Two years ago, Alan Reynolds’s book Income and Wealth poked a million holes in the argument that the gap between millionaires and everyone else was growing in an unprecedented and deeply distressing way. In his powerful critique of the pessimistic new arguments, Reynolds focused mostly on the misleading data and statistical analysis of quintiles and cohorts, the unexamined distinction between income and wealth, the changing nature of “households,” and the often ill-defined nature of income itself.
Now, in a new article, Reynolds’s colleague Brink Lindsey teases out many additional unappreciated factors in the apparent recent increase in wage inequality. Among the most important overlooked factors is the huge influx of immigrants over the relevant period:
Just two months after signing the Voting Rights Act, President Lyndon Johnson signed the Immigration and Nationality Act of 1965, ending the “un-American” system of national-origin quotas and its “twin barriers of prejudice and privilege.” The act inaugurated a new era of mass immigration: Foreign-born residents of the United States have surged from 5 percent of the population in 1970 to 12.5 percent as of 2006.
This wave of immigration exerted a mild downward pressure on the wages of native-born low-skilled workers, with most estimates showing a small effect. Immigration’s more dramatic impact on measurements of inequality has come by increasing the number of less-skilled workers, thereby increasing apparent inequality by depressing average wages at the low end of the income distribution. According to the American University economist Robert Lerman, excluding recent immigrants from the analysis would eliminate roughly 30 percent of the increase in adult male annual earnings inequality between 1979 and 1996.
Although the large influx of unskilled immigrants has made American inequality statistics look worse, it has actually reduced inequality for the people involved. After all, immigrants experience large wage gains as a result of relocating to the United States, thereby reducing the cumulative wage gap between them and top earners in this country. When Lerman recalculated trends in inequality to include, at the beginning of the period, recent immigrants and their native-country wages, he found equality had increased rather than decreased. Immigration has increased inequality at home but decreased it on a global scale.
In sum, immigration has been mostly good for overall U.S. economic growth and for the immigrants themselves, whose “low” U.S. wages are dramatically higher than were their home-country wages. But immigration has altered the statistics of aggregate “inequality” in a misleading way, rendering much of the debate moot.
