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Asset Management

The Underground Labor Force

Is Rising To The Surface

Robert Justich and Betty Ng, CFA

January 3, 2005

Illegal immigrants constitute a large and growing force in the political, economic, and

investment spheres in The United States. The size of this extra-legal segment of the

population is significantly understated because the official U.S.Census does not capture

the total number of illegal immigrants. In turn, the growth of the underground work force

is increasingly concealing the economic impact of this below-market labor supply. Our

research has identified significant evidence that the census estimates of undocumented

immigrants may be capturing as little as half of the total undocumented population. This

gross undercounting is a serious accounting issue, which could ultimately lead to

government policy errors in the future.

Though we cannot conduct an independent census of the United States population, as

investors, we need not accept the accuracy of the official census immigration statistics,

which are widely recognized as incomplete. There are many ancillary sources of data

that provide evidence that the rate of growth in the immigrant population is much greater

than the Census Bureau statistics. School enrollments, foreign remittances, border

crossings, and housing permits are some of the statistics that point to a far greater rate of

change in the immigrant population than the census numbers. At the risk of appearing

dogmatic or taking a leap of faith, we have applied the rate of growth from these other

areas and have drawn several conclusions about the current immigration population:

1. The number of illegal immigrants in the United States may be as high as 20

million people, more than double the official 9 million people estimated by the

Census Bureau.

2. The total number of legalized immigrants entering The United States since 1990

has averaged 962,000 per year. Several credible studies indicate that the

number of illegal entries has recently crept up to 3 million per year, triple the

authorized figure.

3. Undocumented immigrants are gaining a larger share of the job market, and

hold approximately 12 to 15 million jobs in the United States (8% of the



Asset Management

4. Four to six million jobs have shifted to the underground market, as small

businesses take advantage of the vulnerability of illegal residents.

5. In addition to circumventing the Immigration Reform and Control Act of 1986,

many employers of illegal workers have taken to using unrecorded revenue

receipts. Employer enforcement has succumbed to political pressure.

6. Cell phones, internet and low-cost travel have allowed immigrants easier illegal

access to the United States and increased their ability to find employment and

circumvent immigration laws.

We believe that immigration is becoming one of the most significant economic themes of

this decade. The investment implications for 2005 and 2006 will hinge on the

forthcoming government policy decisions in amnesty, employer enforcement, and

monitoring systems, as well as the effective enforcement of the laws. Over the coming

year, we intend to monitor and analyze the benefits and costs of assimilating a

demographic group the size of New York State into the financial and legal mainstream.

Though this challenge is not quite the magnitude of, say, German reunification, we

believe most investors are underestimating the magnitude and significance of this theme.

The growing extralegal system in the United States has distorted economic statistics and

government budget projections. The stealth labor force has enhanced many of the

economic releases that investors follow closely. Payroll numbers understate true job

growth and inflation has been artificially dampened by this seemingly endless supply of

low-wage workers. The large infusion of the imported labor supply has reduced average

annual earnings by approximately 4 to 6 percent. Real estate prices have been boosted by

the foreign population infusion. The productivity miracle may be exaggerated because

the government is incorporating the output of millions of illegal immigrants but not

counting their full labor input. Long-term budget projections are probably overstating the

potential growth of the U.S. economy because productivity is inflated. Or, stated

differently, are long-term growth projections dependent on a steady flow of illegal

immigration that no one is taking into account?

As census procedures improve and the immigration numbers are revised closer to reality,

many of these questions will be answered, and public perceptions will change. Many

government forecasts, policies and procedures will be modified to compensate for the

undercounting. The public sector will incur significant costs in assimilating a reclassified

population. An abrupt increase in employer enforcement could have a negative impact

on GDP. In the short-term, an adjustment to immigration policies could squeeze small

business profits and increase the budget deficits. Longer-term, we believe the effects

will be more balanced as this invisible work force provides aid to the demographic


Asset Management

problems of social security. Increased enforcement of legal employment procedures

should also boost tax revenues.

The implications of these massive inflows of workers are enormous. Although there are

economic benefits to cheap, illegal labor, there are significant costs associated with

circumventing the labor laws. The social expenses of health care, retirement funding,

education and law enforcement are potentially accruing at $30 billion per year. Many of

these costs lag and will not be realized until the next economic downturn and beyond as

new immigrants require a safety net.

On the revenue side, the United States may be foregoing $35 billion a year in income tax

collections because of the number of jobs that are now off the books. Illegal aliens offer

below market labor costs and many employers circumvent regulations to take advantage

of the laissez faire government enforcement process. We estimate that approximately 5

million illegal workers are collecting wages on a cash basis and are avoiding income


The United States is simply hooked on cheap, illegal workers and deferring the costs of

providing public services to these quasi-Americans. Illegal immigration has been

America’s way of competing with the low-wage forces of Asia and Latin America, and

deserves more credit for the steroid-enhanced effect it has had on productivity, low

inflation, housing starts, and retail sales.

From a personal standpoint, our research does not take sides with any of the emotional

arguments of the

with immigrants, local business owners, realtors, and police officers. This project

afforded us the opportunity to see into the past and look into the future of the United


Crossfire mindset. We are grateful to have had the opportunity to speak

Problems With The Census: The Missing Half

The Census Bureau estimates that 8.7 million people are illegally residing in the United

States, while the Urban Institute estimates a total of 9.3 million people. The Current

Population Survey (CPS), a joint project of the Bureau of Labor Statistics and the Census

Bureau, puts the number at 9.2 million. In a recent report released in November 2004,

the Center for Immigration Studies (CIS) stated that the CPS could have missed as many

as 10% of illegal aliens, suggesting a total illegal population of 10 million as of March

2004. We believe that these estimates fall short. The Census Bureau’s counting process

for the migrant population has some shortcomings. According to our discussions with

illegal immigrants, they avoid responding to census questionnaires. For this reason, the

official estimates do not fully capture this group. The CPS, the Census Bureau, the

Urban Institute, and the former INS (now part of the Department of Homeland Security)

all use similar processes to determine the total number of immigrants, and which

immigrants should be categorized as legal and illegal. In essence, this has created a


Asset Management

circular equation that relies on a singular source of inaccurate statistics that gives the

impression of independent, multiple verifications.

According to a recent study by the Migration Research Unit, University College London,

a wide range of methods have been used to measure immigration flows, which by

definition eludes registration and statistical coverage. “Estimating the numbers of illegal

resident persons in a country is a task made extremely difficult by the unrecorded nature

of the phenomenon, by the problems of the data that are recorded and the different

definitions, data sources, collection methods and legislative differences between

countries. The dynamism and fluctuation in the size of the illegal population is as much

related to the intricacies of the immigration law as to the movements of the migrants

themselves.” Studies of methods used to calculate the illegal population have concluded

that no existing method “provides a well-founded or rigorous method by which to

measure the illegal population.”

The Congressional Budget Office acknowledges “deriving estimates of the number of

unauthorized, or illegal, immigrants is difficult because the government lacks

administrative records of their arrival and departure, and because they tend to be

undercounted in the census and other surveys of the population. Unauthorized

immigrants generally fall into one of two categories: those who entered the United States

illegally and without inspection and those who were admitted legally as visitors or

temporary residents but overstayed their visa.”

According to Maxine Margolis, author of


recorded only 9,200 Brazilians in New York City, while the local Brazilian consulate

estimated 100,000 Brazilians at that time. The Brazilian foreign office placed the number

at 230,000; Dr. Margolis also noted that comparisons of the Boston Archdiocese and

Brazilian consulate records with U.S. census records show a startling 10 to 1 difference.

The latest census taken in 2000 significantly revised the number of illegal immigrants

upward versus 1990 projections. The INS also increased their estimates. Upward

revisions to such projections have been a consistent trend.

An Invisible Minority: Brazilians in New York, the discrepancies started well over a decade ago. The 1990 census, for example,

The Implications of Illegal Labor

Regardless of the politics of immigration, getting an accurate read on the size of the

current wave is important. Tax collections, budget projections and school capacity

planning are a few of the public sectors functions that rely on accurate head counts.

Eventually, the official statistics will catch up with the new reality that global migration

is exploding. When population and labor force statistics are properly synchronized, we

will see an impact on financial markets, economic statistics and social policy.


Asset Management

These revisions will bring some difficult decisions to the surface, as it seems that we have

been living in a state of denial for almost a decade. If indeed, the number of illegal

immigrants is 20 million people, approximately the equivalent of New York State, any

amnesty or legalization and assimilation process will require significant public sector


Illegal immigrants work very hard to conceal their identities and successfully avoid being

counted. Even apprehended illegal migrants will hide important personal data on their

status to avoid removal. Census officials and academics underestimate the ingenuity and

the efficiency of the communications network among immigrants. Understandably,

illegal immigrants go to great lengths to maintain a low profile and conceal their

identities, not only for census purposes, but for tax purposes as well. The risk–reward

trade of dodging census inquiries is severely skewed. Migrants that pay large portions of

future earnings to gain entry into the United States make the sacrifice of leaving their

families behind, or have trekked through physical obstacles and thousands of miles;

accordingly, they have no downside risk in discarding census surveys.

Employers also have incentive to hire undocumented workers off the books, taking

advantages of inefficient immigration enforcement. The competitive winds of deflation

from overseas labor markets have forced U.S. employers to find extra-legal, innovative

ways to capitalize on sources of cheaper labor to stay competitive. These employers

have, in turn, placed pressure on the government to ignore the flood of cheap labor. INS

enforcement of employer violations has decreased dramatically over the last five years.

This trend is counter intuitive, given the substantial rise in illegal immigration during a

new era of national security.


Asset Management

Evidence Beyond Anecdotal

The strongest evidence supporting our theory that the actual illegal population is double

the consensus estimates lies within several micro trends at the community level. We see

very dramatic increases in services required in communities that have become gateways

for immigration. States with high populations of undocumented immigrants have

experienced extra demand for public services. The top nine states, California, Texas,

Florida, New York, Illinois , New Jersey, Arizona, Georgia and North Carolina account

for approximately 50% of the undocumented population. Although the federal

government has the sole authority to govern immigration flows, the responsibility for

providing support to legal and illegal immigrants rests with the state and local


The de facto administration at the state and local level reinforces our premise that we

must look at local statistics to extrapolate the most reliable headcount of immigrants.

The increases in services, including public school enrollment, language proficiency

programs, and building permits all point to a rate of change far greater than the

census numbers would imply for the demand for these local services.

these areas indicates that more people are moving into these communities than the

official estimates.

The growth in

Chart 1. INS (now USCIS) Enforcements












1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: US Citizenship and Immigration Services (USCIS)

Investigations of Employers with Unauthorized Aliens:

Cases Completed

Arrests from Investigating Employers with

Unauthorized Aliens


Asset Management

Based on several criteria, we believe that immigration is growing significantly faster than

the consensus estimates:

1. Remittances

2. Housing permits in gateway communities

3. School enrollment

4. Cross border flows


Many immigrants, particularly those with immediate families in their native country,

provide financial support to those left behind. Remittances are surging because many

immigrants send home on average $1,400 to $1,500 per year through money transfers.

In 2002, people sent $133 billion worldwide, according to the World Bank. Developing

countries accounted for $88 billion of the total, up 33% from $60 billion in 2000.

Countries that are experiencing migration outflows are having very large increases in

remittances. Remittances from the United States to Mexico have tripled to $13 billion

between 1995 and 2003. For Mexico, this is an important source of funds that has

surpassed foreign direct investments and tourism receipts in 2003, and is second only to

petroleum export revenues.

Most importantly, this explosion in remittances is not consistent with the estimates of

legal and illegal immigrants from Mexico. The rate of increase in remittances far

exceeds the increases in Mexicans residing in the U.S. and their wage growth. Between

1995 and 2003, the official tally of Mexicans has climbed 56%, and median weekly wage

has increased by 10%. Yet total remittances jumped 199% over the same period. Even

considering the declining costs of money transfers, the growth of remittances remains



Asset Management

The rapid addition of bank accounts by Mexicans living in the U.S. is also revealing.

According to the Pew Hispanic Center, 39% of surveyed Latino immigrants cited legal

status as a concern for opening bank accounts. This motivates many immigrants to remit

cash through private money centers such as Western Union and Money Gram, which

charge very high fees. Since late 2001, however, many major banks including Citibank,

Bank of America, and Wells Fargo Bank began accepting

identity cards for Mexicans living in the U.S. These cards show the local addresses of the

holders, and any legal or illegal Mexican can obtain it at one of the 45 Mexican

consulates across the country. The removal of legal status as a concern for opening and

using bank accounts has led to a boom in retail business for some banks. Wells Fargo

opens an average of 700 new accounts everyday based on this identification, representing

the fastest growing segment for the bank. To date, around 2.5 million

been issued, and the number is growing.

matriculas, photographedmatriculas have

Housing permits

In major immigrant gateway cities, the influx of immigrants has led to overcrowded

dwellings and a housing boom unexplained by official population growth. Many illegal

immigrants, especially those who just arrive, reside in congested dwellings in cities, with

the hope of finding jobs and upgrading to better living conditions later. These congested

dwellings often house far more tenants than they are built for, and their landlords have no

qualms about cramming in additional renters for a surcharge. Even so, new housing

demand in these illegal immigrant enclaves outstrips those in other areas.

Chart 2. Mexican Remittances from the US, 1995-2003










1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Pew Hispanic Center, Banco de Mexico, Informes Anuales


Mexicans in the US (Indexed)

Mean Weekly Wages for Hispanics (Indexed)

Total Remittances (Indexed)

Mexican remittances from the US have jumped dramatically since 2000. Surveyed wage growth

and the offically estimated Mexican population growth in the US do not adequately explain this




Asset Management

In New Jersey, the three gateway towns of New Brunswick, Elizabeth, and Newark

exemplify this trend. According to the census, the combined population in these three

towns between 1990 and 2003 grew only 5.6%, less than the 9% reported in the rest of

the three corresponding counties. Yet housing permits in these three towns shot up over

six-fold, while the rest of the three counties only saw a three-fold increase. More

importantly, 80% of these permits were designated for multiple dwellings, so the

corresponding increase in people accommodated are even greater. Official statistics state

that illegal immigrants in New Jersey have jumped 110% during the same period – an

estimate that is inconsistent with the housing statistics, our discussions with local realtors

and the changes that we have visually observed in the demographic landscape.

School Enrollment

The major immigration gateways have experienced school enrollments much higher than

projections. The decrease in the number of births in the past decade had led education

administrators to expect decreasing school enrollments as a post echo boom trend. A

higher immigration rate, however, has offset the impact of declining births. The

enrollment statistics for a sample of school districts that included Queens, New York,

Elizabeth, Newark and New Brunswick, New Jersey and Wake County in North Carolina

revealed explosive growth in immigrant students, far beyond numbers consistent with

legal migration limits.

Chart 3. Housing Permits in New Jersey Immigrant Gateways: New Brunswick, Elizabeth,

and Newark







1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: US Census Bureau, NJ Dept of Workforce & Labor Development

No. of permits

Multiple Units

Single Units

These three towns saw lower official population growth (4%) than the rest of their respective

counties (7%). Yet their residential housing permits jumped sixfold vs. threefold in the counties,

with 80% slated for multiple dwellings.

Even if the offiical 110% increase in New Jersey illegal immigrants all moved to these three

towns, the housing permit spike was hard to explain.


Asset Management

According to the Urban Institute, children under 18 comprise approximately 17% of the

undocumented population, with only half attending school, making the sharp increases in

school enrollment more telling. We can extrapolate that for every undocumented

immigrant child in the public school system, there are potentially 8 to 9 additional

undocumented men, women and children living in the United States.

In New York City, nearly one-quarter of the general population is under the age of 18.

Approximately 55% of these children were enrolled in grades pre-K-12 in the 2001-2002

school year. It appears that the ratio of illegal immigrant school children to adults is

much lower than the general population, and understandably so. Historically, the

transition of illegal immigrants is lead by single males, followed by single females, who

establish a presence, a job and home before starting a family or relocating other family

members from their native countries.

Chart 4. Student Enrollments in Wake County, North Carolina










2001-02 2002-03 2003-04 2004-05

Source: Wake County Public School System

No. of Students











Historically, projected and actual % Difference

public school enrollments differed

only by 0.08%. This gap has

widened substantially, driven by

higher than expected elementary

school enrollments.


Asset Management

With a total enrollment of 1.1 million students, the NYC public school system is the

largest in the nation. Immigrant student enrollment for the 1998-2001 period was

103,000, with Queens accounting for the largest share, 37,000. Between 1990 and 2001,

more than half of New York City’s school districts increased their enrollments 10% or

more, driven by a high number of immigrant students.

Demographic and enrollment trends according to the New York City Public Schools

system state:

number of births on school enrollment.” Administrators have been surprised that

school population growth significantly exceeded earlier projections, thus creating

overcrowding in many school districts.

“To a significant degree, high rates of immigration offset the effect of a declining

registered for grades pre-K-12 in New York City Public Schools, with many

predominant countries of origin, other than Mexico, including the Dominican

Republic, China, Jamaica, Mexico, Pakistan, Ecuador, Colombia and Haiti.”

“In the three-year period from 1999 to 2001, 102,867 immigrant students

Chart 5. Declining Births and Increasing School Enrollments in New York City








1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: NYC Dept of Planning, NYC Dept of Health

Despite declining births in New York City, immigration has

fueled increases in elementary and intermediate school


PS/IS enrollments (5 year lag) minus resident births


Asset Management

Cross Border Flows

Pulitzer Prize reporters Donald L. Barlett and James B. Steele recently reported for


magazine that “the number of illegal aliens flooding into the United States this year will

total 3 million. It will be the largest wave since 2001 and roughly triple the number of

immigrants that will come to the U.S. by legal means.” The

according to Mr. Barlett, relied not only on figures projected by the U.S. Border Patrol,

but also on the reporter’s extensive investigations along the Mexican border at factories,

local communities, and the district offices of the U.S. Border Patrol.

Though more resources have been designated to patrolling the Mexican border,

TIME investigation,TIME

argues that “the government doesn’t want to fix it, and the politicians, as usual, are

dodging the issue, even though public opinion polls show that Americans

overwhelmingly favor a crackdown on illegal immigration.” It can be strongly argued

that enforcement at the work place is a much more efficient way of controlling illegal

flows because the primary incentive for sneaking into the United States is money and

jobs. A telephone verification system was designed under the auspices of the

Immigration Reform and Control Act of 1986 for employers to confirm the legal status of

potential employees. As of today, this system is still not running.

Migration is a Global Macro Trend

The world is undergoing the largest migration wave since the late 1800’s. Over 175

million people are in motion. The dramatic increase in human mobility has left the public

sector and policy makers behind. The specific and general understanding of migration

flows has not kept pace with the growth, complexity and implications of this

phenomenon. The economic implications of demographics have increased tremendously

over the last 20 years. In no other time period during the last century have demographics

undergone such a subcutaneous change in the United States.

The human race is on the move – human mobility is increasing drastically, according to

the International Organization for Migration (IOM), the Population Division of the

United Nations. It estimates the total number of international migrants is approximately

175 million or 2.9% of the world population. The migration wave has two components –

transnational and rural to urban, and these waves are changing the dynamics of

government, economics and lifestyles more than any other driver of human behavior.

Governments are seriously behind in recording and comprehending the current

phenomenon, and more importantly, governments are making economic and social policy

decisions based on flawed information. Like corrupt corporate accounting practices or

poor national security information, the United States is struggling with its immigration

policies because of false assumptions and unreliable data.


Asset Management

Far Reaching Investment Implications Hinging on Government Policy and


The importance, rightfully or wrongfully, that markets place on economic data can be

demonstrated in the bond market reactions to employment releases. Employment

releases are like earnings releases in that investors count on the information to be

accurate, within a reasonable margin of error, so that good analysis can lead to prudent

evaluations of risk and reward.

In the case of household employment numbers, there is a 90% confidence interval for

monthly changes in employment, which equates to a margin of error of approximately

plus or minus 350,000. A 350,000 margin of error on a labor force of 135 million people

is acceptable, but the current migration wave is distorting total employment by the

millions, we believe. This presents serious statistical problems that can lead to faulty

investment decisions. Unless the government and investors get the numbers on

immigration correct, the market will fail to grasp the extent of the required policy

changes. The consequent adjustments could be drastic and disruptive to the bond


To a large extent, U.S. immigration policy is adhoc, according to Robert Shiller, Stanley

B. Resor Professor of Economics, Yale University:

The system that developed countries currently use to keep people from lessdeveloped

countries out is inefficient. The United States has strict immigration

policies but lax enforcement; so many people manage to slip illegally over the

border. Once here, the illegal immigrants pay dearly in terms of quality of life.

Then, periodically, the United States considers granting amnesty to illegal

immigrants. This is a crazy system, and we could imagine a better one that could

someday handle immigration.

Belated policy responses no doubt complicate efforts to assess the number of illegal

migrants. However, the focus on the migration issue is growing. The profile of the

immigration topic is rising in the media, the legislature, and in grass root movements.

Many documentary and feature films are exploring the immigration themes. State and

local governments and medical institutions in the gateway states are being financially

impacted by the increased demand generated by these new American residents.

Arizona’s Proposition 200 may represent a new trend to address the state and local strains

associated with this unanticipated and underestimated population growth. We expect that

the coverage, the tangential issues and the political emotions will be magnified in 2005.

In this paper, we have merely outlined what we see as the magnitude of the current

migration wave. We have barely touched on the economic and investment implications.

In the coming months, we will explore further the specific relationship between public

policy, enforcement and the more specific implications for the economy and the bond



Asset Management


Fernando Lozano Ascencio, 2004. “Tendencias recientes de las remesas de los migrantes mexicanos en

Estados Unidos.” Centro Regional de Investigaciones Multidisciplinaries de la UNAM.

Donald L. Barlett and James B. Steele, September 20, 2004. “Who Left the Door Open?” TIME


Steven A. Camarota, October 2004. “A Jobless Recovery? Immigrant Gains and Native Losses.” Center

for Immigration Studies.

Steven A. Camarota, November 2004. “Economy Slowed, But Immigration Didn’t. The Foreign-Born

Population, 2000-2004.” Center for Immigration Studies

Joel Dreyfuss, Scott Silvestri and Thomas Back, March 2004. “Western Union. Margins Shrinking. Send

Customers.” Bloomberg Markets.

Kevin L. Kliesen and Howard J. Wall, April 2004. “A Jobless Recovery with More People Working?”

The Federal Reserve Bank of St. Louis.

Maxine L. Margolis, 1998. “An Invisible Minority. Brazilians in New York City.” Allyn & Bacon

Kevin O’Neil, June 1, 2003. “Remittances from the United States in Context.” Migration Policy Institute.

Jeffrey Passel, May 22, 2002. “New Estimates of the Undocumented Population.” Migration Policy


Charles Pinkerton, Gail McLaughlan, John Salt, 2004 “Sizing the illegally resident population in the UK.”

Migration Research Unit, University College, London

Ray Stone, January 21, 2004. “Payrolls – Illegal Immigrant Workers, the Missing Link?”

Dilip Ratha, October 1, 2004. “Understanding the Importance of Remittances.” Migration Policy Institute.

Edwin S. Rubenstein, 2004. “Illegal Immigration – Unmentionable Answer to Household vs. Payroll

Survey Controversy.” ESR Research Economic Consulta

Roberto Suro, et al, 2002. “Billions in Motion: Latino Immigrants Remittances and Banking.” Pew

Hispanic Center Report and the Multilateral Investment Fund of the Inter-American Development Bank.

“World Migration, 2003.” The International Organization for Migration.

Mexican Embassy, Washington D.C.

The New Jersey Department of Education

New Jersey Department of Labor and Workforce Development.

The New York State Department of Education

US Census Bureau

US Department of Homeland Security, Office of Immigration Statistics.

US Border Patrol, telephone interview.

Wake Country Public School System, North Carolina

Wells Fargo Bank, October 2004, interview.

World Bank.


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