Migration, wages, supply and demand

This page reviews some of the underlying theory connecting migration, wages, supply, and demand. The analysis here does not consider subtleties that arise from the greater specialization that larger populations enable, and the minimum efficient scale that is needed for specific industries. It is nonetheless a useful initial analysis.

An Economic Case for Immigration by Benjamin Powell, an article for the EconLib website, makes the basic point:

Don’t the laws of supply and demand dictate that wages would fall? Not when other things change at the same time. Those immigrants who increase the supply of labor also demand goods and services, causing the demand for labor to increase.

When people migrate into an economy, they both demand and supply goods. They demand goods because they need stuff for themselves. They supply goods by working. Therefore, both the demand curve and the supply curve for goods should in principle expand. Of the population that migrated was compositionally identical to the existing population, the demand and supply curves would expand in roughly the same way, and the nature of the economy would not change much (though there are subtleties arising from natural resource inputs and technological inputs).

If the migrants are heavily concentrated in a particular sector of the labor market, then the demand curves for most goods expands, but the supply curve expands (and expands considerably) only for the goods produced with the help of that sector of the labor market. Therefore, by elementary supply-and-demand considerations, we would expect the following:

  • Wages would go down in the sector of the labor market where the migrants are concentrated, because supply increases to a considerably greater extent than demand.
  • Wages would go up in the other sectors of the labor market, because demand increases whereas supply stays constant.

The per capita decline in the wages for the sector of the labor market that see immigration would likely be greater than the per capita increase in the wages for other sectors, but in sum, they would approximately cancel out, because the majority of people would not be working in that sector of the labor market.

(An example for illustrative purposes might be considerable migration of farmers to a territory, reducing wages for farmers but increasing wages for other sectors, at least in real terms).

It’s also worth noting that the extent to which these effects operate depends heavily on whether the goods in question are tradable and whether the economy is open to trade. For goods that are effectively traded on the world market, migration is unlikely to significantly change the price of the good or the wage that direct work towards producing that good can command. On the highly tradable end are physical goods with very low transportation costs (relative to production costs) as well as digital goods such as those that can be sold or transported over the Internet. A good like food is partly tradable: it is possible to import food from other countries, but transportation cost is significant in proportion to production cost. The effects described above are strongest for non-tradable goods, such as haircuts.

Further subtleties:

  • Migration, wages, and occupational mix: This page describes the relation between migration, wages, and the occupational mix of migrants as seen in practice. It builds on the analysis in the page you’re currently reading.
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