The Economic and Fiscal Consequences of Immigration (2017) / Chapter Skim
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4 Employment and Wage Impacts of Immigration: Theory
4 Employment and Wage Impacts of Immigration: Theory
Pages 165-196
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From page 165... ...
Theory predicts that immigration initially confers net economic benefits on the destination country economy while creating winners and losers among the native-born via changes in the wage structure and the return to capital. Resulting changes in factor prices increase the production of goods and services that use the type of labor that immigrants provide most intensively.
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From page 166... ...
each firm owns. We assume that all individuals devote a fixed amount of time to work activities (the quantity of labor supply is perfectly inelastic -- it does not respond to wage changes)
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From page 167... ...
Crucially, we assume these new immi 1 2 grants arrive without capital and that they do not receive a share of the Wages L1 S L2 S H A G w1 1 F3 B E w2 2 C D D D L1 L2 N N+ M Labor FIGURE 4-1 Labor market (with inelastic labor supply) response to an influx of immigrant workers.
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From page 168... ...
Although immigrants are consumers as well as workers, the demand curve for labor does not shift outward in this simple model until capital adjusts. The reason for this is that the demand curve is determined by the economy's productive capacity, and the addition to aggregate consumption created by the immigration-driven population growth is represented as a movement along the demand curve.
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From page 169... ...
The rightward shift in the demand curve for capital from KD to KD in Figure 4-2 1 2 captures this rise in the rate of return to capital. If one assumes that the production technology has an attribute economists call constant returns to scale -- which specifies that output quantity increases by the same proportion as the quantity of all inputs -- the horizontal distance between KD and 1 KD, measured in percentage terms, is equal to M/N (the ratio of immigrant 2 to native labor)
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From page 170... ...
Modeling the impact of immigration in terms of its impact on the market for capital is admittedly less intuitive than modeling it in terms of its impact on the labor market. However, the rise in the rate of return to capital from r1 to r2 in Figure 4-2 underlines an important insight: the immigration surplus arises because the labor supplied by new immigrants makes native-owned capital more productive.
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From page 171... ...
Immigrant labor accounts for 16.5 percent of the total number of hours worked7 in the United States, which, using this methodology, implies that the current stock of immigrants lowered wages by 5.2 percent and generated an immigration surplus of $54.2 billion, representing a 0.31 percent overall increase in income that accrues to the native population. However, it bears noting that it is problematic to apply the same static methodology used for small temporary inflows to measuring the impact of the entire population of immigrants, which has grown over the course of decades.
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From page 172... ...
A decline in wages of 0.35 percent in this simple model economy, assuming a GDP of $17.5 trillion, implies that as much as $39.6 billion that was once paid as wages is now paid as returns to capital (for the 1% immigration-induced workforce increase scenario)
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From page 173... ...
Once again the supply curve for labor shifts from LS to LS , but now this 1 2 is accompanied by a shift in the demand curve from LD to LD as the addi 1 2 tional capital the immigrants bring raises the marginal product of labor. If one further assumes a constant returns to scale production technology, the economy reaches equilibrium points marked by the number 3 in both Figures 4-1 and 4-2, where neither the wage nor the rate of return to capital changes, there is no immigration surplus or change in the composition of income, and the initial ratios between capital and output and labor and output are restored.
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From page 174... ...
This is particularly appropriate if a large fraction of the economy's output is devoted to exports, if it is very open to inflows of capital from abroad, and if it represents such a small share of world output that changes in economic conditions originating in that country are unlikely to have meaningful effects on the global economy. In the context of a small open economy, an influx of immigrant workers is likely to be accompanied by an inflow of capital from abroad.
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From page 175... ...
Lower wages 2 mean the equilibrium amount of labor supplied by each worker drops from 12 Unlike the static analysis, here the change in immigration represents a change in long-run flows. The flow of immigrant workers dilutes the capital stock, hence any change in the flows has permanent (albeit small)
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From page 176... ...
l2 (N+M) l1 l (N+ Labor FIGURE 4-3 Labor market (with elastic labor supply)
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From page 177... ...
. If one treats v = 0.4 as an upper bound, and assuming once again thatR03045compensation of employees accounts Immigration for 65 percent of national income, the immigration influx that raises labor supply by 1 percent now yields an Figure 4-4 surplus of only $175 mil immigration lion, an influx of 2 percent yields $698 million, and the entire stock of vector editable current immigrants, who contribute 16.5 percent of total hours worked, yields $47.5 billion.13 13 By contrast, in Ben-Gad's (2004)
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From page 178... ...
In Figure 4-5, the arrival of Mu low-skilled immigrant workers, augmenting the population of low-skilled native workers Nu, means that, just as in Figure 4-1, the supply curve in the market for low-skilled labor LS shifts to LS . Wages u,1 u,2 for low-skilled workers decline from their initial value of wu,1 to wu,2.
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From page 179... ...
EMPLOYMENT AND WAGE IMPACTS OF IMMIGRATION: THEORY 179 Wages of Low- S Lu,1 S Lu,2 Skilled Workers A+Cs wu,1 , 1 3 wu,3 Bu ES + EK wu,2 2 Cu D D D D Lu,1 Lu,2 = Lu,3 Nu Nu+Mu Low-Skilled Labor FIGURE 4-5 Low-skilled labor market response to an influx of low-skilled immi grant workers. Wages of High- S Ls,1 Skilled Workers R03045 Immigration A+Cu+Bu-Bs ws,3 3 Figure 4-5 ws,2 ES 2 vector editable Bs ws,1 1 Cs D D Ls,1 D Ls,2 Ls,3 Ns High-Skilled Labor FIGURE 4-6 High-skilled labor market response to an influx of low-skilled immi grant workers.
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From page 180... ...
Start with the low-skilled natives who now face direct R03045 competition from immigrants in their labor market. Generally, the smaller Immigration the share of workers in a given category, the greater in absolute value the Figure 4-7 corresponding value of the factor price elasticity will be.14 Take the example vector editable in which the labor force is equally divided between high-skilled and lowskilled workers.
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From page 181... ...
the corresponding elasticity of the own-factor price for low-skilled labor ΕUU. What this means is that the slope of the low-skilled labor demand curve LD in Fig u,1 ure 4-5 is likely to be steeper than the slope of the aggregate labor demand curve LD in Figure 4-1.
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From page 182... ...
Wages of high-skilled workers rise still further as the stock of capital grows, and the wages of low-skilled workers partially recover as well. Yet with more than one type of labor, neither the process of capital accumulation nor even the free flow of capital from abroad is sufficient to guarantee that wages return to their previous levels for both groups following an unexpected immigration episode, even in the long run, unless it also affects native occupational choice and investment in education.
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From page 183... ...
To see this, consider what happens in the market for high-skilled labor when the population of high-skilled native workers Ns is augmented by Ms highskilled immigrant workers. The labor supply curve shifts from LS to LS in s,1 s,2 Figure 4-8 and wages decrease from ws,1 to ws,2.
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From page 184... ...
Indeed, if one vector editable assumes that the share of national income captured by high-skilled immigrants is larger than the share captured by low-skilled immigrants and that the elasticity ΕUS is greater than ΕSU, then the demand curve in Figure 4-9 shifts outward more than in Figure 4-6. Hence, a percentage increase in the number of high-skilled workers raises the wages of low-skilled workers by more than the same percentage increase in low-skilled workers raises the wages of the high skilled.
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From page 185... ...
EMPLOYMENT AND WAGE IMPACTS OF IMMIGRATION: THEORY 185 Wages of Low- S Lu,1 Skilled Workers wu,3 3 A A+Cu+Bu-Bs wu,2 2 ES Bs wu,1 1 Cs D D D Lu,1 Lu,2 Lu,3 Nu Low-Skilled Labor FIGURE 4-9 Low-skilled labor market response to an influx of high-skilled immi grant workers. Rate of Return K1S K2S R03045 Immigration Cu+Cs r2 Figure 4-9 2 vector editable Bu EK F r1 3 1 G A H K1D K1 K2 Capital FIGURE 4-10 Capital market response to an influx of high-skilled immigrant workers.
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From page 186... ...
Immigration Surplus in the Long Run It might seem odd that the influx of the same number of immigrants who are exclusively either high-skilled or low-skilled can each generate a surplus larger than the influx generated by immigrants in the model with undifferentiated labor. The reason for this result is that by altering the skill distribution in the economy, immigrant labor creates shifts in wages that represent opportunities for native-born workers.
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From page 187... ...
In the short run, natives benefit most from the arrival of high-skilled immigrants because of capital-skill complementarities, but in the long run, low-skilled immigrants generate the larger surplus because they are more dissimilar to natives. In all cases, once capital adjusts, capital-skill complementarity is less important to the immigration surplus.
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From page 188... ...
The shaded area between the two rays is referred to as the cone of diversification. This means that, if R03045 the economy's total initial endowment of productive inputs -- its stock of capital K and available labor N -- falls Immigration within this area, one expects this economy to produce both goods.
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From page 189... ...
Its domestic garment industry produces less than the total amount of garments consumed and the remainder is imported. The arrival of more labor will reduce the volume of these imports and increase the amount produced domestically.
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From page 190... ...
Since this case assumes that the labor supplied by natives and by immigrants is identical, one can assume furthermore that all M new immigrants join type B firms. Even so, the number of native workers employed at type B firms increases as well, from NB,1 to NB,2.
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From page 191... ...
Indeed under certain conditions, particularly if there is a high degree of substitutability between the different workers in the economy, the long-run labor demand curve will slope upward.21 Consider once more an influx of high-skilled immigrants MS in Figure 4-12 that shifts the supply of labor S S from Ls,1 to Ls,2. In the initial phase, the wage drops from ws,1 to ws,2 along the short-run labor demand curve LD .
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From page 192... ...
as the labor supplied by new immigrants is made available in the market. Summarizing, firms can also respond to immigration by implementing technologies that are complementary to the type of labor immigrants' supply; this is another adjustment mechanism that mitigates adverse wage effects.
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From page 193... ...
For the case of an elastic labor supply, the influx of immigrant workers in Figure 4-3 initially lowers the wage from w1 to w2, and the amount of work supplied by an average native declines from l1 to l2. Yet this decline in the amount of work performed by natives does not correspond to an increase in the rate of unemployment as economists usually define this term.
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From page 194... ...
, the new immigrants who arrived between 2000 and 2009 had a particularly large and positive impact on the wages paid to the pre-existing stock of immigrants, whether high or low skilled. This result contradicts much of the empirical literature on wage effects, which generally finds that new immigrants are close substitutes for previous waves of immigrants.
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From page 195... ...
4.8 CONCLUSIONS The theoretical models point to many ways in which economic responses by individuals and firms are expected to mitigate the initial impact of immigration on the labor markets of receiving countries. Once immigration changes the relative prices of labor and capital, factor inputs are reallocated across sectors and firms may adjust their technology and output mix to make more intensive use of workers.
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From page 196... ...
Third, the arrival of immigrants raises the overall income of the native population that absorbs them: the immigration surplus. This surplus is directly related to the degree to which immigration changes wages and returns to capital.
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