but does not attempt to look over a longer horizon.

How Would the Economic Impact of the Legislation Affect Federal Budget Deficits?

Cost estimates produced by CBO and JCT typically reflect the convention that macroeconomic variables such as gross domestic product (GDP) and employment remain fixed at the values they are projected to reach under current law. That is a long-standing convention—one that has been followed in the Congressional budget process since it was established in 1974. However, because S. 744 would significantly increase the size of the U.S. labor force, assuming that total employment was unchanged would imply that any employment of the additional immigrants would be offset one-for-one by lower employment elsewhere in the population. Because that outcome would be highly implausible, CBO and JCT relaxed the assumption of fixed GDP and employment and incorporated into the cost estimate their projections of the legislation’s direct effects on the U.S. population, employment, and taxable compensation. Nevertheless, to remain as consistent as possible with the estimating rules CBO and JCT follow for almost all other legislation, the cost estimate for S. 744 does not incorporate the budgetary impact of every economic consequence of the bill.

The analysis here provides an estimate of the incremental budgetary effects that would arise from the economic outcomes that are not reflected in the cost estimate. Specifically, it includes some additional budgetary effects stemming from changes in the productivity of labor and capital, the income earned by capital, the rate of return on capital (and therefore the interest rates on government debt), and the differences in wages for workers with different skills. CBO estimates that an increase in productivity and capital income would reduce the bill’s federal budgetary cost but that an increase in the interest rates on government debt—and thus an increase in interest payments—would raise the budgetary cost, as would changes in the relative wages of people at various points in the skill distribution, although only modestly.

On balance, the economic impacts not included in the cost estimate would have no significant net effect on federal budget deficits during the coming decade and would reduce deficits during the following decade. Taking into account a limited set of economic effects, the cost estimate shows that changes in direct spending and revenues under the legislation would decrease federal budget deficits by $197 billion over the 2014–2023 period and by roughly $700 billion over the 2024–2033 period. The cost estimate also shows that implementing the legislation would result in net discretionary costs of $22 billion over the 2014–2023 period and $20 billion to $25 billion over the 2024–2033 period, assuming appropriation of the amountsauthorized or otherwise needed to implement the legislation. According to CBO’s central estimates (within a range that reflects the uncertainty about two key economic relationships in CBO’s analysis), the economic impacts not included in the cost estimate would have no further net effect on budget deficits over the 2014–2023 period and would further reduce deficits (relative to the effects reported in the cost estimate) by about $300 billion over the 2024–2033 period.

How Would the Legislation Affect the Economy?

S. 744 would boost economic output. Taking account of all economic effects (including those reflected in the cost estimate), the bill would increase real (inflation-adjusted) GDP relative to the amount CBO projects under current law by 3.3 percent in 2023 and by 5.4 percent in 2033, according to CBO’s central estimates. Compared with GDP, gross national product (GNP) per capita accounts for the effect on incomes of international capital flows and adjusts for the number of people in the country. Relative to what would occur under current law, S. 744 would lower per capita GNP by 0.7 percent in 2023 and raise it by 0.2 percent in 2033, according to CBO’s central estimates. Per capita GNP would be less than 1 percent lower than under current law through 2031 because the increase in the population would be greater, proportionately, than the increase in output; after 2031, however, the opposite would be true.

CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023 and 0.5 percent higher in 2033 under the legislation than under current law. Average wages would be slightly lower than under current law through 2024, primarily because the amount of capital available to workers would not increase as rapidly as the number of workers and because the new workers would be less skilled and have lower wages, on average, than the labor force under current law. However, the rate of return on capital would be higher under the legislation than under current law throughout the next two decades.

The estimated reductions in average wages and per capita GNP for much of the next two decades do not necessarily imply that current U.S. residents would be worse off, on average, under the legislation than they would be under current law. Both of those figures represent differences between the averages for all U.S. residents under the legislation—including both the people who would be residents under current law and the additional people who would come to the country under the legislation—and the averages under current law for people who would be residents in the absence of the legislation. As noted, the additional people who would become residents under the legislation would earn lower wages, on average, than other residents, which would pull down the average wage and per capita GNP; at the same time, the income earned by capital would increase. CBO has not analyzed the full economic effects of the legislation separately for the incomes of people who would be U.S. residents under current law.

In sum, relative to current law, enacting S. 744 would:

Employment and Wages. The supply of labor in the economy would increase primarily because the legislation would loosen or eliminate annual limits on various categories of permanent and temporary immigration. Enacting the bill would, in CBO’s view, increase the U.S. population by about 10 million people (about 3 percent) in 2023 and by about 16 million people (about 4 percent) in 2033.

CBO and JCT expect that new immigrants of working age would participate in the labor force at a higher rate, on average, than other people in that age range in the United States. Relative to CBO’s projections under current law, enacting the bill would increase the size of the labor force by about 6 million (about 3½ percent) in 2023 and by about 9 million (about 5 percent) in 2033, CBO and JCT estimate. Employment would increase as the labor force expanded, because the additional population would add to demand for goods and services and, in turn, to the demand for labor. However, temporary imbalances in the skills and occupations demanded and supplied in the labor market, as well as other factors, would cause the unemployment rate to be slightly higher for several years than projected under current law.

The increase in average wages for the entire labor force in 2025 and later years relative to average wages under current law would occur primarily because the bill would boost the productivity of labor and capital (as discussed below). However, not all workers would experience those effects equally. The legislation would particularly increase the number of workers with lower or higher skills but would have less effect on the number of workers with average skills. As a result, the wages of lower- and higher-skilled workers would tend to be pushed downward slightly (by less than ½ percent) relative to the wages of workers with average skills.

The increase in the average wage would not occur for a dozen years. As the labor supply initially increased under the legislation, less capital would be available for each worker to produce output, and thus workers’ output, on average, would be lower for a time. That decline would reduce average wages relative to those under current law. Over time, as capital investment increased and the amount of capital per worker returned approximately to what it would have been under current law—and productivity improved as well—average wages would be higher than under current law.

Investment and Interest Rates. Capital investment would rise primarily because the return that investors would earn on a given amount of investment would be higher under the legislation than under current law, for two reasons: First, the larger labor force would render the existing stock of capital relatively scarce (compared with the supply of labor). Second, even apart from capital’s relative scarcity, each unit of capital, such as a single computer, would be more productive (as discussed below). Relative to that projected under current law, the nation’s capital stock would be about 2 percent greater in 2023 and about 5 percent greater in 2033, according to CBO’s central estimates.

The increase in the rate of return on investment would moderate over time as the stock of capital grew. For roughly the first decade, the increase in the size of the labor force would make capital relatively scarce. By the second decade, changes to the labor force would become proportionately smaller and the capital stock would grow sufficiently for its rate of return to move down toward, although not quite reaching, the rate that would prevail under current law. With that greater rate of earnings on investment, the federal government would face higher interest rates than under current law because it would be competing with the private sector for investors’ money.

Productivity. In CBO’s view, enactment of S. 744 would lead to slightly higher productivity of both labor and capital because the increase in immigration—particularly of highly skilled immigrants—would tend to generate additional technological advancements, such as new inventions and improvements in production processes. CBO estimates that total factor productivity (TFP, the average real output per unit of combined labor and capital services) would be higher by roughly 0.7 percent in 2023 and by roughly 1.0 percent in 2033, compared with what would occur under current law. The increase in TFP would make workers and capital alike more productive, leading to higher GDP, higher wages, and higher interest rates.