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The Surprising Economics of Latino Immigration

 

gonzalo huertas, a former economic advisor to the Chief of the Cabinet of Ministers of Argentina, is a research analyst at the Peterson Institute for International Economics. jacob kirkegaard, a specialist in immigration and workforce issues, is a senior fellow at the Peterson Institute. This article was adapted from Peterson Institute Working Paper 19-3.

Published July 29, 2019

 

Few social scientists, it is safe to say, share the current populist aversion to immigrants who look different and speak languages other than English. But some distinguished analysts, among them the economist George Borjas and the political scientist Samuel Huntington, have argued that the past few decades of immigrants from Latin America are, on balance, an economic liability for the country because they arrived with fewer marketable skills and are integrating more slowly into the culture than their European counterparts from earlier generations.

However, a careful look at the numbers paint a different picture — one in which it is clear that the Hispanic community is contributing significantly to U.S. economic growth and, more important, is key to sustaining growth for decades to come.

In part, this follows from some familiar demographic statistics. Hispanics are the youngest and largest ethnic minority in a country in which the native population is rapidly aging. And they are on a path to becoming an increasingly large share of the U.S. labor force because of their higher fertility rates, continuing net migration and rising labor force participation rates. But a good part of the story is unfamiliar — and should be welcomed by those who worry that Hispanic immigrants are a burden on the native population. For the substantial contribution of Hispanic immigrants to U.S. economic growth results from the quality of the new workforce as well as the quantity. Hispanic arrivals have exceeded contemporary native-born Americans (and some other migrant groups) in their entrepreneurial efforts as well as in the pace of their integration into the workforce.

The Good News on Education and Wages

A key factor in determining the long-term economic prospects for a country, an ethnic community or even an individual is how much time and effort is devoted to skills attainment. Consequently, it’s widely agreed that a primary cause of Hispanic economic disadvantage in the United States to date has been persistently lagging educational attainment compared with the average. But happily, as the figure above shows, this deficiency is now being addressed. Indeed, rates of high school graduation have increased dramatically and have almost converged with today’s historically high national average. Hispanic high school completion rates rose from about 60 percent through the mid-1990s to 89 percent in 2016 — a figure higher than the U.S. average before the Great Recession in 2008.

Note, too, the evidence of progress on convergence in higher education seen in the data since 1990. Since there is no statutory age of completion for higher educational degrees, with many Americans attaining them only in mid-career, completion rate figures seriously underestimate the lifelong gains in human capital accruing to contemporary Hispanics.

An imprecise way to gauge the improvement is to compare the Hispanic share of total degrees issued with the community’s share of the U.S. labor force. In 1990-91, the Hispanic share of the U.S. labor force above age 16 was roughly 8 percent; by 2006-7, it had reached about 13 percent, and a decade later about 16 percent. Thus, as the graph (above) implies, by 2016-17 Hispanics had more than caught up to their share of the U.S. labor force in obtaining associate’s degrees as well as certificates below the associate’s degree level. And they are approaching parity in bachelor’s degrees. (They are still a long distance away in attaining master’s degrees and PhDs, though.)

To be sure, Hispanics in the U.S. labor force today are, on average, less educated than whites, blacks and Asian-Americans. But the trend is plainly in the right direction.

Wage trends are closely linked to education trends, albeit with a twist. Average Hispanic wages declined relative to the U.S. average during the 1980s and early 1990s, as millions of lower-skilled Hispanics crowded into low-paying jobs. Since the mid-1990s, however, the gap has been narrowing, as a better educated generation with more choice in occupations enters the workforce. In light of the huge premium in wages enjoyed by college grads, however, it is unrealistic to expect Hispanics’ average wages to reach the national average until the community has matched non-Hispanic college graduation rates for some years.

Entrepreneurship and Hispanics

Keep in mind that while education is the most important broad determinant of individuals’ economic success in the United States, it is not the only one. Entrepreneurship and willingness to take risks can also play a crucial role. The U.S. is widely recognized as the most entrepreneurial large developed economy in the world. And compared with other advanced economies, the most valuable American firms are noticeably younger than their counterparts. Nonetheless, there is growing evidence that the overall intensity of entrepreneurship in America has declined since the Great Recession. This is the case whether one looks at the rate of new-firm creation or the creation of new establishments — the latter figure including multiple locations of a firm (think Starbucks or Supercuts).

New-firm formation averaged almost half a million annually in the 30 years from 1977 to 2007, but during the Great Recession the figure fell to about 400,000. And by 2016, it had recovered to only 433,000. Meanwhile, the startup rate — that is, the share of total firms started in the past year — was cut in half between 1977 and the recovery from the Great Recession.

In the late 1970s, U.S. startup formation was powered by the coming of age of the baby boomers. The subsequent steady decline in the startup rate is thus partly attributable to the decline in population growth since the 1970s, though a discontinuous shift downward during the Great Recession is also apparent.

The link between new-firm formation and entrepreneurship on the one hand, and population growth and the population’s age profile on the other, highlights the increasingly important roles of the youngest groups — the foreign-born in general and Hispanics in particular. In 2017, the median age of U.S. Hispanics (28.7 years) was nearly a decade younger than the median age of Americans as a whole. Meanwhile, the share of the U.S. foreign-born who were of working age (defined here as ages 18-65) was 79 percent — a remarkable 20 percentage points higher than the share of the working-age U.S. native-born population. This share rises to 83 percent for foreign-born Hispanics and 86 percent for foreign-born of Mexican origin. Rising levels of entrepreneurship among the foreign-born — of Hispanic origin and as a whole — should be expected, especially as the native non-Hispanic U.S. population ages.

It is widely known that foreign-born entrepreneurs — like Sergei Brin, Elon Musk and Vinod Khosla — have played an outsized role in U.S. high-tech and software. However, far greater numbers play diverse, if typically less glamorous, roles as entrepreneurs.

Annual survey data of opportunity-driven entrepreneurship in the United States collected by the Kauffman Foundation highlight the role of both the foreign-born and the Hispanic community. In the early 2000s, foreign-born U.S. residents began to exhibit significantly higher participation as entrepreneurs than native-born residents. And the trend seems to be accelerating: since the Great Recession, the foreign-born have been roughly twice as likely to start their own businesses. This reality, moreover, is beginning to be reflected in the ownership of businesses. The U.S. Census Bureau survey of entrepreneurs shows the percentage of businesses less than two years old owned by the foreign-born is twice as high as the percentage for firms that are more than 16 years old.

 
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The Kauffman Foundation data also show that, since the early 2000s, Hispanics have exhibited significantly higher levels of opportunity-driven entrepreneurship than whites, African-Americans or Asian-Americans. And by no coincidence, there is a positive correlation between individual states’ Hispanic population share and opportunity-driven entrepreneurship levels. The leaders: California, Texas, Florida and New York.

All that said, there are still considerable lags in translating Hispanic entrepreneurship into business ownership. Approximately 2 percent of Americans over the age of 18 own businesses. But just 0.8 percent of Hispanics are business owners. Even with the significantly higher current rates of entrepreneurship, it will take many years for Hispanic business ownership to reach the U.S. average.

Hispanic Labor and Economic Growth

Development economists looking at countries’ long-term performance have identified the concept of the “demographic dividend” as a source of sustained growth. For communities with growing levels of human capital, a shift in age structure caused by a rising share of the working age population and lower share of the non-working age group (typically defined as 0-14 and 65-plus) presents an opportunity to build on that growth rate. This opportunity is usually reinforced by parents having smaller families, enabling them to endow their children with higher skill levels and correspondingly better job opportunities. The demographic dividend played a major role in the rapid development of Japan and South Korea after World War II, as well as in periods of historically high growth of the U.S. economy after sustained high immigration from Europe.

Our analysis shows that such a demographic dividend is emerging for the U.S. Hispanic community, with significant positive effects on the overall U.S. economic growth rate. Hispanic fertility rates have declined significantly since the Great Recession, to levels very close to the U.S. average — reducing the dependent population — and this trend is very likely to persist.

In light of the fact that convergence in education levels is already well underway, we estimate that the Hispanic demographic dividend is likely to contribute 0.21 percentage points to the annual real GDP growth rate over the next 25 years through its impact on the rate of increase of employed Hispanic labor. This might look like a modest number at first glance. But remember, most economists think the sustainable growth rate of the economy is currently about 2 percent — implying that the Hispanic demographic dividend alone could raise that rate by one-tenth. Consider, too, that the high rate of entrepreneurship among Hispanic immigrants suggests that their estimated effect on growth could be even higher as they accumulate human and financial capital.

The Hispanic community’s deviation from the U.S. average on educational attainment, entrepreneurship and fertility has historically fed political stereotypes of Hispanics as a growing but economically lagging minority. However, the community’s movement toward convergence to the mean largely tracks the path of earlier waves of immigrants coming to the United States. And, as fertility rates in Mexico are also rapidly falling toward the U.S. average, the fact that Hispanic inward-migration to the United States largely comes from Mexico means that Hispanic immigration no longer looks very different than earlier inflows in terms of economic characteristics. In general, standards of living, social circumstances and family norms and sizes in Latin America — and in Mexico in particular — are themselves converging toward those of the United States.

The decline in Hispanic fertility rates will also have a quantitative impact on overall U.S. population forecasts. Importantly, migration from Mexico — until recently, the most significant country of origin — has also begun to decline in recent years. It is now running significantly below levels projected by the U.S. Census Bureau in its standard forecasts. And, by extension, this implies that the portion of the U.S. population consisting of Hispanic migrants has peaked. Thus, while the demographic dividend is real and imminent, it is also finite in duration. The labor-supply driver of Hispanic immigration is declining, with impacts that will be felt in U.S. growth down the road. Absent some future source of sustained immigration, and barring some unprecedented surge in fertility among middle-income families, the U.S. growth rate will be limited by labor supply, much as Japan’s is now.

Comparing the projected contributions of employed Hispanic and non-Hispanic labor suggests the two will follow distinct paths. Non-Hispanic labor added significantly to growth in recent years as the economic recovery brought millions back into the workforce, and the added jolt of fiscal stimulus from the 2017 tax cuts drove unemployment below the anticipated sustainable level. But that process is expected to reverse (because it is unsustainable), yielding a temporary negative contribution before returning to the long-term trend late in 2019. By contrast, in the medium term, it is clear that the expansion of employed Hispanic labor will become an important contributor to economic growth. This trend is likely to continue, reflecting the changing demographics of the country.

Policy Matters

Our revised scenario of the economics of Hispanic migration suggests the value of policy initiatives that would not be easy sells in today’s political climate. First, declining fertility in both native and foreign-born households implies that it will be necessary to maintain net migration levels at least at recent historical U.S. levels or face unpalatable economic consequences. Whereas growth in the native-born population accounted for the bulk of U.S. population growth in the post-World War II baby boom years, net inward migration now accounts for approximately half of that growth. Maintaining immigration at least at recent levels will consequently be needed to avoid further declines in long-term economic growth. It follows that more restrictive immigration policies would exacerbate the looming problem of supporting a rapidly growing dependent elderly population, which will be felt in ballooning outlays for old-age income and medical support programs, as well as demand pressure on segments of the labor market.

Second, even when declining Hispanic fertility and slowing net migration are taken into account, the community will still account for a majority of the contribution to GDP growth from labor inputs in the middle term, a reality that underlines the importance of fostering ongoing productivity growth for Hispanics through education. Specifically, it will be important to increase college and graduate school attendance. Only then can the Hispanic community generate the full demographic dividend for the economy made possible by their age distribution — and in the process achieve full wage convergence for themselves.

 
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Expansion of employed Hispanic labor will become an important contributor to economic growth. This trend is likely to continue, reflecting the changing demographics of the country.
 

Third, our finding of higher levels of Hispanic opportunity-driven entrepreneurship than among the rest of the population emphasizes the importance of making sure that Hispanics get equal access to capital and technical support that are vital to scaling startups.

Fourth, the decline in net migration from Mexico highlights the United States’ clear interest in supporting continued political stability and economic growth in that country — and, indeed, in the rest of Central America. U.S. policy changes toward Mexico and the region that reverse ongoing economic integration — for instance, a U.S. pullback from open trade and capital movement — would risk undermining decades of political and economic gains (especially in Mexico) and could lead to a renewed inflow of economically motivated migrants to the United States

Fifth, the decline in native fertility and net migration from Mexico highlights the need for the United States to maintain its global appeal as a destination for migrants from all over the world. The nation needs more immigrants to sustain its potential economic growth rate and can no longer take for granted that these migrants will come from its near neighbor to the south. Maintaining an immigration system that attracts a more diverse set of migrants will thus be an important component of the continued economic success of the United States.

 
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Who’s Hispanic?

Race has been recorded in every American census conducted since 1790, reflecting its central role in U.S. history. Until 1950, respondents’ race was determined by census interviewers, which generally resulted in each American being assigned a single race category. But in 1960, Americans got the opportunity to choose their own race in the census, and in 2000 they got the option to identify as more than one race.

At around 27 percent, intermarriage rates for the U.S. Hispanic population are already among the highest of any sub-population in the United States. And this figure rises to 39 percent when counting only native-born U.S. Hispanics. (Only Asian-Americans, with 29 and 46 percent intermarriage rates in 2015 for total and native-born segments, respectively, had higher rates.) This phenomenon again speaks to the rapid convergence and integration of Hispanic migrants and their children into American society, stereotypes notwithstanding. Consequently, though, in terms of recorded census data, more and more partly Hispanic respondents are likely to self-identify with the “more than one” category in terms of race and/or ethnic affiliation.

It follows that analysis based predominantly on government data classified into discrete racial and ethnic categories and focused on the economic and social circumstances of specific groups will become less analytically tractable as these ethnic lines become blurred over time. An increasingly Latino U.S. population is coming, and this demographic dividend will drive the process of integration.

main topic: Immigration
related topics: Demographics, Economic Growth, Latin America