Suppression of wages of natives

A common critique of open borders (and of migration liberalization in general) is that immigrants, by competing with natives for a limited pool of jobs, have the following important effects:

  • The wages that the natives can demand for the jobs go down.
  • Some natives are unable to compete and hence become unemployed.
  • Both the above effects reduce the quality of life of natives, and some of them may be pushed to lives of welfare dependency and crime as a result. (See also second-order welfare objection and second-order crime).

For more on the US-specific story, see US-specific suppression of wages of natives.

Misleading pro-immigration argument

A somewhat misleadingly framed pro-immigration argument that is often made in this debate is discussed here: immigrants do jobs natives won’t do.

Points of theoretical contention

The argument outlined above has prime facie theoretical validity, because it comports with the law of supply and demand, which are key foundations of economics. However, there are a number of confounding and opposing effects and the net effect is theoretically ambiguous. Some of the points of theoretical contention are listed below.

The key points of contention among economists are:

  • To what extent does the increased demand for goods and services (and hence, for the labor to produce them) created by more immigrants offset the greater supply of labor? An Economic Case for Immigration by Benjamin Powell, an article for the EconLib website, makes this 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.

  • To what extent does immigrant labor compete directly with native labor? The downward effect on native wages would be maximal if immigrants and natives had identical skill sets. In the article An Economic Case for Immigration, Benjamin Powell argues that in the context of immigration to the United States, immigrant labor complements rather than substitutes for native labor:

    Second, immigrants don’t simply shift the supply of labor. Labor is heterogeneous. When the immigrants have different skills than the native-born population, they complement the native-born labor rather than substitute for them. Many of the immigrants to the United States are either extremely highly-skilled or very low-skilled. Yet most native-born labor falls somewhere in between. The native-born population makes up around one third of adults in the United States without a high school diploma. A large portion of new Ph.D.s is awarded to foreign-born people. To the extent that immigrants are complementing U.S. labor, they can increase, rather than decrease, the wages of the native-born.

    Note that there are also cases where immigrants and natives are homogeneous in skills, but immigrants still increase the demand for native labor because certain industries need a minimum efficient scale for operation, and immigration helps create that scale. This might be most relevant to construction and manufacturing industries on the relatively low-skilled side, and also various high skill industries that tend to concentrate in hubs. For related ideas, see here and here.

  • What happens in the medium to long run, as the economy readjusts and new patterns of division of labor are discovered? This point is taken up in the blog post Supply AND Demand for Labor by Donald Boudreaux, which considers the adjustment of the economy to a larger labor supply through new patterns of division 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.

  • What happens in the medium to long run, as immigrants acquire more skills, and assimilate somewhat with the native population?

For more on the US-specific story, see US-specific suppression of wages of natives.

Comprehensive theoretical discussions

Some of the papers listed below combine theoretical discussion with empirical analysis of specific labor markets such as those in the United States or Europe, but they are listed here mainly for the theoretical detail offered.

Technical versus pecuniary externalities: why suppression of wages of natives is not sufficient justification for restricting or taxing immigration on standard welfare/efficiency grounds

In his paper Economics and Emigration: Trillion-Dollar Bills on the Sidewalk, Michael Clemens writes:

Further, even if emigrants modestly depress wages when they arrive at the destination, this does not justify restricting movement by the standard welfare economics analysis. Such effects represent “pecuniary” externalities rather than “technical” externalities. The human capital externalities discussed [NB: this refers to brain drain] in the previous section, along with common examples like belching smokestacks, are examples of technical externalities. Pecuniary externalities, in contrast, operate through the price mechanism: for example, my decision not to place a bid on the house you are selling may lower the price you can receive from an alternative buyer. Pecuniary externalities are a near-universal feature of economic decisions. In standard economic analysis, they offer no welfare justification for taxation or regulation of those decisions.[7]

For example, research on domestic labor movements has found—to the surprise of few—that movement of labor from one city to another tends to modestly lower wages at the destination (Boustan, Fishback, and Cantor, 2010), and that the entry of women into the labor force can modestly lower men’s wages (Acemoglu, Autor, and Lyle, 2004). However, no economist would argue that these facts alone signify negative externalities that reduce social welfare and should be adjusted with a Pigovian tax on those who move between cities or on women entering the workforce, because these externalities seem to be almost purely pecuniary. Similarly, economists would be virtually unanimous against imposing a tax on new domestic competitors on the grounds that they imposed costs on existing firms, because again such externalities are pecuniary. Of course, this argument need not imply that policies to help low-wage U.S. workers in some manner are socially undesirable, only that such policies should be based on concerns over equity or building human capital, rather than on standard efficiency justifications.

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