What Explains the Wages of Undocumented Workers?

The Issue:

Undocumented foreign workers earn lower wages than legal immigrants and native workers with similar skills. What are the reasons for this wage gap? The answer is important for understanding the economic effects of a range of policies, including providing driver’s licenses to undocumented workers (as recently approved in New York State), changing occupational licensing requirements, and providing a path to legal status.

Individuals lacking legal status face obstacles that limit their job options and lower their productivity.

The Facts:

• Undocumented immigrants cannot legally work in the United States, yet they comprise nearly 5 percent of overall U.S. employment — and a larger share of workers in particular industries and occupations. An estimated 7.6 million unauthorized immigrants ages 18 and older were in the U.S. labor force in 2017 (representing 4.6 percent of the labor force), according to a report by the Pew Research Center. There is large variation in the participation of undocumented immigrants in different industries, with undocumented immigrants estimated to make up a relatively large share of employment in agriculture (18 percent), construction (13 percent) and leisure and hospitality (10 percent) (see here). Undocumented workers were estimated to account for about 3 percent of private sector GDP in 2011-2013. 
• The hourly wage for undocumented workers is much lower than for U.S.-born workers and legal immigrants — but much of this difference can be explained by differences in education and in other factors. By their very nature, there are no comprehensive official counts of undocumented workers and their wages. In order to study this population, most researchers use a procedure that ascribes undocumented status to individuals in existing databases, based on a series of demographic and socioeconomic characteristics.  Using this type of data, we estimate that, on average, the hourly wages of undocumented workers are 42 percent lower than the wages of U.S.-born workers and legal immigrants. To a large extent this reflects differences between these groups of workers. Undocumented workers tend to have lower educational attainment than documented workers. In addition, there may be differences in skills other than education – for instance, an imperfect command of English or lack of other local skills can be associated with lower wages until workers acquire those skills. 
• However, when you compare undocumented workers to documented workers with similar education and skills, undocumented workers continue to earn lower wages (although the gap is smaller). We find that the wage gap between documented and undocumented workers in the period 2010-2012 falls to 8 percent when accounting for observable characteristics other than occupation. Additional evidence of a wage penalty associated with undocumented status comes from studies that tracked immigrant wages following the passage of the Immigration Reform and Control Act (IRCA) in 1986. Close to 1.7 million long‐term unauthorized workers obtained legal status through IRCA and studies of the IRCA legalization process have shown that gaining legal status resulted in higher earnings. For instance, one study analyzed the wage effects of the 1986 IRCA amnesty and found that the wage penalty for being unauthorized amounted to 14 to 24 percent. 
• What accounts for this wage gap? There are several possible explanations for why undocumented workers may earn lower wages than otherwise similar workers. One reason may be that undocumented workers have weak bargaining power, which may result in being paid below-market wages. It is also possible that undocumented workers have lower unobservable skills such as poorer physical and mental health. Finally, being undocumented may limit workers' ability to maximize their potential. Individuals lacking legal status face obstacles that reduce their access to jobs and, as a result, they may be unable to work in jobs that are a good match for their productive abilities. Unlike documented workers who are able to find work in the occupations for which they have greater aptitude and where they are likely to be most productive, the employment options of undocumented workers are limited to occupations with low exposure to apprehension and weak enforcement (this is why we do not control for occupation in some of our analyses). In addition, because of professional licensing, in many states undocumented workers are effectively barred from entering certain professions including teachers and lawyers, healthcare practitioners, policemen and firefighters. Correspondingly, relative to similarly skilled documented workers, undocumented workers are over-represented in certain occupations, such as cleaning and maintenance, restaurants and construction. 
• Determining the relative importance of these factors is important for policy-making. Suppose that the main reason for the increase in wages is that legal status increases bargaining power. From an economy-wide perspective, the main implication is that a path to legal employment would lead to a redistribution of income from employers to employees, since employers would not be able to pay below market wages once workers gain legal status. Such a change would leave GDP unaffected. On the contrary if legal status provides wider access to jobs that better match the undocumented workers’ skills, the resulting wage increase stems from increased productivity. As a result, we should expect a net increase in GDP from policies that provide a path to legal employment.
• Distinguishing empirically which factors account for lower wages of undocumented workers is difficult. In our study, we try to estimate how much of the undocumented wage penalty is due to lost productivity by comparing the wage gaps for undocumented workers who are visibly overqualified (by virtue of having a higher educational attainment than is typical for their occupation) to the documented-undocumented wage gaps for workers with the typical educational qualifications for their occupation. Many undocumented workers are over-qualified for the jobs that they hold. We estimate a 75% over-qualification rate for undocumented workers with a high-school degree (aged 28-37), compared to 48% among documented workers with the same education and in the same age group. Likewise, 70% of undocumented college graduates are over-qualified, compared to 45% among documented college-graduates. Thus, roughly, over-qualification is about 50% higher among undocumented workers with at least a high-school degree, relative to documented ones. 
• However, some undocumented workers have overcome these barriers and obtained jobs aligned with their education levels. We assume that these workers have largely avoided the productivity loss associated to lack of legal status. Then comparing the (conditional) documented-undocumented wage gap for these workers within an occupation to the corresponding gap for workers suffering over-qualification, provides a measure of the productivity penalty arising from lack of legal status. Our analysis suggests that lack of legal status reduces the wages of undocumented workers by about 12% due to occupational barriers. We also find the same productivity penalty when we restrict the analysis to Dreamers, defined as undocumented workers that arrived in the United States as children—whose education is most similar to that of natives since most of it has taken place in the United States. It is worth noting that the overall productivity loss may be substantially higher if undocumented youth under-invest in human capital because of the anticipation of labor market barriers in occupations with high skill requirements (as shown here and here), or if lack of legal status increases stress and anxiety (as in here and here).