Three factors seem to blunt the effect of immigration we might expect: immigrants are consumers as well as producers, so more people means our businesses grow; immigrants are often complementary to "natives"--more immigrants to work in restaurant kitchens means more demand for native wait staff; and there's plenty of capital in the global system ready to complement increased labor supply.
Who should most fear competition from immigrants arriving from Mexico this year? Immigrants who arrived from Mexico last year.
One question that always bothered me. When immigrants move into a particular area and increase supply of labor in particular industries, can’t it lower wages in those industries? Overall the demand supply argument makes intuitive sense but labor cannot freely move across industries always. So demand for labor increases in the local economy across multiple industries but within the industry experiencing a surge in immigrant labor won’t there be a wage drop? So economy is overall not worse off but there are winners and losers?
I live and have lived for decades in communities where about 1/3 of my neighbors are immigrants, legal and otherwise, and I find whenever I hire a contractor to do something around the house, everyone on the job, including the contractor, is an immigrant. These people work incredibly hard, the same contractor has the same workers on every job, and the work is always well done. My neighbors also work incredible hours and given average houses here run $500K and up, they are obviously quite successful. I grew up in different world; the only immigrant in my HS graduating class was a Cuban refugee. The world I live in now is a much, much better one. Let's bring in lots more folks, like my all over the world.
I'm curious how this compares to the discussions about free trade. The economics behind it is very convincing and directionaly accurate that it will - in the aggregate - be net positive. However, many economists have spent the last 20 years learning that net positive can still have harsh side affects for some communities. Do we recognize that there similarities to this with immigration, where there is a net positive, but its impact on some communities/industries/business can be severely negative?
Thank you for this! I'm hopeful that opinions will also be helped along by the much faster than expected shift in global age demographic trends. In the sense that the drawbacks of an ageing population will become more obvious when people look around in the world. Many places will be having ever fewer tax payers to fund the growing needs of social support, healthcare, etc. For the conversation now I think having more intuitive ways of looking at it would really help - the example of when women entered the workforce someone brought up a while back was a really good one.
Hey Noah, you mentioned that empirical research is slowly shifting academic economists’ opinions on the effects of the minimum wage. Can you point me towards this research? I thought that David Neumark´s and William Wascher´s book "Minimum Wages" was the most comprehensive discussion on the topic (arguing that minimum wages do lower employment). But I am definitely open to change my mind!
Sure, but then economists are known for their contradictions too. On Tuesday, they can be telling the world the counterintuitive claim that immigration doesn't reduce wages and Thursday saying that the minimum wage doesn't reduce wages either....never thinking about the internal contradicts therein. My favorite living economist, Bryan Caplan, gives the details here: https://www.econlib.org/archives/2013/03/immigration_the_1.html
All the nonsense above focus on net economic impact - which is equally false because whatever economic benefit that is brought by immigrants - the beneficiaries are overwhelmingly the wealthiest part of the population.
For the working classes - immigrants are 100% net negative.
The working classes don't benefit from lower wages in employees - they ARE the employees.
The working classes don't employ housekeepers and nannies.
The biggest idiocy: the working classes are the ones that have to compete with immigrants; the wealthy do not.
There's a reason why the AMA, the various Bar associations, etc all place ruinous entry requirements to their guilds even for experienced practitioners from other countries: those represent competition and risk to existing guild members.
I will be more convinced of the above immigration rhetoric when both PMC and working classes are equally exposed to immigration competition.
Of course the *net* increase in labour is smaller than the *gross* one, so the aggregate effect is smaller than expected, but there are the usual pretty huge "misunderstandings":
* If "immigration increases labor demand as well as labor supply" it does not increase the supply of capital, and thus alters to the detriment of workers the relative pricing power of capital (productive or infrastructure) and labour.
* If immigration only modestly affects negatively the average *level* of wages, that is very different from claiming that it its effect on wages is small: in the absence of immigration average wages *growth* could have have been significantly positive instead of being small and negative.
* If immigration only modestly affects negatively the *average* level of wages, that is very different from claiming that its effect on the *distribution* of income is small, as “Immigrants may compete with some groups of native-born workers more than others”.
* If immigration only modestly impacts the *level of employment* of existing workers, it can still affect negatively in a bigger way the *level of hours worked* by employed workers, and the *growth of hours worked*.
* If immigration only modestly impacts the *level* of wages or hours, it can still affect much more the *level* of living costs of native workers, by increasing the inflation of the price of housing and other essentials, and also can affect other non wage aspects of work, like job security and
* The claim that “New immigrants can compete with existing immigrants” is "strange", as if “existing immigrants” would only compete with new immigrants but very modestly refrain from competing with pre-existing workers.
Overall the guesses that high rates of population growth, and specifically immigration have significant negative impacts on existing workers, whether as to the level, growth or distribution of wages, and the level or growth of living costs, are supported by simple observations:
* The Fed and the BoE have consistently listed immigration as moderating wage growth and thus allowing a looser monetary policy than otherwise. For example:
https://www.theguardian.com/uk-news/2017/nov/24/former-bank-governor-encouraged-eastern-european-immigration “King pressed the case to open the labour market without transition on the grounds that it would help lower wage growth and inflation, address supply bottlenecks in a fast-growing pre-financial crisis economy, and help keep interest rates low,” Was Mervyn King, a skilled Economist with a legion of skilled Economists briefing him, wrong?
* The employer associations constantly lobby to increase immigration. Are they and their consultants wrong?
* The property and other capital vested interests constantly lobby to increase immigration. Are they and their consultants wrong?
Overall small rates of immigration or other sources of population increase have a small impact on the living standards of existing workers, but the cumulative effect over time of higher rates seems pretty large, to the benefit of business and asset rentiers. Since many if not most existing workers are also in part, having a small amount of stocks and residential property, business and asset rentiers, the higher prices and rents compensate them for the negative impact on their leverage as workers, and immigration also lowers their cost of living where it depends on the cheapness of other people's wages. So the overall effect of immigration on existing workers is highly dependent on their overall economic position.
Well, the case of H1-B Visa workers in the period 2001-2004 was pretty much opposed to your ideas.
In Santa Clara County, CA, several thousand immigrants were admitted, almost all of whom were Software Engineers, Programmers, or Computer Engineers. For legal and reputational reasons, most of these people were hired as Consultants.
Consulting rates for US citizens dropped, to roughly half of what they had been. ($120/hour in 2000, down to $60/hour in 2004)
So, here we have at least one example of immigration having a dramatic negative effect on wages.
To be fair, this was a special case:
-The immigrants were targeted at one particular occupation.
-The H1-B visa program was designed to push down wages, and it worked.
-The fact that these immigrants did not own their visas, but were tied to the sponsoring employer made the reduction in wages larger than simple supply-and-demand considerations.
Agreed that immigration will drive up the demand for labor. But will the slope of the supply line remain constant? Intuitively it seems as though immigrants from a different economy will be willing to work for less and have fewer social programs to fall back on, meaning that the slope could be lower, moving the intersection with the demand line to a lower wage point?
But i would like to say something about why we should find those results surprising.
Labor demand comes from consumption, and consumption in the internal market may happen at any age. A kid, an adult and a retired person all consume and thus all of them drive the demand for labor.
Therefore, if your unconditional expectation is that someone increases labor demand as much as labor supply, than if you condition your expectation on age, things change: a kid should increase labor demand more than labor supply; someone who's retired should increase labor demand more than labor supply and conversely, someone who is neither too young or too old to work should - on expectation - increase labor supply more than labor demand. At least for non-tradable goods.
As far as I know, the expected age of migrants is not the same as the expected age of the overall population in developed nations (somewhat aged). This means several things: migrants contribute to the sustainability of social security; migrants contribute more to the economy than what they get in social services, etc. But, in the same way, they should contribute to reduce wages.
If they don't, as it seems according to those empirical studies, that should be seen as a puzzle. I know that the labor market is not like other markets (a lot of rigidities, frictions, etc. ) but I have not yet seen a good theoretical explanation for these empirical results. The one in the post was not convincing because it did not account for the "age" question I mentioned.
Immigration does not depress employment or wages much. It was the Billion Chinese who do not emigrate who depressed employment and wages for the middle 60-80% of the income declines.
What about the argument that restricting the labour supply leads to more substitution by capital and leads to higher productivity per worker and so higher wages? The UK for example has seen chronically slow productivity growth and high immigration in recent years. Wasn't the high cost of labour why the Industrial Revolution started in England? Surely we should want to limit labour growth to boost productivity (yes, I know Japan has had little of either for two decades)
"Each new generation is bigger than the one that came before it." This is incorrect.
There are many countries in the world with shrinking populations. The reasons are complex but it is typically where the population are confident that they will be looked after when they are old regardless of how many children they have. Where people do not have confidence they will have access to food, medicine and care when they are old and infirm they typically have more children, presumably in the expectation that at least one of their children will look after them.
I wrote a long but I think fairly accessible review of the ideas and evidence on this question: https://davidroodman.com/blog/2014/09/03/the-domestic-economic-impacts-of-immigration
Three factors seem to blunt the effect of immigration we might expect: immigrants are consumers as well as producers, so more people means our businesses grow; immigrants are often complementary to "natives"--more immigrants to work in restaurant kitchens means more demand for native wait staff; and there's plenty of capital in the global system ready to complement increased labor supply.
Who should most fear competition from immigrants arriving from Mexico this year? Immigrants who arrived from Mexico last year.
One question that always bothered me. When immigrants move into a particular area and increase supply of labor in particular industries, can’t it lower wages in those industries? Overall the demand supply argument makes intuitive sense but labor cannot freely move across industries always. So demand for labor increases in the local economy across multiple industries but within the industry experiencing a surge in immigrant labor won’t there be a wage drop? So economy is overall not worse off but there are winners and losers?
***And to see why this is true, just think about babies. Each new generation is bigger than the one that came before it.***
Right. Or as I like to put it, according to the restrictionists, wages in America should have peaked in 1607.
I live and have lived for decades in communities where about 1/3 of my neighbors are immigrants, legal and otherwise, and I find whenever I hire a contractor to do something around the house, everyone on the job, including the contractor, is an immigrant. These people work incredibly hard, the same contractor has the same workers on every job, and the work is always well done. My neighbors also work incredible hours and given average houses here run $500K and up, they are obviously quite successful. I grew up in different world; the only immigrant in my HS graduating class was a Cuban refugee. The world I live in now is a much, much better one. Let's bring in lots more folks, like my all over the world.
I'm curious how this compares to the discussions about free trade. The economics behind it is very convincing and directionaly accurate that it will - in the aggregate - be net positive. However, many economists have spent the last 20 years learning that net positive can still have harsh side affects for some communities. Do we recognize that there similarities to this with immigration, where there is a net positive, but its impact on some communities/industries/business can be severely negative?
Thank you for this! I'm hopeful that opinions will also be helped along by the much faster than expected shift in global age demographic trends. In the sense that the drawbacks of an ageing population will become more obvious when people look around in the world. Many places will be having ever fewer tax payers to fund the growing needs of social support, healthcare, etc. For the conversation now I think having more intuitive ways of looking at it would really help - the example of when women entered the workforce someone brought up a while back was a really good one.
Hey Noah, you mentioned that empirical research is slowly shifting academic economists’ opinions on the effects of the minimum wage. Can you point me towards this research? I thought that David Neumark´s and William Wascher´s book "Minimum Wages" was the most comprehensive discussion on the topic (arguing that minimum wages do lower employment). But I am definitely open to change my mind!
Sure, but then economists are known for their contradictions too. On Tuesday, they can be telling the world the counterintuitive claim that immigration doesn't reduce wages and Thursday saying that the minimum wage doesn't reduce wages either....never thinking about the internal contradicts therein. My favorite living economist, Bryan Caplan, gives the details here: https://www.econlib.org/archives/2013/03/immigration_the_1.html
This is utter nonsense.
Immigrants have lower economic expectations.
They increase the labor supply.
All the nonsense above focus on net economic impact - which is equally false because whatever economic benefit that is brought by immigrants - the beneficiaries are overwhelmingly the wealthiest part of the population.
For the working classes - immigrants are 100% net negative.
The working classes don't benefit from lower wages in employees - they ARE the employees.
The working classes don't employ housekeepers and nannies.
The biggest idiocy: the working classes are the ones that have to compete with immigrants; the wealthy do not.
There's a reason why the AMA, the various Bar associations, etc all place ruinous entry requirements to their guilds even for experienced practitioners from other countries: those represent competition and risk to existing guild members.
I will be more convinced of the above immigration rhetoric when both PMC and working classes are equally exposed to immigration competition.
Of course the *net* increase in labour is smaller than the *gross* one, so the aggregate effect is smaller than expected, but there are the usual pretty huge "misunderstandings":
* If "immigration increases labor demand as well as labor supply" it does not increase the supply of capital, and thus alters to the detriment of workers the relative pricing power of capital (productive or infrastructure) and labour.
* If immigration only modestly affects negatively the average *level* of wages, that is very different from claiming that it its effect on wages is small: in the absence of immigration average wages *growth* could have have been significantly positive instead of being small and negative.
* If immigration only modestly affects negatively the *average* level of wages, that is very different from claiming that its effect on the *distribution* of income is small, as “Immigrants may compete with some groups of native-born workers more than others”.
* If immigration only modestly impacts the *level of employment* of existing workers, it can still affect negatively in a bigger way the *level of hours worked* by employed workers, and the *growth of hours worked*.
* If immigration only modestly impacts the *level* of wages or hours, it can still affect much more the *level* of living costs of native workers, by increasing the inflation of the price of housing and other essentials, and also can affect other non wage aspects of work, like job security and
* The claim that “New immigrants can compete with existing immigrants” is "strange", as if “existing immigrants” would only compete with new immigrants but very modestly refrain from competing with pre-existing workers.
Overall the guesses that high rates of population growth, and specifically immigration have significant negative impacts on existing workers, whether as to the level, growth or distribution of wages, and the level or growth of living costs, are supported by simple observations:
* The Fed and the BoE have consistently listed immigration as moderating wage growth and thus allowing a looser monetary policy than otherwise. For example:
https://www.theguardian.com/uk-news/2017/nov/24/former-bank-governor-encouraged-eastern-european-immigration “King pressed the case to open the labour market without transition on the grounds that it would help lower wage growth and inflation, address supply bottlenecks in a fast-growing pre-financial crisis economy, and help keep interest rates low,” Was Mervyn King, a skilled Economist with a legion of skilled Economists briefing him, wrong?
* The employer associations constantly lobby to increase immigration. Are they and their consultants wrong?
* The property and other capital vested interests constantly lobby to increase immigration. Are they and their consultants wrong?
Overall small rates of immigration or other sources of population increase have a small impact on the living standards of existing workers, but the cumulative effect over time of higher rates seems pretty large, to the benefit of business and asset rentiers. Since many if not most existing workers are also in part, having a small amount of stocks and residential property, business and asset rentiers, the higher prices and rents compensate them for the negative impact on their leverage as workers, and immigration also lowers their cost of living where it depends on the cheapness of other people's wages. So the overall effect of immigration on existing workers is highly dependent on their overall economic position.
Well, the case of H1-B Visa workers in the period 2001-2004 was pretty much opposed to your ideas.
In Santa Clara County, CA, several thousand immigrants were admitted, almost all of whom were Software Engineers, Programmers, or Computer Engineers. For legal and reputational reasons, most of these people were hired as Consultants.
Consulting rates for US citizens dropped, to roughly half of what they had been. ($120/hour in 2000, down to $60/hour in 2004)
So, here we have at least one example of immigration having a dramatic negative effect on wages.
To be fair, this was a special case:
-The immigrants were targeted at one particular occupation.
-The H1-B visa program was designed to push down wages, and it worked.
-The fact that these immigrants did not own their visas, but were tied to the sponsoring employer made the reduction in wages larger than simple supply-and-demand considerations.
So, here is your counter-example. What say you?
Agreed that immigration will drive up the demand for labor. But will the slope of the supply line remain constant? Intuitively it seems as though immigrants from a different economy will be willing to work for less and have fewer social programs to fall back on, meaning that the slope could be lower, moving the intersection with the demand line to a lower wage point?
The empirical studies are somewhat compelling.
But i would like to say something about why we should find those results surprising.
Labor demand comes from consumption, and consumption in the internal market may happen at any age. A kid, an adult and a retired person all consume and thus all of them drive the demand for labor.
Therefore, if your unconditional expectation is that someone increases labor demand as much as labor supply, than if you condition your expectation on age, things change: a kid should increase labor demand more than labor supply; someone who's retired should increase labor demand more than labor supply and conversely, someone who is neither too young or too old to work should - on expectation - increase labor supply more than labor demand. At least for non-tradable goods.
As far as I know, the expected age of migrants is not the same as the expected age of the overall population in developed nations (somewhat aged). This means several things: migrants contribute to the sustainability of social security; migrants contribute more to the economy than what they get in social services, etc. But, in the same way, they should contribute to reduce wages.
If they don't, as it seems according to those empirical studies, that should be seen as a puzzle. I know that the labor market is not like other markets (a lot of rigidities, frictions, etc. ) but I have not yet seen a good theoretical explanation for these empirical results. The one in the post was not convincing because it did not account for the "age" question I mentioned.
Immigration does not depress employment or wages much. It was the Billion Chinese who do not emigrate who depressed employment and wages for the middle 60-80% of the income declines.
What about the argument that restricting the labour supply leads to more substitution by capital and leads to higher productivity per worker and so higher wages? The UK for example has seen chronically slow productivity growth and high immigration in recent years. Wasn't the high cost of labour why the Industrial Revolution started in England? Surely we should want to limit labour growth to boost productivity (yes, I know Japan has had little of either for two decades)
"Each new generation is bigger than the one that came before it." This is incorrect.
There are many countries in the world with shrinking populations. The reasons are complex but it is typically where the population are confident that they will be looked after when they are old regardless of how many children they have. Where people do not have confidence they will have access to food, medicine and care when they are old and infirm they typically have more children, presumably in the expectation that at least one of their children will look after them.