The other day Hal and I were talking about some work we're doing on the H1-B visa with a policy shop here in DC. It was the type of group that likes to offer proposals, so one of the things that it suggested as an alternative to the current H1-B system is a counter-cyclical visa (never mind that use of the visa is counter-cyclical anyway). The idea is that they didn't want these guys competing with American workers when labor markets were weak.
You all know my concerns about the H1-B are very different from this. I think the globalization of labor supply is a good thing - I don't like the program because of the preferential treatment for a particular class of workers. But aside from the merits of the program itself, I really hesitated at the very idea of thinking solely in terms of these partial equilibrium effects.
The evidence on the impact of immigration on native wages is mixed - there are literatures that show a positive impact and literatures that show a negative impact and none of it is particularly large. You would expect immigrants to hurt native workers using basic economic reasoning, and indeed when you look at close substitutes that's what the evidence seems to show. But if basic economic reasoning were sufficient they wouldn't put us through PhDs in economics.
There are lots of microeconomic counterarguments to that story - yes, some are substitutes but there are also a lot of complements. Raising productivity only ever risks displacing workers in the short run (same with technological unemployment fears). Or maybe frictional unemployment - close substitutes lose work but they'll find jobs shortly.
But one argument you don't see much that I wish you'd see more is what you might call a general equilibrium argument. Immigrants aren't just supplying labor in a labor market. They are also demanding food, housing, cars, computers, hair cuts, etc. For every immigrant worker we add we also get an immigrant consumer and saver. If those two roles are perfectly in balance, it's a wash from an economic perspective. Of course we don't expect them to be perfectly in balance, but the lack of a strong finding one way or another suggests that it's pretty close (which is what we'd expect).
To me immigration is a lot less about being an immediate boon or burden to society. The real action is in the distributional consequencs of immigration.
As a quick note - the other area where you see this mistake of looking only at partial equilibrium is with discussions of the minimum wage. This is another area where you see a conflicting literature (in this case, slightly less conflicting), but even the negative impact of the minimum wage on employment is modest when it does come up in the data. Why? Because we need to think about general equilibrium: those minimum wage workers are also consumers. This is not to say in specific groups the consequences aren't bad, it's just to say that it's precisely the distributional questions that probably have more interesting answers than the question "are we better off?". The answer to "are we better off?" is often that there isn't that much of an impact.
Monday, February 4, 2013
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"Immigrants aren't just supplying labor in a labor market. They are also demanding food, housing, cars, computers, hair cuts, etc. For every immigrant worker we add we also get an immigrant consumer and saver. If those two roles are perfectly in balance, it's a wash from an economic perspective. Of course we don't expect them to be perfectly in balance, but the lack of a strong finding one way or another suggests that it's pretty close (which is what we'd expect)."
ReplyDeleteVery important point. :) Also its application to the minimum wage.
Where is Henry Ford when you need him?
"You would expect immigrants to hurt native workers using basic economic reasoning"
ReplyDeleteYes. But then again, the very first thing I ever learned in any economics class was comparative advantage and the gains from trade which are of course just as applicable to labor as they are to other things.
"If those two roles are perfectly in balance, it's a wash from an economic perspective."
ReplyDeleteNo it isn't. The resources a country possesses per person still decreases with each immigrant. For example, one of the reasons America is richer than the European developed nations is that it has more land. That means more building plots and more farmland.
There are also forces that act in the other direction. More people means larger economies of scale, in the private sector and in government. The US will have the same number of senators however many people in contains, so the more people the cheaper the senate is per person (ceteris paribus of course). There are probably many other things that improve with economies of scale. In my view it's very difficult to say which factor is larger.
I don't agree with the comment on minimum wage laws. If you're talking about the long-run, then I think you're definitely wrong.
ReplyDeleteFirstly, the minimum wage only improve the wages of workers whose marginal value to their employer is higher than the minimum wage. The wages of those workers who would be willing to work at a rate below the minimum wage, get less wages, they lose the difference between their benefits and potential wages. (Those benefits are paid by someone else in taxes, i.e. the balance budget multiplier is 1). So, to begin with it must be the case that the losses in earning are more than made up for by gains.
Now, how is that supposed to work in the *long-term*. Certainly, in the short-term companies may make a large margin on each hour of labour by a low-paid worker. So, a minimum-wage law will force those companies to pay more. Then more of the wages those workers earn will be spent on GDP components compared to the companies who would save more. But, in the long-term risk-adjusted profits converge on the long-term rate of interest, through competition (as even Marx pointed out). If firms all make high profits from low-wage employees then in time production in those areas will expand until those profits are reduced. So, you can't expect asymmetry to last forever.
You also can't expect the asymmetrical spending of households and businesses to continue forever. As I understand you're version of the flight-to-quality and liquidity-trap arguments, these are temporary, not a permanent feature of the economy. If the economy improves in earnest then companies will spend their profits on expansion, and spend down their accumulated cash holdings. So, in the long-run their demand for GDP goods won't be different to consumers, only more choppy.
I haven't even mentioned the supply side yet.... It is possible that those who are prepared to work below the minimum wage may help produce capital goods. So, the accumulation of capital goods may be harmed by minimum wage laws, that would lessen the potential productivity of the economy in the long-run and therefore lessen output in the long-run. (On the other hand it may be argued that businesses will invest more in labour-saving technology if labour is more expensive. That's true, but it's only beneficial in the long-run if there are positive externalities to doing that. These days everyone seems more worried about the negative externalities of automation.)
None of these arguments apply to the case of immigration, if immigrants are similar to the existing population. Most of these argument don't apply to immigration full stop.
Daniel,
ReplyDeleteYou write: "If those two roles are perfectly in balance, it's a wash from an economic perspective."
Not true. There are gains from trade.
Also, who is Hal?