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Global Economics Paper No.

168

GS GLOBAL ECONOMIC WEBSITE


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Immigration and the North


American Economy

! Immigration to the United States has surged over the past decade,
with most of the increase outside legal channels. Immigrants
boosted US labor force growth by about half a percentage point per
year over the past decade.

! Though immigrants appear to have a very limited impact on US


wage levels, most immigrants themselves realize a large economic
gain—with further benefits accruing to the second generation.

! Remittances from citizens working in the United States are an


important source of capital for Mexico and other countries of origin
of migrant workers.

! Current US immigration policy is ineffective—too tight for skilled


workers, and often irrelevant for undocumented workers. With
compromise stalled, immigration policy is likely to tighten gradually
as enforcement increases.

! Along with a weaker domestic labor market, tighter borders are


likely to reduce the level of both legal and illegal immigration over
the next few years—slowing the growth of the US labor supply and
hence of US economic output.

Important disclosures appear at the back of this document.

Thanks to our GS colleagues Jan Hatzius, Ed McKelvey, Andrew Tilton, Kent Michels,
Erik Nielsen, Jim O’Neill, and Thomas Stolper for helpful
comments and suggestions. Alec Phillips, Alberto Ramos
May 27, 2008
Goldman Sachs Economic Research Global Economics Paper No. 168

Table of Contents

Highlights 1

I. The Next Great Wave of Immigration 2


Forces Driving Immigration 3

II. Characteristics of the Immigrant Labor Force 5


Skilled Immigrants 5
Unskilled Workers 5
The Second Generation 6
Box 1: Estimating the Scale of Immigration 8

III. The Impact of Immigration on the North American Economy 9


Labor Supply 9
Wages and the Income Distribution 11
Fiscal Implications of Immigration 12
Impact on Mexico and Other Emigrant Nations 14

IV. The Ideal Immigration System—And the American One 18


Box 2: The US Immigration System 20

V. Making Immigration Work 21


Makings of a Compromise 21
The New ‘Third Rail’ of American Politics 23
Progress is Unlikely Before 2009 24

VI. Conclusion: An Opportunity on Hold 25

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! Immigrants are a vital part of the American economy and of the


Highlights country’s historical identity. The United States prides itself on being a
“melting pot” for people from all over the world, and accepts hundreds of
thousands of new legal permanent residents each year.
! A surge in immigration over the past decade has pushed the foreign-born
population to nearly 40 million and boosted the growth rate of the US
labor force. New immigrants accounted for about half of the growth in
the US labor force over the past decade, boosting GDP growth by
roughly ½ of a percentage point per year.
! The net economic benefit of immigration is large and goes beyond a
simple increase in the size of the labor force. Immigrants themselves
typically gain enormously from migration, and their US-born children do
even better. Remittances from migrants to relatives back home also
benefit their countries of origin. Immigrants appear to have a fairly small
impact on the level and distribution of wages, and largely offsetting
effects for the federal budget (positive) and state and local budgets
(negative).
! Despite the basic openness of the United States and the benefits of
immigration, a surge in unauthorized migrants over the past few
decades—particularly from Mexico—has evolved into a public policy
crisis. The majority of recent immigrants are in the country illegally,
even as some legal (albeit temporary) work permits go unused.
Immigration flows are larger than ever, but the skilled labor market is
extraordinarily tight and annual quotas for permits for skilled work visas
are exhausted within a few days. In short, current US immigration policy
is unrealistic and inefficient.
! Politicians of all stripes are dissatisfied with the current situation, but
disparate views of the desirability of immigration—exacerbated in some
cases by an insufficient understanding of the facts of immigration and its
impact on the economy—impede legislative progress. Voters and
politicians differ on whether to focus on legal or illegal immigration, the
relative importance of skill-based versus family preferences for
immigrants, and the utility of temporary worker programs. Aside from
recent efforts to step up enforcement, progress on immigration reform
will have to wait until the next administration—and possibly longer.
! The rate of immigration to the United States has already begun to slow,
reflecting the political stalemate, increased enforcement efforts against
unauthorized migrants, and economic weakness. Each of these factors
appears likely to persist over the next year or two. Meanwhile, a weaker
domestic labor market will discourage immigration, particularly of
undocumented workers. Lower immigration flows will reduce labor
force growth and consequently the potential growth rate of GDP in
coming years.
! Over the long term, the United States is likely to remain an attractive
destination for migrants from around the world, especially those from
poorer countries in the Americas. Given a slowdown in native-born
population growth, and assuming some degree of openness to immigrants
remains, immigrants are likely to account for the majority of US
population growth through 2050—up to four-fifths by some estimates.

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I. The Next Great Wave of Immigration


“Give me your tired, your poor, your huddled masses, yearning to breathe
free…”
-- Inscription for the Statue of Liberty (Emma Lazarus)

To many, these noble sentiments capture a fundamental part of the identity of


the United States—an openness to people from around the world who seek a
better life. Many of the early American colonists were political or religious
refugees themselves. Despite controversy over border security and
unauthorized immigration, the United States remains exceptionally open to
immigrants, accepting nearly a million people a year as new legal permanent
residents.

The United States is experiencing The United States is currently experiencing the third great wave of
the third great wave of immigration immigration in its history (Exhibit 1). The first, from the mid- to late-19th
in its history. This surge has been century, was predominantly composed of Northern Europeans. More than
dominated by immigrants from four-fifths of immigrants entering the United States between 1840 and 1870
Latin America and Asia. listed the United Kingdom, Ireland, or Germany as their last place of
residence. Ethnically and religiously, these immigrants matched the native
population fairly well. The second, cresting around the turn of the century
and continuing through the 1920s, was dominated by Eastern and Southern
Europeans with different cultural and religious identities.

The third wave of immigration, which began to gather strength in the 1970s,
has been dominated by immigrants from Latin America and Asia. While
about 40% of those who immigrated to the US prior to 1970 came from
Europe, only about 10% of those who immigrated to the US since 1970 came
from Europe.

Exhibit 1: Third Great Wave of American Immigration


Percent of New LPRs* Percent of New LPRs
100 100
Last Country of Residency:
80 Germany, UK, and Ireland 80
Eastern and Southern Europe
Asia and Central America
60 60

40 40

20 20

0 0
1820s
1830s
1840s
1850s
1860s
1870s
1880s
1890s
1900s
1910s
1920s
1930s
1940s
1950s
1960s
1970s
1980s
1990s

*Legal permanent residents.


Source: Department of Homeland Security.

A distinguishing characteristic of this third wave of immigration is a surge in


unauthorized migrants. According to the Pew Hispanic Center, the inflow of
unauthorized immigrants has outnumbered legal immigrants over the past
decade (Exhibit 2). At an estimated 12 million, the number of unauthorized
residents in 2006 constituted about 30% of the country’s total immigrant
population. The vast majority of these immigrants come from Mexico.

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Exhibit 2: Undocumented Immigration Overtakes Legal Inflows


Thousands Thousands
900 900
Legal Immigrants
800 Unauthorized Immigrants 800
A distinguishing characteristic of Mexican Share
700 700
this third wave of immigration is a
surge in unauthorized migrants. 600 600
500 500
400 400
300 300
200 200
100 100
0 0
1980-1989 1990-1994 1995-1999 2000-2004
Source: Pew Hispanic Center.

In large part because of these flows, the immigrant population in the United
States has skyrocketed in recent decades, with the share of the US population
born outside the country approaching the record set in 1890 (see Exhibit 3).
Between 1990 and 2005 alone, the foreign-born population of the United
States increased by more than 75%, according to figures from the US Census.
The size of this wave of immigration, and the large proportion of illegal
migrants, have put traditional American notions of openness to the test.

Exhibit 3: Immigrant Population Has Exploded in Recent Decades


Percent Percent
The immigrant population in the 16 16
United States has been
skyrocketing in recent decades, 12 12
with the share of the US population Net Increase in Immigrant
born outside the country 8 Population (right) 8
approaching an all-time record. Immigrant Share of
Population (left)
4 4

0 0

-4 -4
2000s*
1850s
1860s
1870s
1880s
1890s
1900s
1910s
1920s
1930s
1940s
1950s
1960s
1970s
1980s
1990s

*Projection based on 2000-2005 increase in the immigrant population.


Source: Census Bureau.

Forces Driving Immigration

Emigration is by nature an exceedingly complex phenomenon, and depends


on a wide variety of economic, political, and cultural variables. Both supply-
side and demand-side changes help to explain the “third wave” of
immigration. On the supply side, several factors have led to a shift in the
composition of immgrants:

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1. Liberalization of immigration laws. Over the past century, US


immigration law has gradually shed preferences for white, Northern
European immigrants. In 1943, Congress repealed the Chinese Exclusion
Act, which had effectively halted immigration from that country since 1882.
The Immigration and Nationality Act amendments of 1965 abolished ceilings
on the level of immigration from many countries that had been established in
1924. (The primary goal of the bill was to stem the flow of immigrants from
Southern and Eastern Europe to “preserve” the ethnic mix of the US
population.) Although the 1965 act retained an annual quota of 170,000
Several factors have contributed to
visas for the Eastern Hemisphere, unlimited family reunification visas
the faster growth and changed
allowed for a bigger inflow.
composition of immigration flows,
including the gradual elimination
2. Changes in relative living standards. Europe’s rapid economic recovery
of racial preferences in US
following the Second World War decreased the incentive for emigration.
immigration laws, changes in
Meanwhile, Latin America’s “lost decade” of the 1980s, compounded in
relative living standards, and the
Mexico’s case by the peso devaluation of 1994 and subsequent economic
declining cost of immigration.
crisis, meant stagnating incomes and a widening gap with US wage levels.
Factory wages in Mexico were roughly a quarter of US levels in 1980, but
have been barely one-tenth as high over most of the last twenty years.

3. Declining cost of immigration. Economically and psychologically, the


costs for Latin American and particularly Mexican workers to migrate to the
United States have declined significantly. As immigrants established
themselves in the United States through temporary worker programs or
unauthorized immigration, they provided aid to relatives and friends. A
recent study by Mexico’s central bank found that 80% of migrants already
had family members in the United States, and 95% of those with family
members lived with them immediately after migration.1 Geographically,
the development of the maquiladora industry drew workers towards Mexico’s
northern border, providing a sort of way station for migrants.

In addition to these supply factors, changes in the profile of labor demand


have also contributed to the surge in immigration:

1. Technological innovation. At the high end of the labor market,


technological innovation has increased the returns on education, particularly
for specialized engineering and technical skills. In turn, this has spawned a
huge demand for highly skilled labor in the sciences, drawing in highly
educated foreigners through programs like the H-1B visa program.2

2. A better-educated US population. A gradual increase in the educational


attainment of the US population has meant a shift in the labor supply away
from low-wage occupations, particularly in the services.

3. Development of the Sun Belt states. The rapid growth of the Sun Belt
states after World War II and their geographic proximity to the Mexican
border may also have been a contributing factor. Well over a third of
immigrants live in California and Texas.3

1
Central Bank of Mexico (2007), Las Remesas Familiares en México.
2
Although many low-skill service sector jobs remain unaffected by
technological progress, the middle tier of the labor market has seen a relative
erosion in labor demand, as automation substitutes for many rote activities
requiring moderate education. See for example “The Polarization of the US
Labor Market,” David Autor, Lawrence Katz, and Melissa Kearney, NBER
Working Paper No 11986. January 2006.
3
Center for Immigration Studies analysis of the March 2005 Current Population
Survey.

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II. Characteristics of the Immigrant Labor Force


From an economic perspective, the most relevant characteristic of working-
age immigrants is the skill set they bring to the labor market. Lumping all
immigrants together into “skilled” and “unskilled” categories is crude but
informative. By our definition, skilled immigrants are those with a college
degree and a legal work permit (without which even a highly skilled
immigrant would have trouble obtaining a job in which he or she could apply
those skills).

Skilled immigrants

We estimate that skilled workers account for just over one-third of recent
inflows to the United States. Three separate statistics lead to this conclusion.
First, about 35% of adult immigrants who arrived in the United States since
We estimate that skilled workers 2000 had a bachelor’s degree or advanced degree. Second, about 20% of
account for just over one-third post-2000 immigrants are in management, professional, and related
of recent inflows to the United occupations; another 13% are in sales and office occupations.4 Third,
States. approximately 30% of current foreign-born households where the head of the
household entered the United States in 2000 or later have incomes above
$50,000 per year; though wages are not an indication of skill they are clearly
correlated with education and skill level. Skilled workers came largely from
Asia, with Europeans playing an important supporting role.

The most common avenue for skilled immigration is the H-1B visa for skilled
temporary workers, which is valid for three years and renewable once. The
annual quota for H-1B visas, which Congress changes from time to time, is
currently 65,000, plus 20,000 additional visas for temporary workers with
advanced degrees and exemptions for certain sectors (e.g. nonprofit
organizations). All told, 115,000-130,000 H1-B visas (including renewals)
have been issued per year in recent years. Skilled workers can also gain entry
through temporary intercompany transfers (the “L-1” visa), which allow
foreign employees to work for up to three years in the United States.

Workers on some but not all temporary visas can apply for permanent
residency in the United States—the so-called “green card.” Priority is given
to applicants with desirable labor market skills. In 2005, 22% of new legal
permanent residents obtained their green cards via employment-based
preferences.

Unskilled workers

The bulk of immigration, perhaps The bulk of immigration, perhaps two-thirds, consists of individuals with
two-thirds, consists of individuals limited job skills or education. Unskilled immigrants come disproportionately
with limited job skills or education, from Latin America and especially Mexico, but are by no means limited to
who come disproportionately from this region.
Latin America.
In theory, unskilled immigrants coming to the United States to work should
be entering through the temporary work (“H-2”) visa program. This has two
categories: the H-2A visa for seasonal agricultural workers and the H-2B visa
for temporary nonagricultural workers. The intent is to provide a legal
mechanism for a seasonal inflow of labor where American labor supply at
prevailing wages may be lacking.

4
Census Bureau, March 2004 Current Population Survey.

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In practice, the H-2A visa is pratically irrelevant. In combination, a heavy


administrative burden and a limited time horizon deter all but a few
immigrants and employers from taking advantage of this program. The
burden of securing such a visa falls on the employer, who must be able to
demonstrate that his need is “one time, seasonal, peak load or intermittent,”
that the job is for less than one year, and that there there are “no qualified and
willing” unemployed US workers available to meet the need. The H-2B visa
has similar problems, though its 66,000 cap is generally reached and it is
highly utilized by Mexicans.

Another legal route, often overlooked as an employment channel, is the


family preference visa system. The United States sets aside visas for family
members of citizens and legal permanent residents, including not only parents
and children but also siblings and spouses. This enables “chain migration,”
whereby one family member receives legal status through a work-based visa
program (or through a past amnesty for undocumented immigrants), then
serves as a gateway for his or her family members to migrate to the United
Between 2000 and 2005 probably States. Roughly 30% of new immigrants, and perhaps 60% of new legal
just over half of total immigrant permanent residents, enter through family-based preferences.
inflows were outside legal
channels. Temporary visas and family preferences aside, the vast majority of unskilled
immigrants entering the country in recent years are coming in illegally.
Between 2000 and 2005 probably just over half of total immigrant inflows
were outside legal channels.5 Mexico accounts for a large share of these
inflows, given its proximity to the United States and the disparity in wage
levels between the two countries. Undocumented immigrants appear to have
a very high labor force participation rate, as their main purpose is typically to
find work, and they often support dependents back in their home countries
through remittances.

The second generation

The reputation of the United States as a “melting pot” suggests a rapid


assimilation of immigrants into the population. Happily, this stereotype has
some support in the data. In combination, a strong immigrant work ethic and
the opportunities in America’s schools and labor market have reduced
disparities in educational attainment and income between immigrants and the
native-born population rapidly.

Exhibit 4 illustrates that first-generation immigrants generally are less well-


educated than the native-born population. But recent data suggest that
Although new immigrants have less second-generation immigrants (the native-born children of foreign-born
education on average than native- parents) actually are slightly better educated on average than the children of
born Americans, recent data native-born parents (the so-called “third-and-higher generation immigrants”).
suggest that second-generation Wage disparities also close quickly. As of 2004, second generation
immigrants actually are slightly immigrants had a higher median income than the rest of the non-immigrant
better educated on average than the
population.
children of native-born parents.
The changing composition of immigrant flows will test the integrity of the
“melting pot.” The increased share of undocumented immigrants from Latin
America has resulted in a lower-skilled pool of immigrants than before (see

5
A significant minority (perhaps as much as half) of unauthorized workers
entered the United States legally but overstayed their visas. Unfortunately,
there is little solid information to gauge more precisely the extent to which this
occurs.

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the leftmost column in Exhibit 4). Therefore, a large number of second-


generation immigrants from Latin America will have to get substantially
more education than their parents in order for this cohort to catch up to the
native-born population. Whether these new immigrants can do so is a
question that will take decades to answer; for the remainder of this paper, we
focus on the impact of first-generation immigrants on the North American
economy.

Exhibit 4: Immigrants Start With Less Education but Catch Up


Percent Percent
100 100

80 80

60 60

40 40

20 20
61.2% 32.8% 13.9% 11.5%
0 0
1st Generation 1st Generation 2nd Generation Rest of Pop.
(Mexico*) (All)
*Includes immigrants from Central America. Bachelor's degree or more
Source: Census Bureau. Current Population High school graduate
Survey, March 2004. High school dropout

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Box 1: Estimating the Scale of Immigration


In this paper, we use estimates of 37 million for the total foreign- Although this is the most comprehensive and straightforward
born population in the United States in 2006 (about one-eighth of approach, other sources provide cross-checks on the number of
the total population), of which about 12 million are in the country unauthorized foreign residents. For example, the Social Security
illegally. Current flows of immigrants appear to be about 600,000 Administration maintains an “Earnings Suspense File” that
legal immigrants and 700,000 undocumented immigrants annually. collects contributions made under Social Security numbers
Below we explain the genesis of these estimates.1 (SSNs) that are unassigned or do not correspond to the proper
name or birthdate. Testimony from the Government
Estimating the scale of United States immigration is tricky for Accountability Office indicates that these reports come
several reasons. First and most obviously, not all immigrants disproportionately from just a few industry sectors of the
enter the country through legal channels, so from the start a economy, particularly restaurants and construction—two of the
large share of immigrants are not registered via any formal top industries in which unauthorized migrants are employed.
system. Second, even for those who enter legally, the United
States Immigration and Naturalization Service (INS) may not Roughly 9 million W-2 tax forms had SSNs of questionable
always be informed about departures from the country, creating provenance in 2002.4 Nearly $20 billion per year of wages were
some uncertainty about what fraction of legal foreign entrants recorded in the earnings suspense file during the 1990s. This
are still in the country, or what fraction of ‘visitors’ overstay their tripled to $56 billion in 2002 (see exhibit 8 on page 13).
visa. Third, many unauthorized immigrants obviously have an Considering that not all undocumented immigrants are on
incentive to avoid detection, and therefore may be under- or mis- company payrolls—for example, domestic workers in private
represented in official population counts. households—this number seems quite consistent with the Passel
estimates of the unauthorized immigrant population. Earnings
Nevertheless, a variety of sources give a fairly consistent read associated with these SSNs are rising roughly in line with
on the net inflow of immigrants, and of the total number currently estimates of the unauthorized population—see Exhibit 8 on page
in the country. We begin with the latter. 12.

Stock of immigrants. The best source of data on immmigrants Flow of immigrants. Flows of immigrants are even more difficult
currently in the country is the Census Department’s Current to determine than the total number currently in the country. The
Population Survey (CPS). To supplement its once-a-decade duty Census Bureau estimates a net inflow of 1 to 1.3 million
to count the entire US population, the Census updates overall immigrants per year in recent years (including both legal and
population estimates on an annual basis based on data on births, illegal immigrants), based on changes in the foreign-born
deaths, and international migration. population discussed above. Approximately 600,000 new arrivals
per year entered via legal channels, suggesting at least a similar
This survey, conducted in March, asks many questions on number entering without authorization.5
income and work experience, and includes an expanded sample
of Hispanics. This information allows researchers to subdivide Although these estimates infer the inflow of unauthorized
the US population in a variety of ways, including by country of immigrants from the difference between legal flows and the total
birth. The total number of immigrants in the country, or the change in the foreign-born population, other data sources allow
foreign-born population, was estimated at about 37 million in for some triangulation. Two examples include border security
March 2006, or approximately 12% of the US population. records and remittance flows.

The most straightforward way to arrive at an estimate of the The Department of Homeland Security maintains data on “border
unauthorized immigrant population is the “residual method”— apprehensions” – the number of would-be migrants detained by
subtracting all known legal immigrants from the total foreign-born US officials. Although this figure is obviously sensitive to the
population. Widely cited estimates from Jeffrey Passel of the intensity of enforcement and depends on the frequency with
Pew Hispanic Center take this approach.2 Information from the which workers cross the border to Mexico during the year, the
Department of Homeland Security and elsewhere is used to flows turn out to be quite correlated with US business cycle
determine the total number of legal residents: fluctuations and other estimates of the immigrant inflow.

• Naturalized citizens (11.5 million in 2005) Likewise, remittance flows to Mexico, the largest source of
• Legal permanent residents (10.5 million) unauthorized migrants, show a pattern consistent with estimates
• Legal temporary residents (1.3 million) of recent Mexican immigrants currently working in the United
• Refugees/asylum seekers (2.6 million) States. We discuss remittance flows in more detail on pp. 14-17.

Remaining foreign-born persons are considered unauthorized. 1


These estimates are the work of the Pew Hispanic Center, which
(The final estimate is revised upward to adjust for the likely regularly analyzes government data on the foreign-born population.
undercounting of unauthorized immigrants in the CPS.)3 2
The Size and Characteristics of the Unauthorized Migrant
Population in the U.S. (Pew Hispanic Center, 2006), p. 4.
3
Passel suggests that 1-1.5 million of these unauthorized immigrants
may be “known to DHS and have full legal statuses pending but are
not yet fully legal.”
4
“Illegal Immigrants are Bolstering Social Security with Billions,”
New York Times, 5 April 2005.
5
Jeffrey Passel, Unauthorized Migrants: Numbers and
Characteristics (Pew Hispanic Center, 2005), p. 6.

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III. The Impact of Immigration on the United States Economy


Immigration affects the US economy in several ways. First and foremost, it
affects labor supply, especially in lower-skilled occupations. The correlation
between the US business cycle and the size of undocumented inflows implies
that the US labor supply is getting help when it is most needed. Second,
immigration affects wages and the income distribution. Although most
studies suggest that its impact on wages is quite small, the skill distribution of
migrants is somewhat different than the labor force as a whole. This has
probably contributed to the increased disparity of the US income distribution
in recent years. Third, immigration has important fiscal effects, providing an
extra source of tax revenue for the federal government and helping to ease the
demographic transition slightly, but placing a greater burden on the state and
local governments that provide most of the social and educational services
used by immigrants. Finally, immigration has important economic benefits
for the countries of origin, notably Mexico and other small Central American
and Caribbean nations.

Labor Supply

New immigrants contributed more Immigration boosts the US labor supply. Estimates from the Census
than half a percentage point per Bureau’s Current Population Survey show the number of foreign-born
year to labor force growth over the workers in the United States rising from 15.6 million in 1997 to 24.0 million
past decade. in 2007. This increase was nearly as large as the increase in entire native-
born labor force; without it (and assuming no offsets in the behavior of native
workers), annual labor force growth would have been roughly 0.7% per year
rather than the observed 1.3% per year, with corresponding consequences for
overall economic growth.

Immigrants are much more likely than natives to have very low levels of
schooling. As noted in the preceding section, in 2004 about one-third of
immigrants over 25 years old lacked a high school education, versus only
12% of native Americans (Exhibit 4 on p. 7). At the same time, immigrants
are just as likely as natives to have a high level of schooling: roughly the
same percentage of immigrants and natives hold bachelor’s degrees, and a
slightly larger share of immigrants have advanced degrees. Natives therefore
have disproportionate represention in the middle of the skill distribution, with
about 60% of native workers holding a high school degree, perhaps with
some college education, and only 40% of immigrants at a similar level.

The upshot is that immigration has increased the relative supply of


Immigration has increased the uneducated, “unskilled” workers, while it has kept the relative supply of
relative supply of unskilled college graduates roughly the same (the relative supply of highly educated
workers. workers has increased slightly as a result of immigration). Immigrant workers
therefore tend to be concentrated in “blue-collar” occupations, as shown in
Exhibit 5. In a recent survey, the Bank of Mexico found that 23% of
Mexicans working in the United States were employed in ad-hoc manual
labor, 19% in the construction industry, and 17% in agriculture.6 Low-paying
service industries also disproportionately employ immigrants.

The extent of immigrant involvement in low-wage manufacturing and service


occupations is such that many businesses rely on this labor source. Using
information from the March 2005 Current Population Survey, the Center for
Immigration Studies found that the likely number of unauthorized workers

6
Banco de México (2007), Las Remesas Familiares en México.

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probably exceeded the number of potential native-born workers in several


areas (Exhibit 6).7

Although it may not be true that “immigrants do jobs Americans won’t do,” it
appears that immigrants do many jobs for which Americans are in short
supply at given wage rates and employment conditions.

Exhibit 5: Immigrants Concentrated in Blue-Collar Occupations


Farming, Fishing
& Forestry

Construction,
Extract. & Maint. Immigrants
Overrepresented
Production,
Trans. & Moving

Service Share of Immigrants in Occupation Relative


to Share of Natives in Occupation
Sales and Office Mexican/Central American Immigrants
All Immigrants
Management &
Professional

0 1 2 3 4 5 6 7 8
Ratio
Source: Census Current Population Survey, March 2004.

Exhibit 6: Several Sectors Rely Heavily on Immigrant Labor


Many businesses in low-wage Millions Millions
manufacturing and service
occupations rely on immigrant 1.4 1.4
labor. Unemployed Natives
1.2 1.2
Unauthorized Immigrant Workers
1.0 1.0

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0.0 0.0
Farm, Const. & Blding. Food Product. Trans. &
Fish, etc. Extract. Maint. Prep. Moving
Source: Center for Immigration Studies Analysis of March 2005 CPS.

Of course, immigration has—in absolute terms—increased the supply of all


categories of workers. And it is here where the impact of immigration may
be most significant. Immigration flows, particularly unauthorized flows, are
highly sensitive to the economic cycle (Exhibit 7). As a result, they make
labor supply more elastic and help to alleviate labor constraints and inflation
pressures. However, this relationship may have weakened somewhat recently

7
Although the Center for Immigration Studies generally favors strict controls
on immigration, the data they use in some of their analysis can actually be
interpreted to support the idea that unauthorized workers are needed.

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judging from a recent decline in border apprehensions. They fell sharply


over the 2006-2007 period, presumably due to stepped-up security efforts that
also deterred border crossings. To the extent this trend continues without
broader reform, undocumented workers would be more hesitant to leave the
country during periods of economic weakness, while new workers would
have more difficulty entering when demand for labor rises.

Exhibit 7: Economic Forces Drive Illegal Immigration


Millions Percent
1.8 3.0
Southw est Border
Apprehensions (left)
Immigration flows, particularly 1.6 4.0
Unemployment Rate
unauthorized flows, are sensitive to (right)
the economic cycle, increasing the 1.4 5.0
elasticity of the labor supply.
1.2 6.0

1.0 7.0

0.8 8.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Bureau of Labor Statistics. Department of Homeland Security.

Wages and the Income Distribution

The fact that immigration has increased the labor supply suggests that—all
else equal—it will decrease the wages of native workers, especially unskilled
workers. If labor supply increases, then the number of workers hired will
increase and the average wage will fall. Furthermore, the barbell-like skill
distribution of migrants, combined with a high correlation between workers’
education and earnings, suggests immigrant flows likely increase income
disparities within the population.

However, the simple “partial equilibrium” view of the world does not capture
the full impact of immigrants on the wage structure. In a series of papers,
David Card of the University of California at Berkeley and George Borjas of
Harvard University, often with co-authors, have debated the extent of the
wage effects extensively. Although the two represent opposite poles of the
debate—with Card arguing that the impact of immigrants on the wages of the
native-born is negligible, and Borjas typically finding a stastistically
significant negative effect—their studies suggest common ground on many
issues.

In the long run, immigration affects labor demand as well as labor supply—a
critical point that is often overlooked by commentators in the mainstream
Although the debate over the media. More workers mean more aggregate demand—both direct
impact of immigration on wages consumption by the additional population, and investment by businesses to
has drawn lots of attention, the complement the larger work force. This shift in the demand curve for labor
bulk of research on the topic has mitigates the impact of the additional labor supply. Exactly where wages end
found very modest effects. up is an empirical question, but the impact is much smaller than a simple
“partial equilibrium” analysis of the additional labor supply might imply.

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Even on the issue of wage effects, Card and Borjas are not particularly far
apart. Borjas’s early papers suggested that between 1980 and 2000 the influx
of immigrants reduced the wages of high school dropouts by 8%-9%, with
smaller effects on more educated workers. Later studies, which assumed that
US businesses would increase capital investment in response to an increase in
the number of available workers, found a cumulative impact of only 3.6% on
the wages of high school dropouts. The revised model suggested that the
aggregate effect of immigration on all workers’ wages was nil since more
educated workers actually saw their earnings increase as a result.8 Lawrence
Katz, a Harvard economist who co-authored a 2005 paper with Borjas,
summed up as follows: “Illegal immigration had a little bit of a role
reinforcing adverse trends for the least advantaged,” he said, “but there are
much stronger forces operating over the last 25 years.”

Fiscal Implications of Immigration

Immigration is probably a small net positive for the federal budget, because
Immigration is probably a small incremental tax revenues outweigh the limited services allowed to
net positive for the federal budget, immigrants. States and localities often pick up the slack in providing social
because incremental tax revenues services to immigrants, and therefore incur considerable costs, particularly in
outweigh the limited services states with a large share of unauthorized migrants.
allowed to immigrants.
The costs immigrants pose to the federal budget are probably relatively low.
The welfare reform passed in 1996 stipulated that states could not use federal
grants to finance benefits such as Temporary Assistance to Needy Families,
Medicaid, etc. to non-citizens, though they could still offer such assistance
with their own funds.9 However, the American-born children of immigrants
(whether authorized or not) are citizens and thus entitled to benefits.

At the same time, immigrants do provide tax revenues to the Treasury. Even
illegal immigrants pay federal taxes: in order to demonstrate eligibility for
employment, undocumented workers often use fake Social Security cards
with numbers “borrowed” from others or simply made up. When federal
payroll taxes and income taxes are withheld from their paychecks, funds
accumulate in the Social Security trust funds with no parallel entitlement.10
Since the Immigration Reform & Control Act went into effect during the late
1980s, inflows into the ‘Earnings Suspense File’ have increased dramatically
(Exhibit 8). The cumulative taxes held in this account are $463 billion.11

8
Even the modest 3.6% effect could be an overstatement, as co-author Katz
suggested that trade flows might further mitigate the wage effects. See: Cost of
Illegal Immigration May Be Less Than Meets the Eye (4/16/06); The
Immigration Equation (R. Lowenstein, NYT 7/9/06); and The Labor Supply
Curve Is Downward Sloping (Borjas, 2003).
9
Gordon Hanson, Why Does Immigration Divide America?: Public Finance
and Political Opposition to Open Borders (National Bureau of Economic
Research, 2005), p. 19.
10
The 2005 Economic Report of the President found that “the net present value
of immigrants’ estimated future tax payments exceeded the cost of services
they were expected to use by $80,000 for the average immigrant and his or her
descendants. Accounting for the 1996 welfare reform, which restricted
eligibility and imposed time limits, this figure increased to $88,000” (p. 107).
While the figure for first-generation immigrants is slightly negative, the fiscal
impact of immigrants’ descendants is projected to be positive enough to push
the aggregate impact well into positive territory.
11
Hanson, p. 13. Data on the annual inflows into the Earnings Suspense File can
be found at this site: http://www.ssa.gov/oig/ADOBEPDF/A-03-03-23038.pdf

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Exhibit 8: Many Undocumented Immigrants Do Pay Taxes


Billions of dollars Millions
60 12
Earnings Suspense File*
50 10
Unauthorized Population (Estimate)
40 8

30 6

20 4

10 2

0 0

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004
*Employee wages reported to the Social Security Administration that
cannot be matched to a valid Social Security number.
Source: Social Security Administration. Pew Hispanic Center.

Furthermore, though immigrants from Mexico and Latin America tend to


have lower incomes, they also tend to be younger. This means that on the
margin, they mitigate the demographic shift of the US population as the baby
boom generation retires, and reduce the financial pressures on entitlement
programs. However, this impact is likely to be modest and ultimately
temporary. After all, immigrants get older too, so unless the flow of
immigrants continues to increase, the impact on the age distribution of the
population fades over time.

The situation at the state and local levels is very different. According to a
ruling of the Supreme Court, these jurisdictions cannot withhold public
However, at the state level, outlays education and emergency medical services from either legal or illegal
for immigrants may exceed the immigrants residing in the United States (Hanson, p. 13). As states generally
corresponding tax revenues. foot the bill for these services, outlays for immigrants likely outweigh the
corresponding tax revenues.

Because they earn less on balance, immigrants tend to rely more on welfare
benefits than the US-born population. Most strikingly, the percentage of
immigrants receiving noncash benefits (such as subsidized school lunches,
food stamps, subsidized housing, and Medicaid) is almost two times greater
than for natives, and the percentage of Mexican immigrants is three times
greater (Exhibit 9). It is also noteworthy that the ratio of individuals
receiving noncash benefits to those receiving cash benefits is much higher for
Mexican immigrants than for any other segment of the population. This
probably reflects the fact that unauthorized immigrants make up a large share
of this group, and it is easier for them to claim noncash benefits than it is for
them to access cash benefits.

A particular problem is that immigrants are less likely to be able to pay for
health care. While nearly five-sixths (86.5%) of native-born Americans have
health insurance, only two-thirds of the foreign-born population—and less
than half of those born in Mexico—are insured. A Houston-area study
“found that about one-fifth of the patients in its health system last year were
immigrants without documents, most of them from Mexico,” and costs for
undocumented immigrants amounted to 14% of the total for the system. The
federal government estimated that spending by California hospitals on illegal
immigrants who were not eligible for state or federal reimbursements

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Exhibit 9: Immigrants Claim Disproportionate Share of


Means-Tested Social Benefits
Percent Percent
60 60
Share of population receiving::
50 Noncash Benefits 50
Cash Benefits
40 40

30 30

20 20

10 10

0 0
Native Foreign-Born Mexico
Source: Census Bureau. Current Population Survey, March 2000.

amounted to more than $1 billion per year.12 Since the most prevalent reason
for hospitalization among the illegal immigrant population is pregnancy –
and the federal government is not absolved of its welfare obligations to these
so-called “anchor babies” by virtue of their status as American citizens – this
has become a particularly sore point for those hoping to stem the flow of
unauthorized immigrants into the United States.

The bottom line is that natives in states with large immigrant populations,
generous welfare benefits, and very progressive tax systems (for example
California, New York, and New Jersey) do subsidize immigrants. A study—
admittedly somewhat dated—from the National Research Council found that
transfers in California amounted to $1,178 per native household.13

Impact on Mexico and other emigrant nations

The flow of labor to the United States has a substantial impact on the home
countries of immigrants, particularly Mexico. Relative to size of the home
Nearly 10% of Mexican citizens are country’s economy, inflows from emigrants are large—for example, nearly
currently working in the United 10% of Mexican citizens are currently working in the United States. One
States. might expect that the economic effects are the opposite of those for the
United States, and indeed this is true in many cases—the labor supply
shrinks, wages are perhaps a bit higher than they would otherwise be, and so
on—though not all (elasticity of labor supply can work similarly in both
countries). However, the most obvious benefit for the Mexican economy,
and other sources of immigrant labor, is the flow of remittances from workers
in the United States.

The growing number of Mexican workers in the United States, along with
technological improvements that sharply reduced the costs associated with
international money transfers, has generated a very significant increase in the
flow of workers’ remittances to Mexico. In fact, in recent years remittances

12
“Texas Hospitals Reflect the Debate in Immigration,” New York Times, 18
July 2006.
13
Hanson, p. 23.

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have grown much faster than other current account receivables, turning these
inflows into a major anchor for Mexico’s external accounts and a key source
of income for many low-income households. Remittances grew from less
than 1% of GDP during the early 1990s to a record high 2.8% of GDP in
2006 (US$ 23.7bn, see Exhibit 10). In 2005, Mexico was the world’s third
largest recipient of workers’ remittances in value, trailing only India and
The diaspora of immigrants from China, whose populations are an order of magnitude larger.
Mexico and elsewhere generate a
sizeable flow of remittances to their In 2006 remittanc e equal to 66% of crude exports, 95% of the maquila sector
home countries. surplus, 128% of es wer FDI flows, and 190% of tourism receipts. From a
current account perspective, remittances are fast approaching the importance
of oil exports.

Exhibit 10: Remittances Have Surged Along With Immigration


Percent Millions
3.0 9
Workers' Remittances,
Share of Mexico's GDP (left) 8
2.6
Mexican Immigrants, 7
Entered US Since 1990* (right)
2.2 6

1.8 5

4
1.4
3

1.0 2
95 96 97 98 99 00 01 02 03 04 05 06 07
*Includes immigrants from Central America.
Source: Census Bureau. Pew Hispanic Center. Banxico.

The rapid increase in recorded remittances is in part a reflection of improved


statistical coverage and increased reporting requirements for these
transactions, leading to the booking of transfers that were hitherto made
through unreported channels. (The growth in total remittances since 2000
was driven almost entirely by a 265% increase in the number of recorded
operations, rather than an increase in their average size.) Another key driver
has been the significant drop in transactions costs, which prompted many
senders to start using formal financial channels, rather than unrecorded cash
or goods transfers. Since 1999 the cost of sending money to Mexico declined
from about 10% of the average transaction in 1999 to slightly over 3% in
2006. The share of remittances made via electronic transfer rose from about
half in 1995 to over 90% in 2006.

The impact of remittances on the Mexican economy comes not only from its
sheer magnitude (close to 3% of GDP) but especially its major micro
economic and regional impact. The destination of remittances is
concentrated in the Mexican states that have recorded the largest emigration
flows in recent years, which also tend to be among the poorest states of the
nation. In 2006, for the top five (out of 33 Mexican states) recipients,
remittances exceeded the total wage bill in the formal sector of the regional
economy. The top destination was the state of Michoacán with remittances
rising to a whopping 13.2% of GDP in 2006; that year no region in the

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country received less than 0.5% of regional GDP. 14 Survey data from the
Banco de Mexico reveal several basic themes behind remittance flows:

1. Most remittances are intended to support family members. The


beneficiaries tend to be the closest family members: parents (68%; almost
once a month), spouses (12%; almost twice a month), followed by siblings,
grandparents, sons, etc.

2. The bulk of remittances come from relatively new migrants.


Remittances tend to fall the longer a worker has been abroad. This is
consistent with evidence from other emigrant nations and suggests that (1)
the sender-recipient links weaken over time, (2) the emigrant gets dependents
(wife, children, etc.) to migrate to the United States, (3) the number of needy
dependents declines (e.g. parents die, younger siblings grow up and enter the
job market, etc.), and/or (4) previous transfers make recipients better off.

3. Remittances go towards consumption. The bulk of the money received


is allocated to consumption: specifically, current consumption (e.g. food,
utility bills) 86.4%, education 6.3%, home improvement 3.2%, other 4.1%.

The Mexican authorities are well aware of the large economic incentives to
emigrate and recognize that it might take a while before the Mexican-US
wage differential tightens enough to render emigration unattractive for large
segments of the population. (About 60% of those emigrating to the United
States were employed in Mexico when they decided to leave.) This
highlights the urgency of deep structural reforms to increase the efficiency of
the Mexican economy and generate more and better job opportunities.

Emigration and the remittances it has generated have undoubtedly had a large
Remittances have lowered poverty positive economic effect on the recipients and the economies of some of the
levels among important segments of poorest states in Mexico. Remittances have (1) increased disposable income
the Mexican population and served and therefore consumption, (2) lowered poverty levels among important
as an important source of funds for segments of the population, (3) served as an important source of funds for
investment in human and physical investment, both in human capital (health and education) and in physical
capital. capital, (4) eased financing constraints for some credit-constrained
households, and (5) assisted in providing seed capital for a number of small
businesses. As examples, survey data show that children in households that
receive remittances reached a higher level of schooling that those in
households that did not, and it is estimated that remittances are the source of
almost 20% of the capital invested in small urban businesses.

At the country level, remittances also contribute decisively to overall macro


stability as they allow for an expansion of domestic demand without
generating imbalances in the external accounts. In this regard, they are like an
ongoing flow of tax refunds with no budgetary consequence and with
favorable exchange rate effects to boot. As a share of imports, remittances
have grown from about 5% during the 1990s to approximately 9% during
2005-06. The flow of remittances reached close to 4% of private
consumption on average during 2005-06, up from about 1.5% in the 1990s.
Thus, without remittances per capita consumption would have been about 3%
lower than what was observed, and GDP growth would have been about
0.3% lower per year. The effects may be even larger because, by
strengthening the current account, workers’ remittances have improved the
financial position of the country and consequently access to international
capital markets by both the sovereign and corporates.

14
Banco de México (2007), Las Remesas Familiares en México.

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Remittances could also be a powerful automatic stabilizer of real business


cycles in Mexico. That is, during downturns the number of households in
need of income support increases which leads family members (emigrants) in
the United States to increase the flow of remittances back to Mexico. This
supports/smoothes consumption levels during periods of low or negative real
GDP growth. However, this automatic stabilizer feature of remittances has
weakened in recent years as the real business cycle in Mexico is increasingly
aligned with the business cycle in the United States. As the number of
“needy” households in Mexico increases the senders in United States are
more likely to be facing financial difficulties and job insecurity as well.
Thus, a deceleration of activity in the United States now has stronger
spillover effects into the Mexican economy—via the strong trade and
financial links between the two countries.

Reflecting these stronger cyclical links, the growth of remittances has slowed
sharply since early 2006, from 24.8% (year-to-year) in the first half of that
year, to 10.3% in the second half, to 1.0% during 2007, and most recently to
an outright decline of 2.9% during 1Q2008 (Exhibit 11). Other factors are
also at work, including a high base effect, a fading boost from improved
statistical reporting, better border enforcement by the US authorities, and
stricter enforcement of labor laws with growing focus on US businesses that
employ undocumented workers. However, the most important factor appears
to be the marked deceleration in the US construction sector, an intense user
of Mexican labor. By itself, the US construction sector accounts for about
one-fifth of remittances from Mexican workers.

Exhibit 11: Growth in Remittances is Slowing Down


Billions of dollars Percent change, year ago
The rapid slowdown of remittances 8 40
in 2007 reflects many factors, but Worker Remittances:
most importantly the collapse in US Quarterly Flow s (left)
construction activity—a key source 6 Grow th Rate (right) 30
of such payments.
4 20

2 10

0 0

-2 -10
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2004 2005 2006 2007 2008
Source: Banxico.

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Goldman Sachs Economic Research Global Economics Paper No. 168

IV. The Ideal Immigration System—and the American One


Current US immigration policy is unrealistic and inefficient. The
immigration system fails to register the majority of new migrants, often
operates at a glacial pace, and leaves some key economic needs unmet.

To evaluate the country’s immigration system today, it is helpful to have a set


The US immigration system fails to of goals or a benchmark for comparison. What would a rational immigration
register the majority of new policy look like?
migrants, often operates at a
glacial pace, and leaves some key 1. All immigration would occur in a legal framework. Both the United
economic needs unmet. States and immigrants would be better off if all immigration occurred through
legal channels. From the standpoint of US national interests, the potential
security risks of illegal immigration have been well documented.
Government administration would also be easier at many levels if immigrants
were properly registered. From the standpoint of migrants, illegal border
crossings are costly (“coyotes” charge thousands of dollars for assistance
with border crossings) and dangerous. Foreigners working illegally in the
United States are also less likely to avail themselves of basic legal
protections, and are at greater risk of abuse by employers or others.

2. Immigration proceedings would be swift, clear, and consistent. Ideally,


would-be immigrants could easily determine how to apply for legal entry,
quickly receive a decision on their applications, and (if approved) begin
working in the United States with little delay. Perhaps more important than
speed is a perception of fairness: two immigrants with similar skill sets and
demographic characteristics would have roughly the same chance of being
admitted to the United States.

3. Immigrant labor would complement rather than substitute for


American workers. Ideally, immigrants would fill gaps in the native skill
distribution, and the inflow and outflow of immigrants would dampen
business cycle fluctuations by allowing changes in labor supply to help offset
changes in demand.

Unfortunately, the reality of the current legal immigration system – the


details of which are provided in Box 2 on p. 20 – falls far short of this ideal:

1. The majority of new immigrants are in the country illegally. As we


have noted, illegal immigration now outstrips legal arrivals. One huge gap in
the system is the lack of information about when legal entrants depart.
According to the Pew Hispanic Center, as many as half of all unauthorized
workers may have entered the country legally but overstayed short-term
visas. Despite the existence of a legal temporary worker program (H2A), it is
hugely underutilized because of its restrictive provisions.
Despite large overall immigration
flows, the skilled labor market is 2. Decisions on visa applications occur at a glacial pace and seem
extremely tight. inconsistent. A massive backlog of applications coupled with low annual
quotas has led to extremely long waiting periods for some family preference
visas (Exhibit 12). For example, a Mexican woman trying to use a sister with
American citizenship as a means of legal entry into the United States would
have had to have applied for a green card almost 13 years ago in order to be
admitted in April 2007. Meanwhile, the playing field is clearly skewed;
some countries receive preferences out of proportion to their size or desired
emigration to the United States, while the presence of even one family
member in the United States can greatly help one’s chances (hence the
phenomenon of “chain migration”).

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3. The econonomic benefit is significant, but far from optimal.


Immigrants can and do aid the American economy, as described in the
preceding section (pp. 9-14). However, despite large overall immigration
flows, the skilled labor market is extremely tight. The unemployment rate for
people with a bachelor’s degree or more was just 2.2% in January 2008. In
some occupations, the unemployment rate was much lower: for example,
1.2% for healthcare practitioner and technical occupations, and 1.9% for
architecture and engineering occupations. High-tech employers have been
complaining vociferously that they cannot fill thousands of high-paying jobs
because of visa restrictions and a lack of qualified workers. In the 2007 fiscal
year, the H-1B visa quota of 65,000 was exhausted in the first day, when the
US Citizenship and Immigration Service received 133,000 applications.

Exhibit 12: Migrants Face Long Wait for Family Reunions


Years Years
A massive backlog of applications 20 20
coupled with limited annual quotas Family-Sponsored Preferences:
has led to extremely long waiting 16 16
1st 2A Others*
periods for some family preference
visas. 12 12

8 8

4 4

0 0
China India Philippines Mexico Others
(Country of Origin)
*Average waiting time for 2B, 3rd, and 4th family-sponsored preferences.
Source: Department of Homeland Security.

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Goldman Sachs Economic Research Global Economics Paper No. 168

Box 2: The US Immigration System


Current Utilization Typical Term
Program Beneficiaries Problem
Annual Cap in 2006/7 of Visa
H-1B Visa Skilled workers in certain 65,000 plus Cap 3 years Demand for skilled foreign
1
"specialty occupations" exemptions Reached labor far exceeds current cap

2
H-2A Visa Temporary agricultural None Very Low 1 year or less High cost and administrative
workers headache: employers must
demonstrate they cannot find
US workers, must arrange for
workers' housing and meals,
and must pay, at a minimum,
the Adverse Effect Wage Rate
(above the federal minimum
wage)

H-2B Visa Temporary 66,000 Cap 1 year or less Cap is too low; same
nonagricultural workers Exceeded administrative difficulties and
high costs as pertain to the H-
2A visa

"Green Individuals with family 416,000- Cap Indefinite Qualifying formula


card" ties to U.S. 675,000, Exceeded complicated; the merits of
3
citizens/LPRs , certain subject to effectively discriminating
job skills, or asylee or numerous against people from countries
4
refugee status; exemptions with large populations and/or
individuals from coun- a high number of people
tries with low levels of wishing to come to the U.S.,
immigration to US such as Mexico, India, and
China, is certainly debatable

Other Visas Various specific groups, N/A N/A N/A Only applicable to relatively
including foreign small groups of people with
government officials, particular skills working in
athletes, enter-tainers, very specific occupations
workers with
"extraordinary abilities,"
religious workers, etc.

Notes:
1. The cap limits visa issuance to 65,000 new applicants per year, but allows an additional 20,000 visas for foreign
workers who have received master degrees or higher from a U.S. institution, and exempts education and non-profit
sector employees. H1-B extensions, usually for an additional three years, are not counted under the cap.
2. In 2004, the Department of Homeland Security recorded 22,141 arrivals for H-2A visa holders. Note that a given
individual could have multiple arrivals in a given year.
3. Legal permanent residents.
4. The limits placed on annual conferrals of legal permanent resident status are based on a rather complicated formula of
the following nature: (1) Family-sponsored preferences limit = Between 226,000 and 480,000, depending on
admissions in preceding years; (2) Employment preference limit = 140,000 + any unused family-sponsored
preferences from the prior year; (3) Diversity preferences = 50,000; (4) individual country limit = 7% of all family-
sponsored and employment preferences; (5) Refugees having lived in the U.S. for one year or more, assylees and
immediate relatives of U.S. citizens (spouses, parents, and children) are exempt from the quotas.

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V. Making the Immigration System Work


Assuming one can find an ideal immigration policy, enacting it into law is
likely to be a challenge. As noted earlier, the federal government has
struggled to reform immigration policy several times in the 20th century,
usually creating as many problems as it resolves.

President Bush made immigration reform a top priority after winning


reelection in 2004. Under a Republican majority in 2006 and under a
Democratic majority in 2007, the Senate debated legislation that expanded
temporary work programs and substantially increased the cap on green cards.
Most controversially, it also provided a legal path to permanent residence for
illegal immigrants. In 2006, the Senate passed an immigration reform bill in
2006 with 62 votes, but it was unable to reconcile differences with a
dramatically different House proposal. In 2007, it failed to find agreement on
a slightly more aggressive compromise crafted by Democrats.

Congress is unlikely to enact reform until at least 2009. If a compromise is


reached in the next several years, we expect it to follow the broad contours of
recent Senate proposals.

Makings of a Compromise

Any future compromise, particularly if it is modeled on recent attempts, is


likely to address three issues:

1. Border enforcement and employment verification: Enforcement


Tighter security is likely to be a provisions have gained importance in the immigration debate in recent years,
prerequisite to any politically and tighter security is likely to be a prerequisite to any politically workable
workable immigration bill. compromise. In the 2007 debate, these benchmarks were:

• Raise the number of border patrol agents from roughly 12,000 to 18,000;
• Erect several hundred miles of vehicle barriers and fencing, and install
various electronic border surveillance equipment;
• End the “catch and release” program; and
• Establish a secure identification program and electronic employment
eligibility system.

As a result of piecemeal funding that Congress has enacted over the last few
years, the Bush Administration has begun to increase border security
manpower and infrastructure. The Congressional Budget Office estimates
that the types of enforcement measures noted above would reduce the flow of
illegal immigrants into the United States by one-quarter, with less of an
impact on illegal immigrants already in the United States.

2. Expansion of temporary immigration: The Senate bill, like most other


proposals, would have expanded several existing visa programs to clear the
backlog of applications and to boost legal employment-related immigration:

• H1-B (skilled workers): There is fairly broad support for raising H1-B
visas for skilled workers, which are currently capped at 65,000 per year
but rose as high as 195,000 in 2002 and 2003, as a result of legislation
enacted in 1998. Most H1-B beneficiaries work in occupations with very
low unemployment rates, making displacement of native-born workers a
minor concern. The latest Senate proposal would have raised the cap to
115,000 per year for 2008 (equivalent to 0.7% of the college-educated

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Goldman Sachs Economic Research Global Economics Paper No. 168

labor force), and to 180,000 for 2009 and beyond. Any increase in the
Most H1-B beneficiaries work in allocation is likely to be fully utilized. While there is general agreement
occupations with very low on the need to expand the H1-B program, most proposals also include
unemployment rates, making new restrictrions on the L visa, which allows intracompany transfers and
displacement of native-born which some companies have used to circumvent H1-B caps.
workers a minor concern.
• H2-A visas and agricultural workers: Last year’s Senate proposal
included an overhaul of the existing agricultural worker visa program to
reduce administrative burdens on employers. Most proposals, including
the recent Senate compromise, would preserve the current requirement
that workers be paid the highest of the statutory minimum wage, the
prevailing wage, or the ‘Adverse Effect Wage Rate’ as well as require
employers to cover some housing and transportation costs. Provisions
dealing with undocumented workers would also create a separate process
for agricultural workers to obtain legal status, which would give them
priority over other undocumented workers in obtaining permanent
residency.

• Y Visas (guest workers): The Senate compromise would create 200,000


annual visas under a temporary guest worker program, dubbed the Y
visa. Although a majority of lawmakers are comfortable with a guest
worker program in concept, some have raised concerns that a large-scale
guest worker program could lead to a visa overstay program as guest
workers whose visas have expired decide not to leave. Although the labor
force under the Y visa would supplement other sources of labor, it would
be less flexibile as it would require employers to certify that temporary
workers are not displacing U.S. workers and that temporary workers will
be paid prevailing wages.

3. Permanent residency and transition to legal status: In addition to the


temporary work visas noted above, recent proposals have included policies to
Recent proposals have included transition undocumented immigrants to legal status, to establish permanent
procedures to transition residency for that population, and to streamline traditional ‘green cards.’
undocumented immigrants to legal
status. • Z Visas: The Senate bill proposed a new Z visa for undocumented
workers present as of January 1, 2007. Eligibility would require that the
head of household file for the visa in the country of origin and pay
several thousand dollars in penalties and fees. Provisional legal status
would be granted in the interim. Z visa holders could be granted
permanent residence, but only after existing immigration backlogs had
been cleared.

• Green Cards: The current green card program would be split into two
groups. Family-based visas would be increased to 567,000 annually, but
would then drop to 127,000 once backlogs are cleared. The temporary
increase is meant to clear the large number of pending family-based
applications, which would take several years at current rates. An
additional 247,000 merit-based visas would be issued each year. The
current quota on new legal permanent residents (LPRs) already includes
some employment preferences to facilitate immigration of skilled,
educated workers. Although immigrants in the top two priority
categories do not face long waiting times – unless they are from India
and China – lower priority immigrants can face waiting times of six years
or more.

Issue No: 168 22 May 27, 2008


Goldman Sachs Economic Research Global Economics Paper No. 168

The New ‘Third Rail’ of American Politics

Despite apparent agreement on the key concepts that must be included in a


comprehensive immigration proposal, reform efforts have stalled as
incumbent lawmakers feared the political consequences of supporting
reforms. In many ways the issues politicians face in the immigration debate
are similar to the obstacles to other broad economic reforms: the opposition
from a vocal minority outweighs a less politically active majority, as well as
the broader benefits of such reforms. In this case, the minority that prefers
less immigration is nearly as large as the majority that believe it should be
held steady or expanded (see exhibit 13). Similar to other reform efforts,
immigration-related issues have become a new ‘third rail’ of American
politics that no politician dares to touch, at least not until after the 2008
election. For the most part, disagreement centers on a few key issues.

1. Should the focus be illegal or legal immigration? One of the key


One of the key obstacles to obstacles to comprehensive immigration reform has been an intense political
comprehensive immigration reform focus on illegal immigration, despite broader support for increased legal
has been an intense political focus immigration. Much of the opposition to comprehensive immigration reform
on illegal immigration. is trained on “amnesty” provisions for undocumented workers. In theory, the
amnesty issue could be put aside entirely simply by expanding legal
immigration pathways and allowing illegal immigrants to take advantage of
these new rules gradually, just as new legal immigrants would. However,
practical complications may make such a solution unworkable, since most
immigrants must apply abroad for permanent legal residency. Forcing them
to return home would be burdensome and more importantly it is likely that
many of them would simply opt to remain in the United States illegally. A
solution to this question will be the linchpin in any eventual compromise.

Exhibit 13: A Majority Supports Greater Legal Immigration


Percent Percent
90 90
Share of respondents who
80 80
believe immigration should be:
70 kept at present level 70
60 decreased 60
increased
50 50
40 40
30 30
20 20
10 10
0 0
1993 1995 1997 1999 2001 2003 2005 2007
Source: The Gallup Organization.

2. Guest worker programs, while broadly supported, face some concerns


over potential abuses. Some policymakers worry that expansive temporary
visa programs could result in visa overstays, eventually increasing the
number of illegal immigrants. Others point out that guest workers could be
used to replace American workers, though requirements on employers to
demonstrate otherwise may alleviate these concerns somewhat.

Issue No: 168 23 May 27, 2008


Goldman Sachs Economic Research Global Economics Paper No. 168

3. Lawmakers must strike a balance between economic and social


considerations. Legal permanent resident admissions are dominated by
family-related admissions, which made up almost two-thirds of total
admissions in 2006. While there is some agreement that the system should
focus on skill-based admissions more than it does now, the shift away from
the family-based system has caused problems among some Democrats who
have otherwise been fairly supportive of immigration reform efforts.

Progress is Unlikely Before 2009

Any eventual compromise is likely As noted, in the summer of 2007 the Senate failed to pass immigration
to resemble last year’s Senate reform for the second time, following failure to reach House-Senate
proposals. agreement in 2006. Comprehensive immigration reform is unlikely to be
debated again until 2009, at which point the outcome depends on political
control following this November’s election.

Despite disagreement on broad reforms, some incremental changes may be


considered in the interim. The Bush Administration has proposed reforms to
broaden use of temporary agricultural and non-argicultural guest worker
programs (the H-2A and H-2B programs). As noted in Box 2, agricultural
work visas are underutilized, due to administrative delays and housing and
wage requirements. The Administration is apt to reduce administrative
burdens, but may lack the authority to modify other requirements that raise
the cost to companies of employing these workers over illegal laborers.

Enforcement is likely to increase absent broader reforms. The Bush


Administration has announced new rules to tighten worksite immigration
enforcement. Specifically, it would treat the notice that the government sends
to employers indicating that an employee’s Social Security number does not
match its records as notice that the employee is an unauthorized immigrant. If
implemented, this could reduce demand for undocumented workers.
However, a substantial portion illegal workers are concentrated in industries
where enforcement would be difficult. A federal court has blocked
implementation of the changes, but the Bush Administration plans to revise
the rules in hopes of lifting the injunction.

Border enforcement has tightened Border enforcement has also tightened and may tighten further. In 2006, after
absent comprehensive immigration a failure to compromise on a final immigration bill, Congress enacted $1.9
reform, and may tighten further. billion in additional border security measures. In 2007, President Bush
proposed $4.4 billion in enhanced enforcement, and it is possible that
additional border security resources could be approved again this year.

The medium term outlook for immigration reform depends in part on the
outcome of the election. Most observers, including ourselves, assume
Democrats will maintain – and likely expand – their majorities in the House
and Senate. However, the election is likely to increase support only
incrementally: only two of the Senators whose seats face a serious challenge
voted against the legislation in 2006.

As for the presidential candidates themselves, Senator Obama or Senator


Clinton is likely to be as supportive of immigration reforms as President
Bush has been. Senator McCain, for his part, led early immigration efforts in
the Senate and could have somewhat greater success in convincing
Republicans to support reform.

Issue No: 168 24 May 27, 2008


Goldman Sachs Economic Research Global Economics Paper No. 168

VI. Conclusion: An Opportunity on Hold


For the next administration, immigration reform represents a substantial
opportunity, both politically and economically. On the political front, US
citizens across the political spectrum report dissatisfaction with the current
system, and many companies are frustrated they cannot access willing foreign
Immigration offers substantial workers in segments of the US labor markets that remain tight. The system
benefits, including faster overall does not serve immigrants well either, given the bureaucratic hurdles
growth, greater responsiveness of discussed above and the fact that millions of immigrants work without any
labor supply to economic legal permission.
conditions both in the United States
and in immigrants’ home countries, Economically, immigration offers substantial benefits. First, it increases the
and dramatic improvement in the growth rate of the labor force, thereby boosting potential GDP growth; as
living standards of many migrants. noted previously, immigrants have accounted for roughly half of recent labor
force growth. Notably, an increase in the immigration rate could help absorb
the excess inventory now overhanging the US housing industry, and it could
mitigate incipient pressures on the federal budget due to the impending
retirement of the baby boom generation. Second, more open immigration
increases the responsiveness of labor supply to economic conditions both in
the United States and in immigrants’ home countries. Finally, immigration
dramatically improves the living standards of many migrants and their
families, with little net impact on wage levels, the US income distribution, or
overall government spending. Broader reform could accentuate these benefits
by improving the match of labor supply and demand, even as authorities gain
better control of US borders.

Over the next year or two, however, this opportunity will likely be on hold,
and the rate of immigration to the United States is apt to decline. In part, this
is because of policy—with a stalemate on a comprehensive immigration plan,
the default path is further tightening of border controls. In part, it is because
of economics—the weaker US economy and labor market will prove less of a
The weak US economy and labor draw for migrants and more of a political hurdle for reform until growth turns
market will draw fewer migrants decisively stronger for an extended period, probably not until 2010. The
until growth turns decisively lower flow could cut immigration by several hundred thousand workers per
stronger for an extended period, year, predominantly among undocumented migrants, reducing labor force
probably not until 2010. growth by 0.2-0.3 percentage point compared to the rate over the past few
years. The potential growth rate of the US economy will be reduced a
corresponding amount until the business cycle and government policies
become more favorable to immigration.

In the long term, the United States is likely to remain an attractive destination
for migrants from around the world. The United States’ higher education
system and professional opportunities in areas like technology and finance
will remain a draw for skilled migrants, while wage levels well above those
in much of Latin America will continue to attract unskilled workers.
Meanwhile, growth in the native-born labor force is likely to slow, given the
overall aging of the US population and retirement of the “baby boom”
generation. The Pew Hispanic Center has estimated that essentially all of the
increase in the US workforce until 2050 will be due to new immigrants
arriving during this period (and their US-born descendants). In short, the
United States is likely to remain a nation of immigrants for years to come.

Andrew Tilton
Kent Michels
Alec Phillips
Alberto Ramos
May 27, 2008

Issue No: 168 25 May 27, 2008


Goldman Sachs Economic Research Global Economics Paper No. 168

Recent Global Economics Papers


Paper No. Title Date Author

Jim O'Neill, Erik F. Nielsen and Saleem


167 In defence of Sovereign Wealth Funds 21-May-08
Bahaj

166 Building the World: Mapping Infrastructure Demand 24-Apr-08 Sandra Lawson, Raluca Dragusanu

165 Vietnam: The Next Asia Tiger In the Making 16-Mar-08 Helen Qiao

164 Women Hold Up Half the Sky 4-Mar-08 Sandra Lawson

Dominic Wilson and Raluca Dragusanu


163 Building On a Decade of Progress–Our 2007 GES Scores 14-Dec-07

Jan Hatzius, Edward F. McKelvey,


162 Housing (Still) Holds the Key to Fed Policy 27-Nov-07
Andrew Tilton, Seamus Smyth
Francesco Garzarelli, Sandra Lawson
161 Bonding the BRICs: A Big Chance for India’s Debt Capital Market 7-Nov-07
and Tushar Poddar

160 Russia: A smooth political transition 22-Oct-07 Rory MacFarquhar

159 Europe’s Immigration Boom: Causes and Consequences 26-Jul-07 Ben Broadbent and Istvan Zsoldos

Dirk Schumacher, Jan Hatzius and


158 Rising Income Inequality in the G3 6-Jul-07
Tetsufumi Yamakawa

157 Latin America: More Than Just a Commodity Play 22-Jun-07 Alberto M. Ramos

156 Can the Carry Trade Carry On? 7-Jun-07 Jens Nordvig-Rasmussen

155 The GCC Dream: Between the BRICs and the Developed World 17-Apr-07 Ahmet Akarli

154 Gender Inequality, Growth and Global Ageing 3-Apr-07 Kevin Daly

153 The N-11: More Than an Acronym 28-Mar-07 Dominic Wilson and Anna Stupnytska

152 India’s Rising Growth Potential 21-Jan-07 Tushar Poddar

151 US Balance of Payments: Is It Turning and What Is Sustainable? 16-Jan-07 Jim O'Neill

150 The 'B' in BRICs: Unlocking Brazil's Growth Potential 4-Dec-06 Paulo Leme
Francesco Garzarelli, Sandra Lawson
149 Bonding the BRICs: The Ascent of China’s Debt Capital Market 20-Nov-06
and Michael Vaknin
148 You Reap What You Sow: Our 2006 Growth Environment Scores 8-Nov-06 Dominic Wilson and Anna Stupnytska
(GES)
147 Globalisation and Disinflation – Can Anyone Else ‘Do A China’? 5-Oct-06 Jim O'Neill, Sun-Bae Kim and Michael
Buchanan
146 China's Investment Strength is Sustainable 3-Oct-06 Hong Liang
145 Japan’s Pension Story 6-Sep-06 Dambisa Moyo
144 Capital Markets and the End of Germany Inc. 23-Aug-06 Dirk Schumacher
143 The US Productivity Boom: Far From Finished 17-Jul-06 Andrew Tilton
142 Europe in a Globalised World: Winners and Losers 6-Jul-06 Ben Broadbent and Erik F. Nielsen

141 GloCo-Motives: Arguing the Case for Globalization 1-May-06 Jim O'Neill and Sandra Lawson

140 Can Hong Kong Afford to Keep the Peg? 27-Apr-06 Enoch Fung

139 Long-Term Price Forecast vs. Inflation-Linked JGB (JGBi) 19-Apr-06 Tetsufumi Yamakawa, Naoki Murakami,
Yuriko Tanaka and Daisuke Yamazaki

Issue No: 168 May 27, 2008


Goldman Sachs Economic Research Global Economics Paper No. 168
1
Jim O’Neill, M.D. & Head of Global Economic Research
2
Global Macro & Dominic Wilson, M.D. & Director of Global Macro & Markets Research
1
Markets Research Francesco Garzarelli, M.D. & Director of Global Macro & Markets Research
2
Jens J Nordvig-Rasmussen, V.P. & Senior Global Markets Economist
1
Binit Patel, E.D. & Senior Global Economist
1
Thomas Stolper, E.D. & Senior Global Markets Economist
2
Peter Berezin, V.P. & Global Economist
1
Kevin Edgeley, E.D. & Technical Analyst
1
Fiona Lake, E.D. & Global Markets Economist
1
Salman Ahmed, Associate Global Markets Economist
1
Themistoklis Fiotakis, Associate Global Markets Economist
1
Michael Vaknin, Associate Global Markets Economist
1
Sergiy Verstyuk, Associate Global Markets Economist
1
Swarnali Ahmed, Research Assistant, Global Macro
2
Raluca Dragusanu, Research Assistant, Global Macro
8
Americas Paulo Leme, M.D. & Director of Emerging Markets Economic Research
2
Jan Hatzius, MD & Chief US Economist
12
Luis Cezario, V.P. & Senior Brazil Economist
2
Edward McKelvey, V.P. & Senior US Economist
2
Alberto Ramos, V.P. & Senior Latin America Economist
2
Andrew Tilton, V.P. & Senior US Economist
7
Alec Phillips, V.P. & Economist, Washington Research
2
Pablo Morra, V.P. & Latin America Economist
2
Malachy Meechan, Associate, Latin America/Global Markets
2
Seamus Smyth, Associate US Economist
2
Kent Michels, Research Assistant, US
2
Shirla Sum, Research Assistant, US
1
EMEA Erik F. Nielsen, M.D. & Chief European Economist
1
Ben Broadbent, M.D. & Senior European Economist
4
Rory MacFarquhar, M.D. & Senior Economist
9
Dirk Schumacher, E.D. & Senior European Economist
1
Ahmet Akarli, E.D. & Economist
11
Ashok Bhundia, E.D. & Economist
1
Kevin Daly, E.D. & European Economist
1
Dambisa Moyo, E.D. & Economist
1
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3
Natacha Valla, E.D. & European Economist
1
István Zsoldos, E.D. & European Economist
1
Saleem Bahaj, Research Assistant, Europe
1
AnnMarie Terry, Research Assistant, Europe
1
Anna Zadornova, Research Assistant, Europe
1
Asia Tetsufumi Yamakawa, M.D. & Co-Director of Asia Economic Research
5
Michael Buchanan, M.D. & Co-Director of Asia Economic Research
5
Hong Liang, M.D. & Co-Director of Asia Economic Research
6
Naoki Murakami, V.P. & Senior Japan Economist
5
Enoch Fung, V.P. & Asia Pacific Economist
10
Tushar Poddar, V.P. & Economist
13
Goohoon Kwon, V.P. & Korean Economist
6
Yuriko Tanaka, V.P. & Associate Japan Economist
6
Chiwoong Lee, Associate Japan Economist
5
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5
Yu Song, Associate Asia Pacific Economist
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10
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1
Admin Linda Britten, E.D. & Global Economics Mgr, Support & Systems
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Issue No: 168 May 27, 2008


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