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Dan Loney: It has long been
discussed, the impact that
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deportation, including mass
deportation, can have on the
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economy of a country, especially
its GDP. But new research from
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the Penn Wharton Budget Model
takes a deeper dive into some
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other impacts, kind of on the
fringes of that element of the
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economy, such as how it might
also impact something like the
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wages of high-skilled workers.
Pleasure to be joined here in
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studio by Kent Smetters, who's
Faculty Director of the Penn
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Wharton Budget Model. Kent,
great to see you again.
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Good to be back, yeah.
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Thank you. What's
interesting is, the topic, or
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that connection between
deportation and GDP impact is
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something that's talked about a
lot. This paper, kind of, as I
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said, goes around the fringes
and looks at some of these other
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areas. Take us into why
that's important.
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Yeah. I mean, there's
almost no debate at all that as
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you get rid of people, your GDP
is going to go down. And that's
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just a pure scale effect.
A country's smaller, they're going
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to have less production. If you
ask the average person,
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especially native-born worker or
authorized worker in the United
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States, though, they're not so
worried about GDP. It's like,
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what's the impact on them, their
wages? And so it's really more
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per capita, is what is more
important here for this
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discussion. And the fact of the
matter is, a lot of deported
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workers— first of all, if it
does happen, it's going to be
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quite costly. Much more costly
than it was in terms of the budget
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that was already allocated in
the recent reconciliation bill
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to pull it off. But even if it
did happen, a lot of these lower
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skill workers, they're not
substitutes for native-born
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workers, especially higher skill,
which is basically 63% of the
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working age population. They are
more complements. They're doing
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things that actually enhance the
wages of higher-skilled workers.
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So we're not talking about just
tech workers. Just— you own a
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business, you have workers. You
own a machine shop, you have
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workers. You own a farm, you
have workers. So we're not
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talking about billionaires
getting rich here. We're just
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talking about the— basically what
you and I would normally
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describe as middle class
households who really do depend
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on the services of these
workers.
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So that element of how high-
skilled, high-wage workers are
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impacted, take us a little deeper
into that. Because that's
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something you kind of alluded
to, not discussed about as much.
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That's right. And in particular,
the way— there's a general
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consensus in economics of how we
would model this, is that when we
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think about the production in
the economy, the really kind of
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old school way before we start
thinking about what's called
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heterogeneous workers, different
skill sets, is that everybody
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just kind of enters this
production function with their
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labor. And so, suppose that
you're three times more
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productive than me. Well, it
would say, therefore, three of me
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could replace you. We are still
substitutes. You just happen to
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be three of me. A more modern
way, that's much more backed by
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data, says, if you're high skill
and I'm low skill, then it's not
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that three of me can replace
you. Rather that if I go, your
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wages are going to go down
simply because you are the
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person who owns that machine
shop and you need me for
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production. So these lower-
skilled workers, we're talking
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about 11, 12 million. Some
people say it's a little bit
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higher than that. They really do
perform this kind of critical
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function that is wage enhancing,
for, kind of— basically anybody
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middle class and higher. Usually
they're more— that level is
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a complement, not a
substitute.
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But if you have a significant level
of deportation, for people who
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are mostly in that low-wage
category, even, I would think,
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some of those low-wage jobs
would be potentially impacted
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moving further down the
road in terms of, do you have to
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pay, now, those people more—
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That's right.
— to be able to fill those jobs?
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That's right. And so
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there's no question. So what we
do is, we look at what's called a
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four-year deportation policy. We
don't say this explicitly, but
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essentially, suppose that, you
know, this deportation policy
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ends with this administration,
then things start to revert
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back. What happens there? Then
we look at a 10-year deportation
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policy, where at the end of 10
years, everybody essentially,
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hypothetically, all the
unauthorized workers are gone.
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And— because very few people
think we can do it faster than
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that. But— and those have
different impacts on lower-skill
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workers. If you actually are
doing the permanent deportation,
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yes, 63% of the population of
higher-skilled workers are going
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to be worse off. But it's
actually true, some of the lower-
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skilled workers are going to be
better off, because even though
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native-born and authorized workers
in the United States are not
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perfect substitutes, even at
lower skill with the low-
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skilled deported workers, they
are much more substitutes than
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they are complements. So it's
not maybe perfect substitutes,
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but they still are more
substitutes than complements
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relative to high-skilled
workers. So some of those could
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be better off. And we calculate,
on our deport permanent policy,
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their wages could actually go up
by about 5%. Under the four-
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year policy, though, they're
actually harmed. And the reason
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why is because things eventually
reverse. But meanwhile, we've
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lost a lot of capital in the
economy and so forth. So
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ultimately, their situation is
not better off.
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And so that 10-year window, in
terms of looking at it, what
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potentially, then, with that
type of a policy in place, is
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the potential GDP impact for an
economy at that point?
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Yeah. There's no— so there's general
agreement, the economy is just
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definitely gonna get smaller by
several percent relative to
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where it would otherwise be. And
so then the question is, why do
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we care about pure scale effects,
versus per capita? And one
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reason why you may care about
scale effects is that there is a
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general understanding that
certain things, like public
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goods, there's economies of
scale, that they can be spread
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across a much larger population
base. Also, when you think about
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America's presence in the world.
I mean, even though some people
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want to pull back on that, the
fact of the matter is, we have a lot
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of presence and military might
and so forth. And that then does
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depend much more on GDP than it
does on per capita GDP. You have
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some countries, Switzerland and
others, who are very wealthy per
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capita for various reasons. But
they're not going to have the
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same sway in the world. And you
know, we tend to sometimes
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minimize that sway. But in fact,
it shows up in so many different
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ways. Not just the reserve
currency that everybody likes to
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focus on, but lots of different
persuasion and ability to kind of
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get stuff done and make sure
markets stay open and so forth.
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So the numbers are as you
have seen them play out within the
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research. What do you think the
takeaway is from doing this
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research and having this
understanding a little bit
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deeper on kind of the breadth of
what the impact could be?
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Yeah, I mean, we're much more
integrated, even inside the
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United States. I mean, yes, some
people debate this international
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integration and so forth. Even
putting that aside, just within
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this country, we derive our wages
from other— working with other
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people. And, you know, I do— I'm
a professor. I have students.
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You know, that provides
income. We have so many people
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at this university that do so
much behind the scenes and so
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forth, way outnumber the
professors. Ten to one. And
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they're doing so much. And so
this idea that, you know, you
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know, I'm my little island— this
is simply not true. And we need
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to kind of recognize that we're
much more connected that way.
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And when you start to break down
some of those relationships,
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it's going to ultimately— someone
has to pay for that. It's going
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to ultimately be a higher skill.
And again, we're talking about
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roughly 63% of the working age
population here, not the
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billionaires. And— middle class
and higher. It's pretty much us
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that are going to bear the
brunt of that.
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Kent, great to see you again.
Thanks very much.
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A pleasure.
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And you can view the research that
they have done at their website.
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Penn Wharton Budget Model. Just
find it wherever you are on the
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internet. Many thanks to Kent
Smetters. I'm Dan Loney. Thanks
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for joining us here on <i>This Week
in Business</i>.
