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Wednesday, May 17, 2006

Immigration, Growth, Employment, and Wages

I think something important is being missed by some people involved in the immigration debate. For the moment, forget about immigration and simply think about population growth among U.S. citizens. What happens as population grows? The economy grows along with it. New housing developments are put in place, another Safeway, another bank, another 7-11, another set of medical and law offices are built, all sorts of new businesses are started or existing businesses expand. Think about the difference in your own town, if it's grown, over the last few decades. Is there another Subway anywhere? Yes the supply of labor increases as more and more people enter the labor force with population growth, but because there are more businesses, because the town and economy have grown, demand for labor grows as well. Because of that, wages do not necessarily rise or fall as population grows, though relative differences in the supply of labor across skill classes can cause adjustments. Essentially, the new population creates the goods and services it needs to support itself. Remove the new population, and the economy would be smaller and so would the number of jobs.

Immigration is no different. Just because a million people come here and get jobs does not mean that 1 million U.S. citizens lose their jobs. The immigrants both create new goods and services and purchase goods and services, and the economy grows to accommodate the new entrants. This is not a zero sum proposition where one person necessarily displaces another because the economy is static, as more people show up there is more growth. I have a hard time believing that the value of what immigrants create in goods and services is smaller than what they are paid, and therefore that they are a drain on the economy even allowing for some of the money to be sent home. But even if they are paid their marginal products (I doubt they are paid more than that), in what sense are they not contributing to the economy exactly what they are taking out of it? Isn't that one of the defenses of capitalism, that each worker is paid according to what they contribute at the margin?

Immigration is no different than population growth in this sense. Every year population increases, and as that happens the economy replicates itself and grows larger. The same with immigration. As new immigrants enter, new businesses, etc. are created, and there is economic growth through replication of the existing economy. Both the supply and the demand for labor increase and wages do not necessarily fall as overall employment increases, though as noted above large changes in some skill classes, e.g. a large influx of low skill labor, can force markets to adjust by changing prices to encourage labor to move where it is needed more. That is what markets do, adjust prices to direct the flow of resources, and if they are failing at this important job, then government can intervene to fix the problem without building a fence along the border. If we were to gather up every illegal immigrant and send them home tomorrow, both the supply and the demand for labor would fall and that is where, I think, many people err in their thinking about this issue, i.e. they presume that sending an immigrant home necessarily opens up a job for a U.S. citizen. But that fails to consider the demand side of the equation and the loss of jobs due to the fall in the demand for goods and services from reducing the immigrant population.

I doubt those of you opposed to immigration will be swayed be any amount of logic or empirical evidence, you already know the answer, so, as usual, feel free to tell me why I'm wrong. One place to prod might be the losses during the transition to a new equilibrium point after an influx of new labor.

    Posted by on Wednesday, May 17, 2006 at 09:04 PM in Economics, Immigration, International Trade, Policy, Unemployment | Permalink  TrackBack (0)  Comments (57)


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