The extremely superficial thinker is me (at least if lots of e-mail correspondents and commenters are to be believed – such as this commenter at Arnold Kling’s Askblog). When someone doesn’t like the straightforward conclusions of supply-and-demand analysis, it’s very common to call those who draw these straightforward conclusions “superficial.” And I readily admit to being a huge fan of supply-and-demand analysis. The straightforward conclusions to be drawn from this analysis are, I believe, almost always correct – or, at least, this analysis almost always reveals important aspects of economic reality that are missed by people who reject (or who are unfamiliar with) supply-and-demand analysis.
Even we superficial thinkers, however, understand that supply-and-demand analysis must be used correctly in order for it to be useful. And the correct use of any theory or analytical tool inescapably requires sound judgment.
The jury here convicts me of extremely superficial thinking because of an apparent – and apparently ideologically convenient – inconsistency separating my use of supply-and-demand analysis when discussing minimum wages and my use of supply-and-demand analysis when discussing immigration. To wit-
When discussing minimum wages, I focus exclusively on the downward-sloping demand curve for labor and on the upward-sloping supply curve for labor, noting that forcing up the wages of workers causes the quantity demanded of labor to fall while causing the quantity supplied of labor to rise. And in doing this analysis I dismiss as being impossible, implausible, or insignificant various other changes in the labor market that cause either the demand for, or the supply of, (or both) labor to change in ways that offset the ‘simplistic’ conclusion that pushing up the wage by legislative diktat reduces the quantity demand of labor. Yet when I discuss immigration, I (it is alleged) suddenly take account of other changes in the labor market beyond those of the simply supply-and-demand analysis that I content myself to stick to when discussing minimum wages. As another commenter at Arnold Kling’s blog says:
This has always struck me as well. When it comes to minimum wage, the libertarian economists are all insistent that the simple supply-and-demand basics explain everything.
Yet, when it comes to immigration, all of a sudden the simple supply-and-demand basics aren’t enough, and now there are important secondary effects that need to be considered.
Far be it from me to insist that I never err when doing economic analysis. I’m certain that I do err, and often. And, also, far be it from me to deny that my mind runs in simpler and less interesting channels than those carved out and followed by smarter and more skilled scholars than myself. I’m sure that mine does. (We each must cope with what abilities we have.) Yet here I believe that the charges that I am being a simpleton are unwarranted.
Analyzing minimum wages using supply-and-demand analysis differs in important ways from analyzing immigration using this analysis. Let’s begin with real, but not obviously germane, differences.
With minimum-wage analysis, the featured change to the system – the “exogenous” alteration in the market – is a forced change in the money price (the wage) of an input (an hour of labor). With immigration, the featured change to the system – the “exogenous” alteration in the market* – is an increase in supply. With minimum wages, a dependent variable in the model (i.e., wage) is forced upward by some agency outside of the market (i.e., the state); with immigration, an independent variable in the model (i.e., labor supply) is increasing, perhaps in response to a policy change instituted by the state, but not as a direct imposition of the state.
I leave to minds less simple than my own to determine if – and, if so, how – these above differences justify my using supply-and-demand analysis one way when discussing minimum wages and another way when discussing immigration. But even my own extremely simple mind detects an important difference that does warrant notice as germane: in the case of immigration, the same change that causes an increase in the supply of labor (immigration) necessarily causes an increase in the demand for labor. Immigrants who work mean a higher supply of labor, it is true, but it also means more consumer spending (unless we are to assume that all working immigrants are incorrigible misers).
It is simply preposterous to assume that the only effect that immigrants have on the market is on the supply of labor. If greater immigration means more people working in country X it also means more people spending and saving in country X. The reason is that greater immigration means, simply, more people in country X. To focus only on the supply-of-labor aspect of immigration while ignoring the demand-for-labor aspect is no more defensible than to focus only on the demand-for-labor effects of immigration while ignoring the supply-of-labor effects. Note that if we did the latter, we would conclude that supply-and-demand analysis shows ‘clearly’ that immigration necessarily raises wage rates by increasing the demand for labor with no other relevant changes to consider – an analysis that is obviously incomplete. In short, to use supply-and-demand analysis when analyzing immigration, both supply and demand curves must shift, because immigrants are both suppliers and demanders.
In contrast, when using supply-and-demand graphs to analyze the effects of minimum-wage legislation, there is no commonly neglected need to shift one of the curves (as there is when immigration opponents argue that supply-and-demand shows that more immigrants ‘necessarily’ reduce wage rates). With minimum-wage hikes, the quantity demanded of labor falls and the quantity supplied rises. Period (pretty much).
It’s true that some non-economists assert that raising minimum wages causes the demand for labor to rise, but this assertion is too weak to take seriously. Because I’ve covered this issue (along with the even less plausible “efficiency-wage” justification for minimum wages) many times at this blog, I’ll not rehearse it here, save to note that, unlike in the case of immigration when spending necessarily rises (because of an increase in the working population of country X), spending does not necessarily, or even plausibly, rise when minimum wages rise (if for no reason other than that whatever extra spending is done by minimum-wage workers means less spending or investment done by employers).
I close with two clarifying remarks. First, I did not say (or mean) in my earlier post – and I do not say (or mean) in this post – that the simple, first-order increase in the demand for labor consequent upon greater immigration is of such a magnitude that it necessarily intersects the increased supply of labor at a new equilibrium wage at or above the old equilibrium wage. My point about taking account of first-order demand-for-labor effects is that immigration, causing an increase in spending just as it causes an increase in the supply of labor, works on wages in a direction opposite of that of the increased supply of labor. The first-order supply-and-demand effects of greater immigration might well be a lower equilibrium wage, but that wage is not as low as it would be if the only effect that immigration has on the economy is to increase the supply of labor. Put differently, supply-and-demand analysis does not ‘obviously’ show that greater immigration necessarily causes wages to fall.
Second, my argument that wages don’t fall in the face of greater immigration is not premised upon any implicit assumption that immigrants buy all of their own outputs.
* Unlike with minimum wages imposed or raised by legislative diktat, immigration is not completely exogenous to the system. Changes in wage rates in country X will affect willingness of people from countries A, B,…, N to immigrate to X.