Immigration and Rising Income Inequality (2007)

  • Rising inequality in the United States is linked to rising immigration, falling union membership and rising international trade according to economists. But, these three trends are not independent of each other, and the rise in the immigrant population contributes to the other two trends.

  • Since 1970, the country’s immigrant population has grown by about 26 million persons — a 272 percent increase. Over the same period, the spread between mean and median family incomes — an indicator of increasing income inequality — has grown by nearly four times the rate of increase during the prior period (1947—70) when the immigrant population was fairly stable.

  • Since mass immigration was unleashed by the 1965 immigration law, increases in average inflation-adjusted family income have steadily shrunk and are approaching no growth, or — if the trend continues — negative growth.

  • The Bush administration’s proposal to increase immigration and increase both skilled and unskilled temporary foreign workers would increase the labor supply and, thereby, accelerate the trend in rising income inequality and the erosion of the middle class.

Background

President Bush has become the latest politician to discover that income inequality is rising in the United States and that it is an increasingly troubling trend. The president’s reference to the rising trend for 25 years is worth a closer look, however, as is his attribution of the trend to education and skills. The trend of accelerating income inequality has been notable for 35 years — since 1970. Missing from the president’s commentary was any recognition of the role of rising immigration — both legal and illegal — as a key factor influencing the rising income inequality. Of course, the trend in immigration also contributes to a growing gap in educational achievement and in skills, but it is important to identify the source, not just the symptoms.

In a recent study, immigration researcher Edwin Rubenstein wrote, “From the end of World War II until the late 1960s, the rich-poor divide was remarkably stable, even narrowing over long stretches. Things started to come apart around 1970, as can be seen by eyeballing the trend in mean and median family income.” He notes the post-1970 increase in the foreign-born population unleashed by the immigration law enacted in 1965 is a major contributor to this trend.

This commentary on immigration as a factor in rising income inequality draws on research by Northwestern University economists presented in September 2005. These researchers argued that:

“To be convincing, a theory must fit the facts, and the basic facts to be explained about income equality are not one but two, that is, not only why inequality rose after the mid-1970s but why it declined from 1929 to the mid-1970s. Three events fit neatly into this U-shaped pattern, all of which influence the effective labor supply curve and the bargaining power of labor: (1) the rise and fall of unionization, (2) the decline and recovery of immigration, and (3) the decline and recovery in the importance of international trade…”

Of course, the surge in legal and illegal immigration — the second point mentioned by the Northwestern economists — is also related to the labor supply curve and the bargaining power of labor — the first point. Some immigration commentators also link the increase in skilled foreigners in the U.S. workforce (H-1B and L visas) with the increase in sending U.S. jobs abroad (offshoring) — the economists’ third point. The explanation for this is twofold: first, the foreign workers in the U.S. act as liaison for U.S. companies to offshore worksites; and, second, these foreign workers often return abroad with the knowledge and skills they acquired in the United States to manage offshoring operations or start up their own offshoring enterprises.

The trend referred to by Rubenstein and the Northwestern economists may be seen in a comparison of the median and mean family income in 2005 dollars from 1947 to 1970 and from 1971 to 2005. The graphic below reveals four trends:

  • Median and mean income tended to increase together during the earlier period, although mean income was rising very slightly faster than median income.

  • Mean income began to rise much faster than median income after 1970.

  • Both median and mean income rose faster before 1970 than they did after that date, although the change in the rate for mean income was less than for median income.

  • The trend in both median and mean income was relatively flat beginning in 1999.

From 1947 to 1970, the difference between median and mean income increased by 41 percent — an average of about 1.7 percent per year. From 1971 to 2005, the spread between mean and median household income grew by 216 percent — an average of about 6.2 percent per year.

The data also show that during the period prior to 1970 mean family income rose by about 84 percent (an average of about 3.4% per year) and median family income rose by about 91 percent (an average of about 3.8% per year). Since 1970, the rate of increase has dropped. For mean family income, the increase for the 35 years was about 52 percent (about 1.5% per year) and median family income increased by about 31 percent (less than 1% per year). The significance of this increasing separation between mean and median income after 1970 is that mean income is the average (total income divided by total number of families) while the median income is the midway point with half of the families higher and half lower than the median income. When high-level earners gain more rapidly than low-level earners, average (i.e., mean) income will increase more rapidly than median income. That is what is clearly evident in the post-1970 period.

Read the full report in pdf format.

March 2007