Migration, wages, and occupational mix

This page is part of a series of pages that discuss underlying theoretical considerations behind the suppression of wages of natives concern voiced against more liberal migration policies.

The page builds on the page on migration, wages, supply, and demand. As discussed on that page, to a first approximation, migration tends to lower wages in the sectors of the labor market to which migration is concentrated, and raise wages in other sectors, and the effects approximately cancel out. The effect that migration has on wages therefore depends heavily on the occupational and skill mix of migrants.

The first approximation offers an incomplete and potentially misleading picture because of the following considerations:

  • A number of industries require a minimum efficient scale for operation. So, if there are too few people with a given skill set, it may not be economical to set up a firm that employs the skill set. Another way of putting it is that the supply curve of labor initially slopes downward for some industries. If migrants are concentrated in skill sets that have not yet currently achieved minimum efficient scale, then everybody’s wages could go up: natives with the same skills can benefit from migration enabling minimum efficient scale, and natives in other firms benefit from the increased demand for their services.
  • In general, the larger the number of people, the greater the ability of the economy to employ division of labor and improve efficiency, even for the same initial skill set. This phenomenon applies both to tradable and non-tradable goods.

Minimum efficient scale and tradable goods

Minimum efficient scale becomes particularly important in the context of tradable goods. Tradable goods are goods that can be produced at a different place from where they are consumed. This includes mass manufacturing industries as well as production of knowledge goods that relies on considerable in-person collaboration. Economics of scale and thick markets are phenomena that have been extensively studied by economists in the context of explaining why industries cluster in certain areas – finance in London, New York, and Hong Kong, technology in Silicon Valley, movie production in Hollywood and Bollywood, automobile manufacturing in Michigan and Japan. While this is not the story for all industries, it is an important counterpoint to the idea that large-scale movement of labor into a region necessarily depresses wages. It is quite possible (though not guaranteed) that if, for instance, the US had open borders for low-skilled workers and some relaxation in labor regulation, manufacturing of the sort currently done in places like China (which requires some level of skill but not a lot) would become feasible in the US, and make the US emerge as a leader in that segment of manufacturing. US natives would likely take on relatively high-paying supervisory roles or roles that used their language skills better in such factories – roles that wouldn’t exist without migration, because the industries themselves would not be economically feasible without the large and (relatively) low-skilled labor force to draw upon.

"The Efficient, Egalitarian, Libertarian, Utilitarian Way to Double World GDP" — Bryan Caplan