The New Americans Economic, Demographic, and Fiscal Effects of Immigration (1997) / Chapter Skim
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4 Immigration's Effects on Jobs and Wages: First Principles
4 Immigration's Effects on Jobs and Wages: First Principles
Pages 135-172
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From page 135... ...
Our theoretical presentation in this chapter relies on a "first principles" discussion of immigration's likely impact on domestic labor markets. This treatment highlights the main insights from economic analysis about the effects of immigration.
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From page 136... ...
Chapter 5 focuses on the empirical evidence concerning the role of immigrants in the labor market. The issues covered range over the changing relative economic status of immigrants, their ability to assimilate economically, the effects of immigration on the wages and employment of native-born workers, and the impact of immigration on the prices of goods and services.
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From page 137... ...
As a homely example, red apples and green apples are almost perfect substitutes, so that an increase in the number of red apples would not only reduce the price of red apples, but also simultaneously lower the price of green apples by about the same amount. In the context of immigration, where as we shall see many immigrants are unskilled laborers, the strong presumption is that immigrants are substitutes for domestic unskilled labor.3 Therefore, an increase in the number of immigrants will generally decrease the wages of domestic unskilled workers.
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From page 138... ...
Since immigrants to the United States are disproportionately low-skilled workers, people usually think of the substitute input as unskilled labor and the complementary input as capital or skilled labor. But large influxes of immigration in some highly skilled workers, such as mathematicians and nurses, imply that some highly skilled natives will also see their wages or job opportunities worsen with immigration while capital or less skilled labor gains.
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From page 139... ...
The new wage that equates the demand and supply of unskilled labor falls to WO1; that is, the wage of substitute domestic unskilled workers falls to WO1. Unskilled domestic workers are clearly worse off.
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From page 140... ...
The area of the triangle in Figure 4.1 that represents the net gain to the domestic economy is equal to one-half multiplied by the number of new immigrants times the fall in the wages of domestic unskilled workers. Since the number of immigrants is fixed, the bigger the drop in the wages of domestic unskilled labor, (WO - WO1)
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From page 141... ...
In this case, all inputs and national output will increase by the same amount and the wages of all workers will remain constant.8 It is only because immigrants and native workers differ from one another that immigration yields a net national gain. These differences between natives and immigrants, which may well be a legitimate source of concern about the ability of immigrants to assimilate socially and culturally, are the very reasons why the nation gains economically from immigration.
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From page 142... ...
Therefore, the bulk of the wage reduction induced by new immigrants may be concentrated on prior immigrant waves. In sum, the baseline analysis suggests that immigration raises national output and on net improves the economic well-being of the native-born.
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From page 143... ...
As before, unskilled domestic labor suffers a loss and skilled domestic labor a gain from immigration. Because good X uses more unskilled labor relative to skilled labor, this increase in immigration will also lower the price of good X relative to the price of good Y
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From page 144... ...
With this expanded model, immigration has distributional effects: skilled domestic labor and domestic consumers of immigration-intensive products gain, and domestic unskilled labor and domestic consumers of goods not produced by immigrants lose or gain the least. But can we go beyond simply distributional gainers and losers to whether these cumulative domestic gains or losses are positive or negative in the aggregate?
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From page 145... ...
The welfare gain to natives from immigration thus can be decomposed into two parts: the gain from shifting production toward more valuable activities that use the relatively more skilled native labor, and the gain in consumption toward commodities whose cost has fallen.~3 In sum, the net welfare gains from immigration stem from two sources. By having immigrants specialize in the production of goods requiring a lot of lowskilled labor, it allows us to shift our domestic production toward those goods (Y)
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From page 146... ...
To the extent that immigrants specialize in activities that would otherwise not have existed domestically at that scale, immigration benefits all the native-born. In this case, there is little substitution against domestic workers, and domestic consumers gain from the availability and lower prices of these new services.
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From page 147... ...
If the United States has a comparative advantage in, say, goods that use highly skilled labor, we will export those goods and import goods that use less skilled labor, which raises U.S. and world income.
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From page 148... ...
until the nation's balance of international trade reaches some sort of equilibrium. By contrast, immigrants who come and work in export-intensive industries shift the industry mix toward those sectors, increasing the nation's comparative advantage in those goods.
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From page 149... ...
, but they are overrepresented in several service sector areas. Returns to Scale, Bottlenecks, and Externalities There are other channels by which immigration can affect the domestic economy and native workers.
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From page 150... ...
Existing research has not convincingly demonstrated that, in the aggregate, either decreasing returns due to fixed factors or congestion effects, or increasing returns, are more compelling alternatives. We caution, however, that this assumption of constant returns to scale is intended for analysis of marginal changes from the existing situation.
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From page 151... ...
Under these assumptions, the increase in the number of immigrants raises the nation's stock of less-skilled workers relative to that of more-skilled workers, which should reduce the pay of the less skilled and raise the pay of the more skilled. The magnitude of the effect on labor incomes will depend on the responsiveness of wages to changes in relative inputs.
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From page 152... ...
(1997) estimate a gain to natives of $9.1 billion i8The gain in total GDP is the area labeled "Native Gain" in Figure 4.1, which is 1.65 percent of the part of GDP going to unskilled labor (calculated as the 10 percent decrease in wages times the 33 percent increase in supply times one-half)
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From page 153... ...
This consensus reflects what economists view as plausible values of the relevant elasticities of factor prices to changes in labor supplies, or of the economic parameters that govern an aggregate production function. These empirical estimates suggest a net gain from immigration of from $1 to $10 billion dollars a year.
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From page 154... ...
Rather, the perspective moves to generations and centuries, as we evaluate whether immigration can serve as a significant force (either positive or negative) in temporarily or permanently altering trajectories of native per capita incomes.
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From page 155... ...
. Unskilled labor in this simple model requires no investment.
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From page 156... ...
is devoted to investment in physical capital used in production and to investment in the resources that produce skilled workers, with the allocation such that the returns to investment are the same in both forms of capital. New investment must be just great enough both to replace the capital and skilled labor lost through depreciation and to provide enough new capital and skilled labor to "scale up" these factors along with the increase in population.22 When this point is reached, all three factors continue to grow at the same rate, but all ratiosincluding the wages of skilled and unskilled workers and the rates of return to owners of capital remain the same.
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From page 157... ...
Thus, an increase in the number of unskilled workers equivalent to 1 percent of the labor force will have the effects on relative wages just described, with a 0.5 percent increase in output and little change in the return to capital. Even if immigrants were disproportionately less skilled and owned proportionately less capital than natives, the permanent effects of immigration would be less than these demand effects alone suggest, however.
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From page 158... ...
The available evidence suggests, however, that the fertility rates of immigrants and their descendants converge toward the national norm within two generations. Consequently, there is little reason to believe that differential rates of population growth will produce any long-term impact of immigra Similarly, if the children of immigrants born in the United States distribute themselves among the skilled and unskilled labor force and also save and invest in the same way as natives, the effects of an increase in immigration over one generation will be negligible one generation following that.24 The only long-run effect of a generation of increased immigration will be an economy that is somewhat larger; the growth rate and distribution of income will be unaffected.
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From page 159... ...
and L represent the total number of workers. Total labor income going to skilled workers (who represent one-fifth of L, or .2L)
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From page 160... ...
is equivalent to slightly more than one 29This follows from the same sort of calculations outlined in the previous footnotes. The fraction of skilled workers in the third generation and beyond is changed from 20 percent to 30 percent, while the fraction of skilled workers in the second generation is changed from one-eleventh to 3/23 (which puts the second generation half-way between the immigrant and third generations in terms of labor income going to skilled workers)
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From page 161... ...
One line of attack in recent models is to investigate how inventions and new ideas find their way into an economy (Grossman and Helpman, 1994~.32 Nations not at the frontier can achieve change by transferring technology from more developed nations, with appropriate modifications. Explaining why some nations do not grow, or explaining why certain nations have moved from stagnancy to approach the highest levels of per capita income, involves examination of the conditions for transfer.33 30The analysis of the effects of immigration, with this kind of technical change, is essentially the same as in the simple framework if we replace "worker" with "effective worker." It is also necessary to assume that each immigrant, skilled or unskilled, becomes the same number of effective workers as each native worker.
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From page 162... ...
implies that returns to skilled labor should be high when the level of skilled labor is low, since returns to all factors are decreasing. Yet we do not observe migration of skilled labor from rich nations with high proportions of this factor to poor nations with low proportions.
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From page 163... ...
If immigrants saved at twice the rate as the native-born (i.e., 20 percent, which is extremely unlikely) , then national savings would rise to only 10.8 percent.
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From page 164... ...
To the extent that immigrants specialize in activities that otherwise would not have existed domestically, immigration can be beneficial for all the native-born. In this case, there is little substitution against native workers, and native consumers gain from the lower prices of these services.
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From page 165... ...
1994 The origins of endogenous growth. Journal of Economic Perspectives 8:3-22.
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From page 166... ...
Assume that good x is relatively intensive in its use of labor and that good y is intensive in its use of capital. The OxOy locus traces all the efficient combinations of production where the marginal rates of substitution between capital and labor are the same in the two sectors.
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From page 167... ...
(6) By dividing the marginal physical product of labor by the marginal physical product of capital in both equations 5 and 6 and by taking the total differential, it follows that capital-labor ratios are strictly increasing in the marginal rate of substitution between capital and labor, independent of the endowments, d~kX)
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From page 168... ...
Given constant returns to scale, national income, Y in terms of y must add up the payment to the factors of production.
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From page 169... ...
Consumption and production are no longer constrained to be the same. At the new relative price, a higher social indifference curve can be attained and domestic workers thus experience an overall welfare gain.
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From page 170... ...
Formally, let I be the increase in immigrant labor to the United States. Assume for simplicity that this increase consists entirely of unskilled labor (what matters is whether the immigrant supply consists disproportionately of skilled or unskilled labor)
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From page 171... ...
In terms of our equation, ~f~/9I= 0, Johnson (1997) estimates that the gain to natives in this case is a bare $1.1 billion, all of which accrues to skilled labor, given his assumption that immigrants were entirely unskilled.
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From page 172... ...
The gain to natives in terms of additional GDP from this flow of immigrants would be the triangle in Figure 4.1, which is one-half the change in labor supply times the change in the wage of unskilled labor. The change in the supply of labor that substitutes for immigrants is 0.33.
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