April 30 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said that illegal immigration makes a “significant” contribution to U.S. economic growth by providing a flexible workforce.

Greenspan, appearing before a Senate subcommittee today, said illegal immigrants provide a “safety valve” as demand for workers rises and falls.

“There is little doubt that unauthorized, that is, illegal, immigration has made a significant contribution to the growth of our economy,” Greenspan said. An overhaul of U.S. immigration laws is “badly needed” to create legal avenues for skilled and unskilled workers to enter the country legally, he said.

“Our immigration laws must be reformed and brought up to date,” Greenspan told the Senate Judiciary Subcommittee on Immigration, Refugees and Border Security.

Congress is beginning hearings on an overhaul of U.S. immigration policies, a legislative priority of President Barack Obama. The Senate blocked legislation in 2007 that would have given an estimated 12 million illegal immigrants a way to earn legal status and would have created a new guest-worker program, a measure supported by then-President George W. Bush.

Working Groups

Obama again endorsed an overhaul of U.S. immigration laws during a prime-time news conference last night and said he will soon convene working groups with lawmakers “to start looking at a framework of how this legislation might be shaped.”

“No one is happy with our current system,” New York Democrat Chuck Schumer, the subcommittee’s chairman, said as the hearing began. “There is a recognition in America that the status quo is not working.”

A key sticking point during the last immigration debate was how to treat the millions of immigrants who are in the country illegally.

Opponents said giving them a path to legal status rewards people who broke the law. They also argued that low-skilled immigrant workers suppress wages for U.S. workers and burden local governments with demands for services. Greenspan dismissed those concerns.

“Economists generally view the overall economic benefits of this workforce as significantly outweighing the costs,” he said.

Skilled Workers

Greenspan also endorsed an expansion of the H-1B visa program for skilled workers that is backed by technology companies such as Microsoft Corp. and Intel Corp.

The 2007 legislation would have increased the size of the program to 115,000 annual visas, up from 65,000.

Greenspan said U.S. schools don’t produce enough skilled workers and the gap must be filled with immigrants who have advanced degrees.

“If we are to continue to engage the world and enhance our standards of living, we will have to either markedly improve our elementary and secondary education or lower our barriers to skilled immigrants,” Greenspan said.

Schumer and Senator Jon Kyl, an Arizona Republican, cautioned that it will remain difficult to reach agreement on the immigration issue. Texas Republican John Cornyn said the Senate devoted 36 days of floor consideration during the last debate to no avail.

“This will be very, very hard to do,” Schumer said. “Make no mistake, this will not be an easy task.”

To contact the reporter on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.net

Last Updated: April 30, 2009 14:56 EDT