Immigrants Keep the United States Free by Undermining Labor Unions

Diversity really is a US strength

My greatest worry about vastly liberalized immigration is that immigrants would undermine economic freedom in the United States, which would, in turn, reduce economic growth. Immigrants overwhelmingly come from countries with less economic freedom than the US, so they could bring opinions, cultures, political influence, or something else that would reduce economic freedom here and kill the goose that lays the golden eggs of economic growth. However, there is approximately zero evidence of this happening in the US or elsewhere and much evidence that immigrants increase economic freedom. How could this be true? I hypothesize that immigrants likely slowed the growth of the American government, undermined the growth of socialism here, and even increased economic freedom by undermining labor unions.

Economic Freedom and Economic Growth

The US had the fifth highest economic freedom score in the world at 8.14 out of 10 in 2021, according to the Economic Freedom of the World Index, assembled by the Fraser Institute and the Cato Institute. The countries with higher economic freedom scores than the United States are all small, with a combined population less than that of Texas. The United States is the largest free economy in the world.

Economic freedom is essential to prosperity because free markets, property rights, contract rights, and other important freedoms incentivize market actors to efficiently produce goods and services demanded by actual consumers. Economic activity in economically free countries is less dependent upon the whims of politicians and the median voter. Whether the current political desire is to help the struggling working class, Make [fill in country] Great Again, or embark on some expensive cultural crusade, politicians in economically free countries have much less control over allocating scarce resources. More economic freedom results in increased production, higher incomes, and a better standard of living.

Immigrants overwhelmingly come here for economic opportunity. Immigrants, in turn, increase economic opportunity in the United States with near-zero or positive effects on native-born wages, partly because they increase the demand for labor just as they increase the labor supply. Immigrants also patent at disproportionately high rates (especially those from some regions of the world), immigrants are more likely to start businesses of every size, and they’re upwardly mobile. Immigrants also increase the value of real property, with positive effects for mostly native-born wealth accumulation and higher rents.

Low population growth is a significant threat to economic growth, but immigration helps delay the decline. The total fertility rate (TFR) in the United States was well below replacement in 2021, at 1.66 per woman. As a result, immigration will account for most population growth so long as TFR remains low (it likely will). There are good theoretical and empirical reasons to think that fewer Americans will slow growth by reducing the number of workers and, more importantly, reducing innovation and entrepreneurship.

This brings me back to my fears about immigrants potentially undermining economic growth by reducing economic freedom. They are workers, entrepreneurs, inventors, and other market actors who increase the size of the economic pie. But immigrants to the United States overwhelmingly come from countries with less economic freedom and, consequently, less economic output as measured by GDP per capita. The average immigrant in the United States in 2022 comes from a country with an economic freedom score of 6.8, nearly identical to Rwanda's. My fear is that immigrants could bring here the factors that make their origin countries less economically free and diminish economic freedom in the United States, killing the goose that lays the golden eggs.

However, there is little evidence that immigrants have degraded American economic institutions, some evidence that they have indirectly improved them, and that American economic institutions are resistant to change in either direction. Cultural differences and differences in political opinion between immigrants and natives would be unlikely mechanisms even if we did find a negative effect. Economists Michael Clemens and Lant Pritchett used an epidemiological model to estimate how immigrants could affect total factor productivity in destination countries, which remains the best theoretical treatment of the problem even though they don’t examine economic freedom directly.

How Immigrants Slowed Government Growth

Benjamin Powell and I wrote a book analyzing how immigrants affect institutions called Wretched Refuse? The Political Economy of Immigration and Institutions that includes chapters on Israel, Jordan, and the United States. The chapter on the United States is necessarily less econometrics-heavy than the chapters on Israel and Jordan because of the scarcity of data in some of the periods analyzed. Still, my hypothesis is that immigrants likely slowed the growth of the American government by undermining labor unions. What makes me think this? 

First, the size of the government grew most when the borders were the most closed (Figure 1). The federal government radically restricted immigration from 1922 to 1967, when federal expenditures grew from 4.5 percent to 18.3 percent of GDP – a four-fold increase. 1922 is an awkward year to start due to the post-World War I demobilization, so the increase in the size of government is even greater, but there’s no other choice given that that was the first full year that America really started closing its borders to all.

In the 45 years after the modest immigration liberalization of the late 1960s, federal expenditures as a percent of GDP climbed to 20.6 percent, a mere 8.7 percent increase. The government grew in other ways not measured here, such as the intrusiveness and size of the regulatory state, but federal expenditures as a percentage of GDP is a decent proxy over the long run. The New Deal, World War II, the Cold War, the Great Society, and other large expansions of government happened when the borders were closed.

The relationship between closed borders and government growth isn’t just my opinion. Paul Krugman aptly observed, “Absent those [immigration] restrictions, there would have been many claims, justified or not, about people flocking to America to take advantage of [New Deal] welfare programs.”

As the late labor historian and immigration restrictionist Vernon M. Briggs Jr. wrote:

This era [of immigration restrictions from 1922-1967] witnessed the enactment of the most progressive worker and family legislation the nation [the New Deal and Great Society] has ever adopted. At the federal level, laws were passed guaranteeing the right of workers to join unions and to bargain collectively; to receive minimum wages; to limit daily and weekly working hours before overtime rates are obligatory; to restrict child labor; and to expand publicly supported education and training opportunities. Beneficial worker legislation manifested public commitments to pursue full employment policies; to promote equal employment opportunity; to provide vaccination and nutrition programs for the young; to guarantee minimum incomes for dependent children, the disabled, and the blind; to combat the causes of poverty; and to provide retirement income and health insurance for the elderly.

Figure 1. Federal Expenditures as a Percent of GDP and Immigrant Stock as a Percent of the Population, 1850-2018. Source: Wretched Refuse? page 195, Figure 9.1.

Second, the unionization rate and stock of immigrants are strongly negatively correlated (Figure 2). This doesn’t mean that there’s necessarily a causal relationship between the two variables. Figure 2 can’t tell us whether immigrants diminish unionization, unionization decreases immigration, or whether there’s a third omitted variable that explains both. To clarify this, Town Oh and I found that immigrants undermine labor unions in the United States using a modified nested skill-cell method first developed by George J. Borjas of Harvard. Immigrants can explain about 30 percent of the decline in union density during 1994-2020 (we're restricted to this period because of limitations on unionization and workforce data). The data are consistent with the theory that more immigrants diminish unionization, but more detailed econometric work needs to be done to analyze this hypothesis.

Figure 2. Unionization Rate and Immigrant Stock as a Percent of the Population, 1900-2018. Source: Wretched Refuse? page 208, Figure 9.4.

Third, there is a slight positive relationship between the size of the federal government and nationwide unionization rates (Figure 3). Unions have been a vital force pushing for progressive policy change in the United States. Unions concentrate political power in support of progressive causes through effective lobbying and voter drives. The American Association for Labor Legislation (AALL) was founded in 1906 and was the first organization to lobby for a sizeable German-style welfare state. Workers who join a union become more progressive, less supportive of market economics, and more anti-trade. Part of the effect of joining a union can be explained by self-selection (people who are already anti‐​market are more likely to join). Still, most of the shift in opinion can be explained by changes in opinion after becoming a member. There is a treatment effect whereby joining a union makes workers more progressive.

Figure 3. Federal Expenditures as a Percent of GDP and the Unionization Rate, 1900-2018. Source: Wretched Refuse? page 205, Figure 9.3.

Fourth, Town Oh and I use a social customs model whereby workers form unions when they are culturally similar. That’s because cultural similarity reduces the transaction costs of union formation. Immigrants increase linguistic, ethnic, racial, and religious diversity, which, in turn, raises the transaction costs of union formation. Our empirical results are consistent with this simple model: immigrant-induced diversity reduces worker solidarity. Think about the difficulty of negotiating time off with a diverse workforce. Christians, Jews, and Muslims have their respective sabbaths on Sunday, Saturday, and Friday. They also have different major holidays like Christmas, Yom Kippur, and Eid ul Fitr. Good luck getting a religiously diverse workforce to agree on days off, even assuming they speak the same language.

One quote often brought up by skeptics of my immigration research comes from economist Thomas Sowell, who said, "What are the alleged 'compelling' benefits of 'diversity'? They are as invisible as the proverbial emperor's new clothes. Yet everyone has to pretend to believe in those benefits, as they pretended to admire the naked emperor's wardrobe." Here's one benefit: immigrant-induced diversity undermines labor unions and helps preserve a relatively free market in the United States.

In sum, I hypothesize that immigrants increase diversity, which undermines the formation and existence of labor unions that indirectly reduces demand for bigger government. Diversity is a strength for those who support free markets and smaller government. This makes a few modern American conservatives' recent embrace of labor unions especially baffling.

Immigrants Undermined Socialism According to Marx and Engels

In It Didn't Happen Here: Why Socialism Failed in the United States, Seymour Martin Lipset and Gary Wolfe Marks explore numerous reasons why the United States is the only major Western country without a large labor or socialist party. Their book presents potential explanations like the US Constitution, our electoral system, American culture, a political break between socialists and the labor movement, and other historical accidents. They probably all played a role. However, their chapter on how immigrant-induced diversity undermined the labor movement is especially compelling compared to Europe.

As Benjamin Powell and I wrote in Wretched Refuse? (192):

Karl Marx, Friedrich Engels, and their American followers warned that immigrant-induced diversity reduced worker solidarity, and that this problem would continue so long as the United States had near-open borders. They believed these factors combined to slow Marxist efforts to stoke a socialist revolution in the United States or at least achieve middle-ground policies like the creation of a large welfare state. At the same time, American Progressives and other immigration restrictionists embraced the ideology of eugenics and were thus worried that immigrants were bringing inferior genetic traits that would undermine American prosperity by lessening support for democratic institutions. Immigrants were a barrier to the demographic central plans of reformers at that time.

Later, we continued with (203-204):

Marx warned that immigrant-induced ethnic and racial differences reduced worker solidarity that slowed his efforts to stoke a revolution in the United States and elsewhere.

Friedrich Engels wrote that immigrants in the United States “are divided into different nationalities and understand neither one another nor, for the most part, the language of the country.”  Furthermore, the American “bourgeoisie knows … how to play off one nationality against the other: Jews, Italians, Bohemians, etc., against Germans and Irish, and each one against the other.” Engels even went so far as to argue that open immigration will delay the socialist revolution for a long time as the American bourgeoisie understood that “‘ there will be plenty more, and more than we want, of these damned Dutchmen, Irishmen, Italians, Jews and Hungarians’; and, to cap it all, John Chinaman stands in the background.”

Engels’ statements are a crude but plausible summary of statements by businessmen like steel magnate Andrew Carnegie, who said that immigration was “a golden stream which flows into the country each year.” Carnegie went so far as to value each adult immigrant as adding about $1,500 to the US economy, largely because the hard work of raising and educating them was done abroad at foreign expense. American meatpackers and steelmakers in the late nineteenth and early twentieth centuries intentionally hired workers from diverse national, ethnic, and racial backgrounds to inhibit their ability to form labor unions because more diverse backgrounds increased transaction costs among organizing workers.”

Our book has many more quotes and anecdotes about how immigrants unintentionally undermined the labor movement in the United States and how unions realized the threat that immigration poses to their goals of organizing workers and progressive policy change. Most of the debate over how immigrants affect policy in the United States focuses on immigrant voting patterns and policy opinions, but more important is how immigrants affect native voting and other behavior. Much evidence suggests that by undermining labor unions through increased nationwide diversity, immigrants unintentionally reduce the most effective progressive organizations in the United States.