National Data | A Third Lesson From 1965: Immigration And Inequality Rise Together

See earlier  Lesson From 1965: More Immigrants = More Violent Crime and Another Lesson From 1965: More Immigrants=More Poverty

S.744, the Obama-Rubio Amnesty/ Immigration Surge bill now being rushed through the U.S. Senate, is not just the 1986 Amnesty writ large: although little-noted, it’s simultaneously the disastrous1965 Immigration Act, which restarted immigration after a 40-year lull—also writ large. Accordingly, I’ve been documenting problems that the 1965 act appears to have exacerbated: violent crime; poverty; and now inequality.

The income gap between haves and have-nots is now greater in the U.S. than in any advanced economy in the world.

Researchers at the International Labor Organization have measured national income inequality using a statistic called the “Gini coefficient.” Gini coefficients can range from 0 (perfect equality in income among all households) to 100 (one household receives the entire national income and the rest get nothing.) Like golf, low Gini scores win.

The recent ILO [PDF] report puts the U.S. Gini coefficient at 47.7 in 2011, or almost half way toward the theoretical maximum of 100. By comparison, inequality in the other 25 developed countries range from 20 to 35.

Moreover, inequality is rising faster here than anyplace else. The U.S. Gini coefficient rose even during the stock market collapse of 2008 to 2009. Market meltdowns like that usually have a leveling effect on inequality.

So it seems as if “American exceptionalism” includes the ability of our wealthy to garner a disproportionate share of national income.

Liberals blame the greed and avarice of the richest 1% —aided and abetted by financial de-regulation etc... Conservatives, to the extent that they fret over inequality, focus on the shocking lack of skills among large swaths of the bottom 99%—the result of an inefficient public education system substantially controlled by teacher unions.

Both sides believe income inequality will increase unless their policy agendas are put in place.

Both sides ignore U.S. economic history—and the role of immigration.

Jay Gatsby notwithstanding, the Roaring Twenties marked the start of a forty-year period during which ordinary workers got richer while the rich got relatively poorer. After an early recession unemployment dropped below 5% and stayed below that level for most of the decade. Americans found themselves sharing broadly similar lifestyles in a way not seen since before the Civil War.

Economic historians Claudia Goldin and Robert Margo call this period of declining income disparities the “Great Compression.”

But all of that went into reverse in the 1970s—right about the time that the 1965 Act became effective (and illegal immigration got underway again).

From the end of World War II until the late 1960s the rich-poor divide was remarkably stable, even narrowing over long stretches. The de facto immigration moratorium in place from the mid-1920s to the mid-1960s forced America to draw on unused and under employed minorities to meet its internal labor force needs.

That things started to come apart around 1970, as can be seen by eyeballing the trend in mean and median family income:

National Data | A Third Lesson From 1965: Immigration And Inequality Rise Together

Mean is the average income, calculated by dividing total income by the number of families. Median income is the mid-point of the income distribution. Half of all families have incomes above the median family income; half have income below it.

You may recall from Statistics101 that if all the objects (e.g., family incomes) in a sample grow at the same rate, its mean and the median will move in lockstep. If, however, the top half grows faster (or falls more slowly) than the bottom half, the mean will pull away from the median.

In 1947 (the earliest year of available mean and median income Census Data) mean family income was 17.0% above median family income. The gap narrowed to 9.4% in the late fifties, and remained in the 10% to 12% range in the 1960s. This, of course, was a time of relatively low immigration.

Then, around 1970, mean family income pulled noticeably ahead of median family income. The divergence is painfully evident in the graphic, especially—and we think, not coincidentally—in the years following the 1986 illegal alien amnesty. In 1986 mean family income was 18.6 percent above median family income. Ten years later it was 27% higher.

In 2011 mean family income was a record 32.9% above median family income.

What happened? Several factors seem to have been at work. Unusually, economists Ian Dew-Becker and Robert Gordon acknowledge that immigration policy is among them:

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 and the share of imports…

Partly as a result of restrictive legislation in the 1920s, and also the Great Depression and World War II, the share of immigration per year in the total population declined from 1.3 percent in 1914 to 0.02 percent in 1933, remained very low until a gradual recovery began in the late 1960s, reaching 0.48 percent (legal and illegal) in 2002. Competition for unskilled labor not only arrives in the form of immigration but also in the form of imports, and the decline of the import share from the 1920s to the 1950s and its subsequent recovery is a basic fact of the national accounts.

Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income, by Ian Dew-Becker and Robert J. Gordon, September 8-9, 2005

While the influx of immigrant workers raised the profits and compensation of their employers—and mean income—it had a negative effect on the well-being of native-born workers, especially among the low-skilled native-born population. But even the median family suffered.

It might be one thing if this inequality were merely in relative terms. Unfortunately, for most Americans since the 1960s, inflation-adjusted incomes have stagnated or worse in absolute terms. Only high-income groups have gotten richer. It’s not a pretty picture.

I’ll document the real income trends in a later article. Meanwhile, another Great Compression, triggered by an immigration moratorium, would help more native-born Americans than it would hurt.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis