The RAISE Act: Effect on Economic Growth and Jobs

Key Points

  • The RAISE Act, a bill recently introduced by Senators Tom Cotton and David Perdue and endorsed by President Trump on Aug 2, 2017, would reduce legal immigration while increasing the portion of new legal immigrants that are highly skilled.
  • By 2027, our analysis projects that RAISE will reduce GDP by 0.7 percent relative to current law, and reduce jobs by 1.3 million. By 2040, GDP will be about 2 percent lower and jobs will fall by 4.6 million.
  • Despite changes to population size, jobs and GDP, there is very little change to per capita GDP, increasing slightly in the short run and then eventually falling.

The RAISE Act: Effect on Economic Growth and Jobs

Introduction

Currently, net legal immigration to the U.S. is about 800,000 people each year, with about 45 percent of new legal adult immigrants having a college degree or higher. On August 2, 2017, President Trump endorsed the Reforming American Immigration for a Strong Economy (RAISE) Act, introduced by Senators Tom Cotton and David Purdue. The RAISE Act will lower the total number of legal immigrants while increasing the portion of highly skilled and educated legal immigrants.

This brief uses the PWBM’s immigration policy model to project the impact of the RAISE Act on the economy. PWBM accounts for the provisions in the RAISE Act by modeling the economic impact of reducing legal immigration by 50 percent while increasing the portion of immigrants with at least a college degree to 75 percent.

The RAISE Act

People can immigrate to the U.S. via many channels including immigrant visas for immediate family, extended family, employment and various other special types. In addition, people can arrive as refugees, with temporary work visas and via other channels.

In 2016, 617,752 immigrant visas were issued at foreign service posts. More than half of those went to immediate family members. Immediate family members are spouses, children and parents of U.S. citizens. More than 200,000 immigrant visas were awarded to extended family members, while 25,056 people immigrated to the U.S. with employment preference immigrant visas. Another 45,664 came to the U.S. with a diversity lottery visa. The remainder of immigrant visas were awarded via special programs. In addition to those awarded immigrant visas, in 2016, nearly 85,000 came to the U.S. as refugees. Finally, in 2016, many people came to the U.S. with temporary work visas, including 180,057 people with new H-1B visas.

Table 1 shows provisions included in the RAISE Act. Immigrant visas with employment preference would be awarded using a skills-based points system. Specifically, immigrant visa applicants would receive points based on education, English language skills, job offers, age, extraordinary achievements, and entrepreneurship. Family preferences for immigrant visas would be limited to spouses and minor children and the diversity lottery immigrant visa program would be eliminated. In addition, the number of refugees would be limited to 50,000 annually.

Table 1: Policy changes in the RAISE Act

Selected Visa Types Number of visas issued at foreign service posts in 2016 RAISE Act
Extended family preference 215,498 Eliminated
Employment preference 25,056 Awarded with a skills-based points system
Diversity lottery 45,664 Eliminated
Refugee 85,000 50,000 cap

Sponsors of the RAISE Act expect it to reduce legal immigration by about 40 percent in the first year, with reductions rising to 50 percent by year 10. In addition, the sponsors expect the bill to increase the portion of legal immigrants with college degrees. Based on the parameters of the law, we estimate that 75 percent is likely the upper bound on the portion of highly skilled legal immigrants. Finally, the sponsors expect to achieve higher wages for working Americans. More information about the RAISE Act can be found in the full text of the bill, from Senator Cotton, and from the White House.

Gross Domestic Product

As shown in Figure 1, the Penn Wharton Budget Model projects that contracting net legal immigration will decrease GDP relative to current law, despite changing the skill mix toward more educated immigrants. If immigration is decreased by 50 percent, the economy will be two percent smaller in 2040, even though 75 percent of those immigrants will now have at least a college degree. Between now and 2040, the economy will grow at about 1.6 percent per year on average rather than about 1.7 percent.

However, we project that the RAISE Act will increase per capita GDP by 0.02 percent by 2027, because the capital stock will be similar to before the reform while the pool of workers will be smaller. Nonetheless, over the long run, immigrants work and contribute to savings. By 2040, per capita GDP will be 0.30 percent lower than under current policy.

Figure 1: Gross Domestic Product with 50 percent decrease to net legal immigration and increase skilled/educated immigrants to 75 percent

If a new policy were to instead simply increase the share of highly skilled new immigrants to 75 percent, without reducing the total number of new immigrants, the impact on GDP would then be positive. By 2027, GDP would rise 0.17 percent and then by 0.37 percent by 2040. GDP per capita would also increase by similar amounts. These effects are small in magnitude because new immigrants (about 800,000 per year on net) are a small portion of the U.S. population (323 million in 2016). So, it takes many years for a change in the skill mix alone to increase GDP.

Jobs and Wages

The RAISE Act also reduces employment because the domestic worker participation rate won’t increase enough to fill the jobs that would have been held by immigrants who are no longer allowed in the country. Figure 2 shows employment under current policy and under the RAISE Act in key years. In its first year, under the RAISE Act, we project 92,537 fewer jobs. After 10 years, job losses increase to 1.3 million relative to current law. By 2040, 4.6 million jobs are lost.

Figure 2: Employment with 50 percent decrease to net legal immigration and increase skilled/educated immigrants to 75 percent

Reducing immigration reduces the pool of workers in the U.S. and, in the longer run, savings available for investment. By 2027, average hourly wages increase by just 0.23 percent, from $42.02 under current policy to $42.12 measured in 2015 dollars. By 2040, hourly wages rise by 0.16 percent, from $49.33 to $49.40.

These small rises in hourly wages do not boost the labor force participation of workers remaining in the U.S. by enough to offset the lost work and savings of the immigrant workers who are no longer entering the country. As a result, a smaller total wage base (average hourly wage times hours worked) emerges. This contraction, in turn, places more pressure on entitlement programs, including Social Security and Medicare, which are mostly pay-as-you-go financed. These two programs alone account for about 44 percent of non-interest federal spending in 2016. Since qualifying for full benefits takes many years, benefits paid by these programs decrease by 2027 by less than the wage base lost. As a result, the RAISE Act, for example, reduces the wage base relative to Social Security benefits by 0.7 percent by 2027. This shortfall increases the projected future federal deficit, which, in turn, negatively impacts private capital formation over time. Each of these effects is captured by our model.

Conclusion

The RAISE Act would reduce the number immigrants per year while increasing the portion of new immigrants that are highly skilled. We project that the RAISE Act will lead to less economic growth and fewer jobs than otherwise. Job losses emerge because domestic workers will not fill all the jobs that immigrant workers would have filled. While in the short run the RAISE Act leads to a small boost to per capita GDP, in the long run per capita GDP dips slightly. Gains in average wages are positive but small.

[Updated on 8/14/2017 to include the impact of the RAISE Act on average wages and additional explanation]