Contrary to popular opinion, U.S. immigration enforcement is draconian.  The proof is in the prices illegal immigrants pay to human smugglers.  Even Mexicans, our closest Third World neighbors, pay 2-3 years‘ worth of wages to illegally cross the border.  Every other Third World nationality pays more.  Millions of immigrants come illegally not because the cost is low but because the benefits are high.

Even so, observed levels of immigration immigration are puzzlingly low.  Let’s stick with Mexico for simplicity.  $3000 is a lot for a Mexican farm worker in Mexico, but not so much for a Mexican farm worker in the U.S.  Suppose annual farm pay in Mexico is $1500, versus $15,000 in the U.S.  That’s a raise of $13,500 a year.  Once he arrives, a Mexican worker could recoup his smuggling fee in under 12 weeks.  Why then do most stay home?

True, these numbers ignore the horrors of the border
crossing.  They are bad, but still seem modest compared to the magnitude
of the gain.  A 0.1% risk of death is a pretty high estimate.  According to standard calculations, pampered Americans would only pay $7000 or so to avoid
that risk.  For would-be Mexican immigrants, even $1000 seems high.

Another major flaw in these calculations is that they assume that paying a human smuggler gets you into the U.S. for sure.  In reality, the success rate is around 50%.  The expected cost of crossing into the United States is therefore roughly double what it seems.

But neither of these sensible adjustments do much to resolve the puzzle.  Add $1000 danger cost to the $3000 out of pocket cost.  Then divide the sum by the probability of successful crossing. It implies that, on average, Mexicans recoup their full smuggling costs in 31 weeks.  That’s still a great return on investment – 167% per year.

What other factors are at work?  One story I’ve heard is that illegal immigrants’ expected gain is much lower than it seems because they only earn American wages if employed.  But this seems a trivial factor.  Illegal immigrants’ unemployment risk is only slightly higher than natives’.  And don’t forget there’s unemployment risk back in Mexico, too.

George Borjas suggests that people’s strong attachment to their homeland deters migration.  He’s right about the general phenomenon, but grossly exaggerates the magnitude.  In any case, feelings of attachment vary widely, and current immigration is far below potential.  So you would still expect the marginal illegal immigrant’s attachment to Mexico to be mild, leaving the puzzle intact.

The key factor, in my view, is quite different: Illegal immigration is relatively low because would-be immigrants have crummy credit and insurance options.

1. Crummy credit options.  Most rural Mexicans can’t just go to the bank to get an illegal immigration loan.  Nor can they pay a coyote with a credit card.  They start in a desperate situation with a lousy credit rating.  To cross the border, they have to save years‘ worth of their own income, borrow years’ worth of income from similarly desperate relatives and friends, or pay frighteningly high black market rates.  When economists invoke such arguments to explain Americans’ behavior, I’m skeptical.  For poor people in developing countries, though, credit constraints are clearly a big deal.

What behavior economists call “debt aversion” amplifies the credit problem.  Most human beings dislike “being in debt,” even when the debt quickly pays for itself.

2. Crummy insurance options.  Rural Mexicans can’t readily buy “illegal immigration insurance.”  So when they finally accumulate their nest egg to cross the border, they’re risking their life savings.  50% chance of crossing the border and entering the land of plenty, 50% of losing their nest egg and getting sent back to Mexico.  A terrifying gamble.  The black market could offer such insurance, of course, but would-be customers are right to worry they’ll never get to collect.

Various choice-under-uncertainty anomalies probably amplify the insurance problem.

And that’s the heart of my story.  In a free market, of course, poor Mexicans would have access to reputable international lenders and insurers.  But neither the U.S. nor the Mexican government would tolerate major First World corporations financing illegal migration.

I hope no one will mistake my analytical approach for lack of sympathy with illegal immigrants’ plight.  In a just world, they could enter the land of opportunity for the price of a bus ticket.  My point is that relatively low levels of immigration do not show that the seemingly immense gains of border crossing are illusory.  The gains are genuine.  They’re just hard for people in desperate poverty to realize with only the black market to help them.

HT: Partly inspired by a Facebook exchange with Bill Dickens, and Alex Nowrasteh’s request.