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Monday, October 02, 2006

Does illegal immigrants cause market inefficency?

Ever since the question weather a tougher illegal immigration law should be set in place and enforced became the talk of the country, as it should, many opinions and proposals have been heard. Let’s for a moment take away the politics involved. Instead let’s ask the question does illegal immigrants, not just people from Mexico create market inefficiency and cause the economy to suffer. In this discussion, I will attempt both side of the argument, and hopefully determine what is more important, a highly efficient market or a high rolling economy.

By now we should agree that illegal immigrants takes jobs and get paid with wages MOST of us would spit on, right? I take that as a yes. The basic efficiency criterion states that efficiency is satisfied when resources are used in such a way that it’s impossible to increase the well-being of one person without hurt another. In other words, marginal social cost (MSC) must equal to marginal social benefit (MSB). However, in a society where most illegal immigrants are willing to accept any wage to have a better life, MSC will be in business owners favor and be less than MSB. Unless business owners accept normal profits, the market will become inefficient.

What about the economy? Will it suffer as a result of inefficient market? Would illegal immigrants take away jobs otherwise be available to legal citizens? Should we as a society do whatever it takes to weed out illegal immigrants? At a first glance, the answer all seem and should to be yes, but in actuality, it may not be so. Some people will answer a definite yes to question three without even any consideration. Well I say no. There is just some work some people are worse performers than others; it’s the way it is. If those people work and become unproductive, consumer will suffer and their MSB in the end will fall below MSC even if the MSC is low from the beginning.

Will the economy suffer as the result? Well, the September 15th article from AOL news by Russ Bynum titled “Immigration Raid Makes a Ghost Town” helps answer this hard question. The articles is about a small town of little bit over 1,000 residents in Stillmore, Georgia. Since September 1st after federal agents raided and rounded up illegal immigrants, the town has becoming the title of the article, a ghost town. Little bit over 120 illegal residents have been captured and sent on their way to immigration courts, while others fled. The result has left Emanuel County in the process toward bankruptcy. Stores that see average of 100 customers per day are now in the single digits. Other business is losing at much as 80% of revenue as the result. When a town loses that much business and counting, its economy will eventually crumble. Some businesses are forced to increase wages to lure new worker like Stacie Bell, whose pay increased from $5.60 at Wal-Mart to $7.75 at her new employment. Let’s say that the market value for her work is at $6.50 per hour. In this case, the increase of $1.25 will cause the MSC will be greater than MSB, causing market inefficiency. Of course if Stacie’s labor is worth exactly $7.75, then the market is at full efficiency, other things held constant.

So do illegal immigrants accepting lower wages than market value cause MSB and MSC fall other than the equilibrium and result in market inefficiency? And does enforcing immigration law help individuals like Stacie and others land a higher wage, thus forcing MSC to be equal to MSB? On one hand Emanuel County has demonstrated that weeding out illegal immigrants will force the business to pay higher wage to its legal residence if they want to stay in business. On the other hand, it has also caused its economy a great deal. When there aren’t workers to serve the few customers that remains, the MSB can laterally be zero.

With out a doubt, based on a solely normative economic and efficiency point of view, I believe illegal immigrants and their acceptance to lower than market wages causes market inefficiency. But is it a problem? Will the economy hurt from it? Emanuel County seems to benefit from an inefficient market. I doubt their illegal immigrants get paid like legal citizens. And when the illegal folks were force out, the economy suffered. But what would the economy accept and want? Would supply create its own demand and force the MSB equal to MSC? In Emanuel County’s case, it seems to be starting to work at its economy’s expense.

When thinking about efficiency and illegal immigration I think it is useful to go to the starting point. Consider that efficiency is about achieving a pareto optimal allocation of resources. In order to judge the allocation from this point of view you first need to decide which utility functions (or which people) are relevant. Efficiency itself cannot answer this question. So, I'm not sure our idea of efficiency as pareto optimality can really answer the question of whether illegal immigrants are associated with efficiency or inefficiency.
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