Immigration Economics

by Russ Roberts on April 5, 2006

in Immigration

What is the effect of immigration on wages and the standard of living of American who are already here? One commenter on a recent post here at Cafe Hayek wrote it’s simple supply and demand—let in more people and wages have to fall. George Borjas makes the same argument—more immigrants means lower wages. But that can’t be the whole story. It certainly isn’t the whole story for Americans overall, inclusive of the full economic effects of immigration.

Imagine the same arguments made about imports of foreign products. It’s a mistake to let in foreign products. Imports lower prices which means Americans selling goods will make less money and be worse off. So imports make America poorer. Imports mean fewer jobs in America, this argument would go, because obviously, there are going to be jobs lost to imports.

There are people who believe these arguments. But it’s hard for these arguments to stand up to logic or the facts. The logical problem with the argument is that it only looks at part of the story. It only looks at what is seen. It misses what is unseen. The unseen effect of trade is that it spurs innovation because domestic firms have to compete with foreign firms. It creates wealth because America can now produce some products the roundabout way—rather than producing our own clothes, for example, we make something else and swap it for clothes—the power of comparative advantage and specialization. And trade doesn’t reduce the number of jobs in the United States. It reduces certain types of jobs but others increase as capital and resources are now available to create new products now that we don’t have to make everything ourselves.

On the facts side, the number of jobs in the United States has risen steadily for 50 years as our population has grown absorbing immigrants, and a tripling of women in the workplace.

The same logic and facts apply to immigration.

Lower wages and fewer jobs can’t be the whole effect. That misses the unseen benefits of new people and new ideas coming into our economy from beyond our borders. Some wages may fall as native-born Americans compete with new arrivals. (And of course, virtually all of these native-borns are descendants of immigrants). But that can’t be the whole impact. That can’t be the end of the story. If America can produce some products more cheaply because of immigrants, that frees up resources to produce more of something else. Those benefits are unseen. But the net impact on America has to be positive. We have more resources. (I am ignoring the problem of immigrants who come here to enjoy the welfare state. I am focusing on the narrower question of whether foreing workers coming here is good or bad for those of us who are already here. The critics of immigration think even foreign workers are bad for America.)

You can’t use supply and demand (or at least the simplistic version of shifting supply and holding demand constant) because everything is endogenous.

That’s the logic. Now what about the facts? Borjas estimates that American wages are depressed 4% by immigration. He estimates that the impact on high school dropouts is a reduction in wages of 8%. He argues that immigration is a redistribution from workers to employers, implying no net effect. Are these numbers right? Maybe. A lot of assumptions have to be made to tease out the effects. But my intuition based on the above logic is that he’s missing something—the hidden connections are too difficult to tease out.

That’s an easy criticism to make of course, so here are some questions to think about if you worry that immigration drives down wages and standard of living of the people already here.

If immigration lowers the wages and standard of living of people already here, do increases in labor force participation and population lower them, too? Yet labor’s share in national income is rock-steady at 70% for the last 50 years. Our standard of living is many times higher.

Would Native Americans (not native-born Americans, but American Indians) be wealthier if they had the American continent to themselves?

Would New York City (or any other city) be richer today if it had held its population to what it was in 1850? 1900? 1950? 1980? Does the inflow of people into New York lower the wages of the people already there? Does it make them poorer? Does it matter whether rich or poor people, high-skilled or low-skilled people are the ones moving into New York?

Has rural America gotten richer as fewer people have chosen to live there? Does the smaller supply of workers increase the wages and standard of living of those people still living there?

Do population increases lower America’s standard of living? Would our wages be higher if we had had zero population growth over the last century? Has the population growth of the last century reduced wages or the standard of living in America? Does population growth lower our standard of living if poor people have a disproportionate share of the new births?

Has the tripling of women in the workforce over the last 50 years reduced wages or the standard of living in the United States? Would our wages or standard of living be even higher if women weren’t crowding into the work force and allegedly lowering wages?

If there were a plague that killed half of the American people, would those who were left find their standard of living rise or fall? Would it depend on whether the people who lived or died were rich or poor or high-skilled or low-skilled?

My answer to all of these questions is "no." More people means more resources for the people already here. It means more trade. More specialization. More economies of scale. It doesn’t matter whether they are native born or imported. (I also recognize it means potentially more congestion and more pollution depending on our public policy choices. But those aren’t necessary consequences of the increase in population. The direct impact on our wages and productivity and standard of living is positive.)

Immigration makes most Americans better off. Are some Americans made worse off because their skills are closest to new immigrants? Here, at least in the short run, one’s usual intuition about supply and demand might hold, though my questions above make me wonder if it’s even right in this case. But let’s help poor Americans by giving them better schools instead of keeping out immigrants. And immigration is really good for immigrants. I care about them, too. If they want to work, let them come.


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