The impact of US deportation policies on the US, Canadian, and Mexican economies

Abstract

North America (Canada, US, Mexico) is a highly inter-connected regional economy (ICRE) with extensive cross-country value chains in production and strong trade, financial, and labor market links. The impact of new US deportation policy would affect the US economy in the short to medium term by reducing the labor force by nearly five percent as foreign-born labor leaves the country or drops out of the labor market. Analysis with a global computable general equilibrium (CGE) simulation model indicates that the shock would cause a supply-side recession in the US and reduce real GDP by four percent. The wage in the labor markets with high participation of the remaining undocumented labor would increase, which would provide an incentive for increased future migration. There would also be a decline in the wage of native-born workers; studies indicate that they are complements not substitutes for non-native labor in their sectors of employment. The US macro shock would also induce macro shocks to both Mexico and Canada, yielding reductions in their GDP. In addition, there would be a dramatic decline in remittance flows from foreign-born workers to their countries of origin. For Mexico, the reduction in remittances would lead to a financial shock due to lost foreign exchange, resulting in a major depreciation of the real exchange rate and changes in macro aggregates: lower GDP, lower imports, increased exports, and much lower aggregate final demand. The financial shock in Mexico would feed back to Canada and the US, affecting the sectoral composition of trade and production in both countries. In sum, the impact of US policies to remove foreign-born labor would reverberate across all three countries, damaging their economies and weakening economic integration in North America.