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Supply AND Demand for Labor

Commenting on my pro-immigration stance, whiskeyJim says:

Illegal aliens hurt the working poor, despite any Cato study. It is a simple supply and demand issue regarding unskilled labor.

whiskeyJim’s claim reflects an incomplete picture of reality.

It’s true that, all else unchanged, an increased supply of unskilled workers will drive down the wages of unskilled workers.  But when analyzing immigration’s full effects, the “all else unchanged” proviso blinds us to the most important consequences of an increased supply of labor.  All else does not remain unchanged – and the changes that occur are, as economists inelegantly say, endogenous to the increased supply of labor.

An important feature of reality that changes as a result of an increased supply of labor supply is the degree and pattern of the division of labor.  More workers means greater opportunities for each worker to more finely specialize.  And the more fine – the ‘deeper’ – is the division of labor, the more productive the economy.  (See the first chapter of Smith, Adam. An Inquiry Into the Nature and Causes of the Wealth of Nations.)

The resulting increase in labors’ productivity increases the demand for labor – which, all else unchanged, raises the wages of even unskilled workers.

At this point in the story we encounter an empirical question: Is the higher supply of labor more than offset, or not, by the higher demand for labor?  It’s certainly possible that the demand for labor rises so modestly that it doesn’t overtake the wage-lowering effect of the higher supply of labor.  But the alternative is also possible.

So what does history tell us?  Are unskilled and low-skilled workers in America today paid less than they were paid, say, in 1960?  Absolutely not.  They’re paid much more.  Both the quantity and quality of goods and services that the typical unskilled worker in America can purchase today with his or her earnings are greater than was the case 50 years ago (and, I’m pretty sure, even just ten years ago).

Yet the supply of labor in the U.S. today – at all skill levels – is much higher than it was in 1960.  If the simple supply-and-demand story that whiskeyJim tells were all there is to the matter, then the compensation of workers across the board would be vastly lower today.

whiskeyJim’s supply-and-demand account is incomplete.