July 1, 2013 4:55PM

Immigration Illusions Part One: “Average Wages” Severely Muddled

The Senate immigration bill would ease quotas on legal immigration (particularly for highly-skilled and farm workers), and also allow those now here unlawfully to apply for a green card after ten years if they pay a fine and back taxes.  In an effort to defend our current tight but leaky immigration quotas, a few legislators and commentators seized on the first half of a sentence in the Congressional Budget Office report on this bill:  “CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023. . . under the legislation than under current law.”  The CBO goes on to predict average wages would be “0.5 percent higher in 2033” (roughly in line with academic studies).  But the CBO cannot possibly predict such data with any precision for a year ahead, much less 10 or 20.  The larger problem is a common yet severe misunderstanding of what “average wage” really means.

If the Senate bill were enacted, claims Alabama Republican Senator Jeff Sessions, "the wages of U.S. workers -- which should be growing -- will instead decline. . . It would be the biggest setback for poor and middle-class Americans of any legislation Congress has considered in decades." Indeed, if it were to pass, he added, “the wages of American workers will fall for the next 12 years. They will be lower than inflation rates.”

This is quite mistaken.  The CBO never said wages of U.S. workers would fall for even one year, much less twelve, nor did the CBO claim wage gains might be “lower than inflation rates.” All the CBO did was to predict that average nominal wages might end up one-tenth of one percent (0.1%) lower in 2023 than they would be if legal immigration remained as restrictive as it is under current law. If the average wage would otherwise have risen to $45 an hour in 2023, for example, it would instead turn out to be just $44.996 with the Senate bill.

Under the current law baseline, the CBO projects that the employment cost index would rise by 3.7 percent per year from 2014 to 2023, while prices would rise by only 2 percent. That means real compensation (the projection includes benefits, not wages alone) is projected to rise by 1.7 percent a year over the next decade, with or without immigration reform.  

If you add up all the yearly increases, the estimated cumulative rise in worker compensation would be 48.7 percent from 2014 to 2023 under current law, or 48.6 percent − 0.1 percent lower − with the Senate immigration bill.  The difference is doubly insignificant, because CBO ten-year projections are no better than throwing darts.  But for a U.S. Senator to misidentify such as trivial 0.1 percent difference over 12 years as a 12-year spell of falling wages, and for Fox News and others to report that error as though it had substance, involves monumental misunderstanding.  

Although the Senate bill involves much greater expansion of work visas for highly-skilled immigrants than for unskilled workers, the CBO nevertheless assumes “the new workers would be less skilled and have lower wages, on average, than the labor force under current law.”  The assumption that most of the new legal immigrants would be relatively low paid is a major reason why the statistical average wage is assumed to be held down by greater numbers of legal immigrants (despite presumably smaller numbers of illegal immigrants). Note carefully, however, that this does not mean wages of current U.S. workers would be lower.  It only means a greater number of new workers (from other countries) would have lower wages than current workers:  “The estimated reductions in average wages,” notes the CBO, “do not necessarily imply that current U.S. residents would be worse off.”  This key point has been so meticulously misunderstood that it apparently requires more explanation.

Suppose there was an island with five workers.  One worker earned $10 an hour, another earned $20, another $30, another $40 and another $50.  Their combined wages of $150, when divided by five, results in an average wage of $30.  

Now, suppose a new immigrant arrives and earns $20 an hour.  The group’s wages then add up to $170 divided by six, so the average wage drops to $28.33.  Yet the wages of all the original non-immigrant population remain exactly the same as before. The average wage of the larger group has been diluted by the addition of one more low-wage worker, but that does not mean anyone else’s wage went down.  Because wages generally rise over time, as the CBO sensibly assumes, real wages and benefits of both new immigrants and existing workers would likewise rise over time – by17 percent over ten years, using CBO estimates, or 16.9 percent (the 0.1 percent difference) with the Senate bill − under the debatable CBO assumption that bill would result in greater immigration of low-paid workers.

Confusing an “average wage” with a “typical wage” is an interminable and mischievous fallacy. That confusion was revived by recent news reports wrongly suggesting the CBO had predicted average wages would fall as a result of allowing slightly greater numbers of legal immigrants to displace illegal immigrants.