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Importing Poverty: The Cheap Labor Trap
William R. Hawkins
Monday, September 05, 2005
Photo of William R. Hawkins
William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
Even with the economy adding jobs last year, the number of Americans who fell into poverty in 2004 rose to 37 million, up 1.1 million from 2003, according to Census Bureau figures released August 29.  It marks the fourth straight increase in the government's annual poverty measure, indicating that the recovery from the 2000 recession has not “trickled down” to everyone.  Indeed, the Census Bureau also reported that “2004 marked the second consecutive year in which real median household income showed no change.”

These new statistics put a damper on the statement made by Commerce Secretary earlier in the month: “President Bush has created the healthy economic environment that is encouraging businesses to hire, and is raising the standard of living in America .  President Bush’s ambitious economic agenda has helped nearly four million Americans find employment since May 2003.” However, the kind of jobs being created makes a difference as to whether living standards are being raised and whether the country is really moving forward.

One of the factors “encouraging business to hire” is the availability of cheap labor, much of it from illegal immigrants.  According to an article in the November/December 2003 issue of Southwest Economy published by the Federal Reserve Bank of Dallas, “Immigrants overwhelmingly filled blue-collar jobs (operators, fabricators, and laborers) but also accounted for as much as half the growth in categories such as administrative support and services....It also means that as immigrants entered these occupations, native workers exited.” This was particularly true in the blue collar category where immigrants accounted for nearly 700% of the new jobs!  That means they pushed tens of thousands of Americans out of those jobs, by underbidding their wages.  

As the Dallas FRB stated, “the foreign-born share of growth has risen, and it reached 51 percent of the total between 1996 and 2002.” The report writers tried to put a positive spin on the situation, claiming “natives typically have more options, and during periods of weak job growth, they can exit the labor force and pursue other alternatives, such as going back to school.” Of course, many Americans have no viable alternatives to working, but even those who do go back to school may not be able to find jobs when they finish their studies.

The great success story of the United States is that it raised the working class into the middle class, the real path to higher standards of living for the population as a whole.  But there are those in the business community who seem to think the American achievement has been overdone.  In their view, we need more poverty, not less.  Open borders and a new “guest workers” program to legalize millions of illegal aliens is what groups like the Chamber of Commerce desire, in effect creating a proletariat.  

To many businessmen, cutting labor costs by reducing wage levels seems expedient.  And in an economy where the laws against illegal immigration have collapsed, there is even competitive pressure on firms to match what rivals may be doing, even if owners and managers may personally find the practice distasteful.  But the proper way to cut labor costs per unit of output is to increase productivity, a process that boosts worker incomes and company profits at the same time, and that is the only way to elevate the living standards of an entire society.  The unregulated availability of cheap labor leads away from innovation.  Technological progress is promoted by the pursuit of “labor saving” methods in markets where labor supplies are tight and expensive.

Last May, a report from the Federal Reserve Bank of Philadelphia looked at whether the availability of cheap, unskilled workers with limited educations slowed the adoption of new technology.  The paper, “Immigration, Skill Mix, and the Choice of Technique” by FRB economist Ethan Lewis, concluded, “Using detailed plant-level data from the 1988 and 1993 Surveys of Manufacturing Technology, we found in both 1988 and 1993, in markets with a higher relative availability of less skilled labor, comparable plants – even plants in the same narrow (4-digit SIC) industries – used systematically less automation.  Moreover, between 1988 and 1993 plants in areas experiencing faster less-skilled relative labor supply growth adopted automation technology more slowly, both overall and relative to expectations, and even de-adoption was not uncommon.” De-adoption! There is no positive spin for a retreat from technological progress.    

Dr.  Evans continued, “Manufacturing automation is particularly suited to evaluating the impact of immigration because less-skilled workers in SMT-covered industries, especially immigrants, are concentrated in labor-intensive assembly, welding, and other tasks that these technologies replace....The combined data show that, in two separate cross sections, the higher the relative number of workers who were high school dropouts in a metropolitan area, the less automated the plants in the area were.  In addition, between 1988 and 1993, plants’ use of technology grew more slowly, both overall and relative to forecasts, where the relative number of dropouts in the local work force grew more quickly.”

The FRB studies from Philadelphia and Dallas mesh.  A third of immigrants have less than a high school education, and these are heavily concentrated among illegal immigrants.  The legal immigration system puts a priority on those who are educated and possess needed skills.  The poverty rate among Hispanics was 21.9% in 2004, reflecting the fact that so many in this community, though hard working, are unable to make a living because they lack the skills to operate in an advanced economy.  So to accommodate them, should we make out economy less advanced?

If one looks around the world at those foreign societies with the worst living standards, their problem is clearly not a lack of cheap labor.  Indeed, their problem is that cheap labor is all they have.  What they need is capital investment in advanced methods.  Economic theory, however, argues that managers will use the least-cost method of production, and when labor is the abundant factor, labor-intensive methods will be chosen over capital-intensive methods that use relatively expensive technology.  This can restructure an entire economy in the wrong direction.  America’s shift from a manufacturing economy where scientific progress is most fruitful, to a service economy dominated by cheap labor fits the model of a country in long-term decline.

The United States needs to choose which path it wants to follow.  America has historically been an economy short on labor.  Though a “nation of immigrants,” there was an entire continent to fill up.  Until the frontier closed a century ago, there were never enough people to utilize all the land, resources, and business opportunities available.  The emphasis was thus on boosting productivity, substituting capital for labor in both field and factory, to make the best use of the working population.  

The one exception was the pre-Civil War South, which used slave labor.  The slave-owners prospered on their plantations, but the South as a whole stagnated.  To defend their reactionary system, their political leaders even tried to undermine the policies that promoted the much more productive development of Northern industry and Midwest agriculture.  The Civil War was as much a contest of economic systems as soldiers, and the Confederacy lost that audit in decisive fashion.

Economic progress needs to be U.S. policy.  But to keep on that path, the flood of unskilled and impoverished aliens needs to be halted before they further drag down American living standards.  National legislation, and its enforcement, must overrule the short-sighted inclinations of business.  Maximizing output per worker, rather than the number of workers; and building up the skills and incomes of workers, not undermining them with the poor and the uneducated, is the right way to advance American civilization.



William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
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