The Effects of Illegal Workers on Productivity

Peter Orszag of the CBO made a number of interesting points this morning. He's a fiscally conservative, left-leaning economist, and I'm sure that he would agree with Dean Baker on many, many things. But on one of Baker's top talking points, there seems to be a big difference. Baker is worried about the recent sharp decline in productivity growth; Orszag isn't.

Orszag takes a line close to that of the Economist, pointing out that "a lot of the downtick in productivity growth seems to be related to the fact that employment is still stable in the construction sector while income has declined." Baker doesn't like that line of argument:

This is a sector that relies heavily on undocumented workers. The article suggests that firms are reluctant to lay people off and therefore are "hoarding" workers in the face of the housing downturn. That is behavior that you would expect to see in a heavily unionized sector. It is more likely that many of the undocumented workers never showed up on the payrolls during the upturn, so there is no job loss recorded when they stop being employed during the downturn.

The thing is, you have to be consistent. Baker's quite right that in the construction industry, illegal workers tend to be the first to lose their jobs. That keeps official employment figures high, and with income in the sector falling, productivity numbers are sure to look atrocious.

But if you take into account the effects of illegal workers on productivity now, in the downturn, then you also need to take into account the effects of illegal workers on productivity during the construction boom. It could well be, in fact, that a large amount of the recorded productivity gains over the past few years was in fact attributable to large increases in the number of illegal workers in the construction industry.

The question is whether the fall in productivity is a temporary thing, which will be corrected when the other shoe drops in the construction industry, or whether it's something more serious. Maybe in fact it's the rise in productivity during the construction boom which we should be taking a second look at.