How Deportation Policies Impact High-Skilled Worker Wages

Dan Loney: The connection between deportation, including mass deportation, and its impact on the GDP of a country has been talked about a lot. But new research from the Penn Wharton Budget Model takes a deeper dive into some other effects, such as how it might also impact the wages of high-skilled workers. We are joined here by Kent Smetters, faculty director of the Penn Wharton Budget Model. The PWBM paper looks at some of these other areas. Take us into why that’s important.

Kent Smetters: There’s almost no debate at all that as you get rid of people, your GDP will go down. That’s just a pure scale effect. A country is smaller, and it will have less production. If you ask the average person, especially a native-born worker or an authorized worker in the United States, though, they’re not so worried about GDP. It’s like, what’s the impact on them and their wages? And so, that per capita [impact] is more important for this discussion.

First of all, if [mass deportation] does happen, it will be quite costly — much more costly than it was in the budget that was allocated in the recent Reconciliation Bill to pull it off. But even if it did happen, a lot of these lower-skilled workers are not substitutes for native-born workers, especially those with higher skills, which is 63% of the working-age population. They are more complements. They’re doing things that actually enhance the wages of higher-skilled workers.

We’re not talking about just tech workers. You own a business, you have workers. You own a machine shop, you have workers. You own a farm, you have workers. So we’re not talking about billionaires getting rich here. We’re just talking about what you and I would normally describe as middle-class households who really do depend on the services of these workers.

Loney: Take us a little deeper into that element of how high-skilled, high-wage workers are impacted. That is not discussed as much.

Smetters: That’s right. In particular, there’s a general consensus in economics on how we would model this is when we think about production in the economy, the old-school way. Before we start thinking about what’s called heterogeneous workers of different skill sets — everybody enters this production function with their labor. So, suppose you’re three times more productive than me, it would say that three of me could replace you. We are still substitutes. You just happen to be three of me.

A more modern way that’s much more backed by data says, if you’re high-skilled and I’m low-skilled, then it’s not that three of me can replace you. Rather, that if I go, your wages will go down simply because you are the person who owns that machine shop and you need me for production. These lower-skilled workers [total] about 11-12 million; some people say it’s a little higher than that. They really do perform this critical function that is wage-enhancing for anybody middle-class and higher. Usually that level is a complement, not a substitute.

Loney: But if you have a significant level of deportation, for people who are mostly in that low-wage category, some of those low-wage jobs would be potentially impacted moving farther down the road in terms of, do you have to pay now those people more to be able to fill those jobs?

Smetters: That’s right. We look at what’s called a four-year deportation policy. We don’t say this explicitly, but essentially, suppose you know this deportation policy ends with this administration, then things start to revert. What happens there? Then we look at a 10-year deportation policy where at the end of 10 years, hypothetically, all the unauthorized workers are gone; very few people think we can do it faster than that.

Those have different impacts on lower-skilled workers. If you do permanent deportation, 63% of the population of higher-skilled workers will be worse off. But it’s [also] true that some of the lower-skilled workers will be better off. [That is] because even though native-born and authorized workers in the United States are not perfect substitutes[to] the low-skilled deported workers, they are much more substitutes than they are complements relative to high-skilled workers. So, some of those could be better off. We calculate that on a permanent deportation policy their wages could actually go up by about 5%. Under the four-year policy, they’re actually harmed because things eventually reverse. But meanwhile, we’ve lost a lot of capital in the economy and so forth. So, ultimately, their situation is not better off.

Loney: In that 10-year window, with that type of a policy in place, what is the potential GDP impact?

Smetters: There’s general agreement that the economy will definitely get smaller by several percent relative to where it would otherwise be. Then the question is, why do we care about pure scale effects, versus per capita? One reason you may care about scale effects is that there is a general understanding that in certain things, like public goods, there’s economies of scale where they can be spread across a much larger population base. Also, when you think about America’s presence in the world — even though some people want to pull back on that — we have a lot of presence and military might and so forth. That then does depend much more on GDP than it does on per capita GDP.

Some countries, such as Switzerland and others, are very wealthy per capita, for various reasons. But they’re not going to have the same sway in the world. We tend to sometimes minimize that sway. But in fact, it shows up in so many different ways. Not just the reserve currency that everybody likes to focus on, but lots of different persuasions and the ability to get stuff done and make sure markets stay open and so forth.

Loney: What is the takeaway from doing this research and having this understanding a little bit deeper on the breadth of what the impact could be?

Smetters: We’re much more integrated even inside the United States. Some people debate this [notion of] international integration and so forth. Even putting that aside, just within this country, we derive our wages from working with other people. I do. I’m a professor. I have students. That provides income. We have so many people at this university that do so much behind the scenes. They way outnumber the professors, 10 to one, and they’re doing so much. And so, this idea that I’m on my little island is simply not true. We need to recognize that we’re much more connected that way.

When you start to break down some of those relationships, ultimately somebody has to pay for that. It will ultimately be higher-skilled [workers]. Again, we’re talking about roughly 63% of the working-age population here, not the billionaires. Middle-class and higher will bear the brunt of that.