- Cafe Hayek - https://cafehayek.com -

It Is, After All, Supply-and-DEMAND Analysis

Tweet [1]

Here’s a letter to the Wall Street Journal:

Matthew Burwell writes that “As long as the law of supply and demand remains in effect, importing massive numbers of foreign workers will necessarily depress wages” (Letters [2], Dec. 16).  I stand second to none in admiring the explanatory power of supply-and-demand analysis.  Yet for that analysis to work it must be used correctly. Mr. Burwell uses it incorrectly.

An increase in the supply of labor lowers wages only if nothing else changes.  But when immigrants enter the workforce two very important other things change.  First, immigrant workers spend or invest their earnings, both of which activities increase the demand for labor – thus putting upward pressure on wages.  By focusing only on immigrants’ effect on the supply of labor, Mr. Burwell overlooks immigrants’ effect on the demand for labor.

A second change is one that was emphasized by Adam Smith: larger supplies of workers, as well as more consumers of the economy’s output, lead to greater specialization. Jobs change.  As Smith explained, this greater specialization makes workers more productive.  This increased productivity, in turn, causes wages to rise.

If Mr. Burwell needs empirical evidence against his mistaken assertion that supply-and-demand analysis implies that more workers “necessarily depress wages,” he should consider that, in large part because of immigration, the population today of the 13 original U.S. states is more than 34 times larger than it was in 1776.  And yet wages in these states today, far from being lower (as Mr. Burwell’s analysis would have it), are vastly higher than they were then.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Comments