A good exam question for EC101

Soon after I began blogging in 2009 I did a post suggesting that a slowdown in immigration might have been a contributing factor in the housing crash.  But at the time I lacked data on migration, which is surprisingly hard to find–especially for illegal immigration.

Here’s some data from the NYT:

Douglas S. Massey, co-director of the Mexican Migration Project at Princeton, an extensive, long-term survey in Mexican emigration hubs, said his research showed that interest in heading to the United States for the first time had fallen to its lowest level since at least the 1950s. “No one wants to hear it, but the flow has already stopped,” Mr. Massey said, referring to illegal traffic. “For the first time in 60 years, the net traffic has gone to zero and is probably a little bit negative.”

The decline in illegal immigration, from a country responsible for roughly 6 of every 10 illegal immigrants in the United States, is stark. The Mexican census recently discovered four million more people in Mexico than had been projected, which officials attributed to a sharp decline in emigration.

American census figures analyzed by the nonpartisan Pew Hispanic Center also show that the illegal Mexican population in the United States has shrunk and that fewer than 100,000 illegal border-crossers and visa-violators from Mexico settled in the United States in 2010, down from about 525,000 annually from 2000 to 2004.

And when did this slowdown begin?

How did this happen?

Partly, emigrants say, illegal life in the United States became harder. Laws restricting illegal immigrants’ rights or making it tougher for employers to hire them have passed in more than a dozen states since 2006. The same word-of-mouth networks that used to draw people north are now advising against the journey. “Without papers all you’re thinking about is, when are the police going to stop you or what other risks are you going to face,” said Andrés Orozco.

And now for the exam question:

How would rapid hispanic immigration to the sunbelt combined with increasingly restrictive zoning laws be expected to impact housing prices in California, Nevada, Arizona and Florida?  Suppose Texas lacked those restrictive zoning laws, how would immigration affect their housing prices?  Now suppose there was a sharp slowdown in immigration after 2006, which dramatically reduced forecasts for future population growth in the sunbelt.  How would this impact housing prices?  Now suppose that NGDP fell dramatically below trend in late 2008, how would this affect housing prices in Texas and the other sunbelt states?

And the answers:

1.  Housing prices should surge in California, Nevada, Arizona, and Florida–but not Texas, where supply is elastic.

2.  After 2006 housing prices should plummet in the four high-flying states, but remain stable in Texas.

3.  After mid-2008 housing prices should fall in all 5 states, indeed almost all 50 states (excluding only those few that avoided the recession.)

HT:  Tyler Cowen

PS.  After completing this post I noticed an interesting Karl Smith post (Oops, Actually Adam Ozimek) on how the flight of illegals is impacting the low end of the labor market:

The obvious question to ask is whether there be others who step in to take the jobs these immigrants would have taken at the wage that will be offered. This question, which I go into detail on here, does ignore one crucial aspect of the problem. The cost to employers is not simply higher wages per hour, but higher unit labor costs. That is, for a given unit of value-added output, what happens to the total cost of labor? Wages may only need to go up by 10% in order to find workers willing to replace illegal immigrants, but if the quality of work goes down -if the workers are slower, sloppier, etc.- then unit labor costs may double or more.

You can see this implied in the Bloomsberg article where a contractor says “It’s not the pay rate. It’s the fact that they work harder than anyone. It’s the work ethic.”

Update:  It was Adam Ozimek, not Kark Smith.  My apologies to both.

Karl Adam then quotes from a AP story on farm work in Alabama:

For more than a week, the state’s probation officers have encouraged their unemployed offenders to consider taking field jobs. While most offenders are required to work while on probation, statistics show they have a hard time finding jobs. Georgia’s unemployment rate is nearly 10 percent, but correction officials say among the state’s 103,000 probationers, it’s about 15 percent. Still, offenders can turn down jobs they consider unsuitable, and harvesting is physically demanding.

The first batch of probationers started work last week at a farm owned by Dick Minor, president of the Georgia Fruit and Vegetable Growers Association. In the coming days, more farmers could join the program.

So far, the experiment at Minor’s farm is yielding mixed results. On the first two days, all the probationers quit by mid-afternoon, said Mendez, one of two crew leaders at Minor’s farm.

“Those guys out here weren’t out there 30 minutes and they got the bucket and just threw them in the air and say, ‘Bonk this, I ain’t with this, I can’t do this,'” said Jermond Powell, a 33-year-old probationer. “They just left, took off across the field walking.”

Mendez put the probationers to the test last Wednesday, assigning them to fill one truck and a Latino crew to a second truck. The Latinos picked six truckloads of cucumbers compared to one truckload and four bins for the probationers.

Of course this relates to an old and tiresome debate on immigration that I’d just as soon skip.  Instead, think about how this might be reducing downward wage and price flexibility in the current recession, a pattern that surprised even Paul Krugman.



18 Responses to “A good exam question for EC101”

  1. Gravatar of marcus nunes marcus nunes
    9. July 2011 at 15:01

    Another piece of evidence that “supports” the answers is data from Nevada. Up to 2001 there were no zoning laws in Nevada where about 90% of the land is federally owned. House prices in Nevada evolved just as in Texas. But after 2001 the “greens” succeeded in their claims for environmental restrictions. From 2003 to 2006 house prices in Nevada soared!

  2. Gravatar of Adam Ozimek Adam Ozimek
    9. July 2011 at 16:40

    Nice post Scott. I think this is an important untold story of the recession. If immigration had continued at ’05 pace we’d probably have more than a million more people right now, which would be useful given we’ve got a fee million more homes than households.

    P.S. It was my post not Karl’s that you quote.

  3. Gravatar of Scott Sumner Scott Sumner
    9. July 2011 at 17:10

    Marcus, Yes, last year I did a post on Nevada and Arizona building restrictions.

    Sorry Adam, I just added an update.

  4. Gravatar of Morgan Warstler Morgan Warstler
    9. July 2011 at 19:24

    Scott, I still think you are pushing it on immigration. There’s a ton of doubling up – extended families under one roof – that’s the real effect.

    Also, stop making Paul Ryan drink expensive wine:


  5. Gravatar of Doc Merlin Doc Merlin
    9. July 2011 at 22:11

    @Morgan Warstler:
    Meh, its his money he can spend it how he pleases.

    Yes, we need increased flexibility in the housing market. These regulations are decreasing flexibility. I wonder… are benefits and employment regs doing the exact same thing in the labor markets?

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. July 2011 at 00:40

    Which is the only developed economy where immigration raises the average level of human capital? That would be Australia. Of course, it is easier to do immigration better when one has no land borders and unashamedly cherry-picks. And border control is a hot issue in Oz politics too. (I find a common feature in both countries is that members of the “cosmopolitan” elites do not seem to get, or want to get, that a strong legal regime is the only way ordinary “parochial” voters get any say in immigration policy.)

    There is a connection between immigration and land use regulation–the more one’s housing market entrants are non-citizens (so non-voters), the easier it is for regulation to discriminate against them in favour of incumbents. (Texas avoids this effect because its mainly Hispanic migrants can plug into already existing substantial Hispanic networks, a lot of its influx is voting citizens from other US States and other institutional factors work against land use control.)

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. July 2011 at 01:04

    The reversal of immigration flows was a major factor in Ireland’s downward spiral.

    Continuing strong immigration in Oz is a reason why those who say :”no bubble, what bubble?” in Oz housing prices say it can go on, apparently indefinitely.

  8. Gravatar of Morgan Warstler Morgan Warstler
    10. July 2011 at 03:27

    Doc, I don’t care about the wine, I care about the news cycle. Pols agree to live in tank, to be poked and prodded, and generally turned into entertainment creatures.

    But whichever economist who was discussing Fed policy with Ryan decided to drink a fancy bottle of wine, didn’t realize they are obligated to that to the Dem Congressman, not Republicans.

  9. Gravatar of Morgan Warstler Morgan Warstler
    10. July 2011 at 03:28

    Also, another continued proof point that Matty is a very young thinker:


  10. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 06:18

    Morgan, The doubling up is exactly what I am talking about!!! I said their are two problems: less people and tight money. The tight money causes unemployment which causes gen X to live with their parents. Or is it gen Y?

    Doc Merlin, Yes, labor market intervention is modestly raising the “natural rate” of unemployment.

    Lorenzo, I favored more legal and less illegal immigration. I agree about Ireland. I think Canada might also have above average skill levels of immigrants. And I agree immigration is one factor in the Australian bubble. Hasn’t immigration recently slowed in Australia? And hasn’t housing recently slowed?

    Morgan, I should do a post about that Yglesias post–he’s wrong about land prices.

  11. Gravatar of Rien Huizer Rien Huizer
    10. July 2011 at 06:59

    This is another illustration of the mechanism that killed the Soviet experiment.

  12. Gravatar of Benjamin Cole Benjamin Cole
    10. July 2011 at 13:09

    Important post by Sumner. There are whole sections of Los Angeles that used to be in decline, and inhabited lower-income, mostly black residents, say around 1975. Empty storefront, abandoned housing, the works. They were dangerous neighborhoods.

    Thirty-five years later, those same neighborhoods are lower middle-class and largely Latino, with markets, auto repair shops, small tax preparation firms, clothing stores etc. They are not dangerous.

    If we cut off Latino immigration, the central core of almost every city in the West/Southwest will likely suffer.

    And yes, as a rule, Latinos work harder than low-income Americans.

    I have done field work in Thailand. It is really, really hard work (especially at 90 and humid, but you have to cover up nearly entirely, to avoid bugs, sun, and getting scratched by sugar cane leaves). I told my wife I am doing such work no more than four hours a day.

    Closing the USA border may be a bad mistake.

  13. Gravatar of Rien Huizer Rien Huizer
    10. July 2011 at 19:16


    Although the Oz gvt is traditionally under heavy electoral pressure to resist low-skilled immigration (except as refugees, a minority category), there is now quite a bit of US/European-style (where low skilleds tended to dominate the numbers) intake as well. Look at the people pushing the supermarket trolleys and the cleaners.How did they get skilled immigration visa? Are they all students? More important is that Australia imports vast numbers of hairdressers, policemen and brickies, but also exports vast numbers of college graduates (Australians, not only the foreign students that repatriate after obtaining their PR, for lack of jobs in their fields). I am not so sure that the net effect of migration on the stock of human capital in Australia is positive. Maybe it depends how you define human capital..

  14. Gravatar of Scott Sumner Scott Sumner
    11. July 2011 at 18:23

    Benjamin, It’s a negative supply shock, the last thing we need in this recession. As food prices rise the Fed tightens monetary policy.

  15. Gravatar of Jaap Jaap
    13. July 2011 at 16:03


    are you sure there is no problem with causation?

    my (Mexican & legal US-resident) fiancee left Florida for Mexico in 2008 because of poor prospects in FL and great prospects in Mexico.

    it could be that illegal immigrants are the canary in the coalmine. as soon as there is no more work, it is not a good idea to stay in a country illegally (or to come there).
    on top of that, are there any fines for hiring illegal immigrants if caught? they’d be the first to go in that case, whatever their productivity.

    with Mexico catching up, and the US getting in a recession, prospects changed for (illegal) immigrants. it was just not worth the risk anymore.

  16. Gravatar of ssumner ssumner
    14. July 2011 at 08:59

    Jaap, I’m sure the causation runs both ways.

  17. Gravatar of Jaap Jaap
    14. July 2011 at 10:57

    my only thought about this is: NEED MORE DATA!
    we need to see when the flow stopped, and return started (+ of course accurate economic data to match).

  18. Gravatar of FT Alphaville » Was demographics destiny after all? FT Alphaville » Was demographics destiny after all?
    2. August 2011 at 07:09

    […] bursting of the housing bubble in California and elsewhere. Maybe one of the first such shocks. See Scott Sumner, for example, or Adam Ozimek. Although data have always been hard to find and causation might be […]

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