Hutchins Roundup: Undocumented immigrants, inflation, and more

Studies in this week’s Hutchins Roundup find that undocumented workers contribute about 3 percent of private sector GDP and their legalization could increase this contribution, disinflationary pressures during the financial crisis were weakened by the effects of credit constraints on firm pricing behavior, and more.

Legalization of unauthorized immigrants could potentially increase private sector GDP

Ryan Edwards and Francesc Ortega of Queens College, CUNY, find that undocumented immigrants represent about 5 percent of employment in the U.S. and account for about 3 percent of private sector GDP. Their analysis suggests that a deportation of all unauthorized immigrants would lead to a cumulative private-sector GDP loss of about $5 trillion over the next 10 years, an estimate that does not include the costs of implementing the deportation or the social costs of disrupting families and communities. In contrast, the authors estimate that legalization of unauthorized immigrants would increase their contribution to private sector GDP to 3.6 percent through an expansion of their labor market opportunities and subsequent increased capital investment by employers.

Financial frictions may explain the weakness of disinflationary forces during the financial crisis

The inflation rate didn’t fall as much during the Great Recession as estimates based on past experience predicted. Despite the severe downturn, inflation fell from the 2003-2007 level of 2 percent to 1.5 percent, on average, over the following eight years. Simon Gilchrist of Boston University, Raphael Schoenle of Brandeis, and Jae Sim and Egon Zakrajšek of the Federal Reserve Board attribute this to the effects of credit constraints on firm pricing behavior. In particular, they find that cash-strapped firms that were unable to borrow raised prices in 2008 while financially healthier firms lowered prices, and conclude that these financial distortions can attenuate the response of inflation to fluctuations in output and complicate the task of monetary policy.

The gap between the median earnings of black and white working-age men has widened since the mid-1970s

Patrick Bayer of Duke and Kerwin Kofi Charles of the University of Chicago find that, while the median earnings gap between working black and white men aged 25-54 has been roughly unchanged since the mid-1970s, that gap has widened when men with zero earnings are taken into account. Although the educational attainment of black and white men has been converging, that effect on shrinking the earnings gap has been offset by changes in the labor market that had particularly large effects on black men in the middle and lower part of the earnings distribution. In particular, they cite the increasing returns to education and the decline in the labor force participation of low-skilled men. In contrast, the gap in earnings between black and white men higher in the earnings distribution has narrowed considerably, driven primarily by forces like improved access to quality schools and declining occupational exclusion.

Chart of the week: In October, the median U.S. worker saw pay rise by the fastest rate of growth since November 2008

Quote of the week: “World economy faces once again an abnormal degree of uncertainty,” says Vice-President of the European Central Bank Vítor Constâncio.

“The consequences may not be immediate. The markets’ perception that the U.S. is embarking into a new phase of expansionary budgetary policy has lifted optimism, with visible effect in financial markets last week. Markets are driven by the insight from the macroeconomic theory that fiscal stimulus, at this stage of the cycle, can break the liquidity trap that has hampered growth in the advanced economies. Consequently, we saw a beginning of a shift from bonds to equities last week…

Many commentators have hasted in concluding that the recent geo-political developments will have, after all, economic benefits. This may be the case in the short-term but the real negative effects of heightened uncertainty can come later. We should be cautious in drawing hasty, positive conclusions from those market developments because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth. So far, those developments point to a U.S. rise in economic growth, but in the context of an “America first” policy. Three factors may contribute to mitigate or even reverse its international spillovers.

The first is the possibility of rising protectionism – hard or soft – that can substantially reduce the effect of higher growth into higher U.S. imports. World trade, already quite weak, may continue to collapse, hurting all open economies dependent on exports. The second are the negative effects that we are already witnessing in emerging market economies (EMEs). In fact, significant capital outflows and exchange rate depreciations already underway can hinder future growth. Protectionist measures directed particularly against large emerging economies may further decelerate world economic growth and create instability in foreign exchange markets. The third factor concerns Europe… [W]e already observed a slight drop in European share prices last Friday. According to market analysts, this was explained by fears concerning protectionism and EMEs’ growth prospects as well as the possible resulting decline in global trade.”