Tuesday, December 21, 2004

Immigration and the US economy

Mark Krikorian on the negative effects immigration has on the American economy:

If the supply of foreign workers were to dry up (say, through actually enforcing the immigration law, for starters), employers would respond to this new, tighter, labor market in two ways. One, they would offer higher wages, increased benefits, and improved working conditions, so as to recruit and retain people from the remaining pool of workers. At the same time, the same employers would look for ways to eliminate some of the jobs they now are having trouble filling. The result would be a new equilibrium, with blue-collar workers making somewhat better money, but each one of those workers being more productive.

Many people fear the first part of such a response, claiming that prices for fruits and vegetables would skyrocket, fueling inflation. But since all unskilled labor — from Americans and foreigners, in all industries — accounts for such a small part of our economy, perhaps four percent of GDP, we can tighten the labor market without any fear of sparking meaningful inflation. Agricultural economist Philip Martin has pointed out that labor accounts for only about ten percent of the retail price of a head of lettuce, for instance, so even doubling the wages of pickers would have little noticeable effect on consumers.

But it's the second part of the response to a tighter labor market that people just don't get. By holding down natural wage growth in labor-intensive industries, immigration serves as a subsidy for low-wage, low-productivity ways of doing business, retarding technological progress and productivity growth.

That this is so should not be a surprise. Julian Simon, in his 1981 classic, The Ultimate Resource, wrote about how scarcity leads to innovation:

It is important to recognize that discoveries of improved methods and of substitute products are not just luck. They happen in response to "scarcity" — an increase in cost. Even after a discovery is made, there is a good chance that it will not be put into operation until there is need for it due to rising cost. This point is important: Scarcity and technological advance are not two unrelated competitors in a race; rather, each influences the other.

As it is for copper or oil, this fact is true also for labor; as wages have risen over time, innovators have devised ways of substituting capital for labor, increasing productivity to the benefit of all. The converse, of course, is also true; the artificial superabundance of a resource will tend to remove much of the incentive for innovation.


At 12:39 PM, Blogger Celi Lisle said...

Not sure if I read you right. The "artificial superabundance" in question is labor in an environment of increased illegal immigration?

When does the act of choosing your nationality become artificial? Obviously ethnicity is fixed for life, but nationality is always fluid (or should be). Nothing is more natural than moving to a country with opportunity. Artificiality only comes in regulating abundance.

At 1:13 PM, Blogger Adam Lawson said...

The problem is that immigration increases the supply of labor. This is bad for workers since wages usually will only rise if the demand for labor is greater than its supply. Immigration ensures that the supply of labor will always be greater than demand which will have a downward effect on wages.

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