Thursday, April 25, 2013

General vs. partial equilibrium and immigration again

One line one of my co-authors used during the conference call the other day was that STEM guestworkers putting downward pressure on native STEM wages was "econ 101".  Indeed it is. I'm reminded of George Borjas's apt article title "The Labor Demand Curve is Downward Sloping".

But what sort of econ 101 is it?

The very important thing to realize is that it is partial equilibrium econ 101. It is what happens in a particular labor market when you increase the supply of workers.

That, of course, is not all there is to talk about. There's also general equilibrium. STEM immigrants buy bread and houses and medical services and gasoline and TVs. In that sense, they're going to reproduce demand patterns similar to native STEM workers and boost demand in the economy across a lot of markets at the same time that they're boosting supply in one particular labor market.

This goes for any immigrant.

So what's the point of distinguishing these general equilibrium and partial equilibrium effects?

If we have a wide-ranging increase in immigration flows that is not determined by Congressional gaming of the immigrant skill distribution, it's going to have a positive impact on aggregate demand and a positive impact on aggregate supply. The positive impact on demand is simply a consequence of the fact that everybody buys lots of different things.

So demand sort of takes care of itself. The only place where problems could really occur is if Congressional manipulation of the immigration flows gives us lots of partial equilibrium gluts and shortages by making life easier for some immigrant workers and harder for others.

The problem is the imbalance, not the immigration.


  1. Well, there may also be network effects which isn't econ 101 but is also most likely true.

  2. I disagree. Divide workers into skilled and un-skilled. Say that immigration doubles the numbers of un-skilled workers. The supply of taxi drivers and dry cleaners goes through the roof. But the demand for tax drivers and dry cleaners doesn't change. That's coming from the skilled workers, and their numbers haven't increased.

    1. I feel like you're agreeing with me...

      Yes, if flows are concentrated in any one field you're going to see big changes in that field. Those taxi driver salaries will fall.

      The "no effect on natives" result is a general equilibrium result. The "wages will fall" result is a partial equilibrium result.

    2. I think that it's only a general equilibrium result under the restrictive assumption that all the relevant factors are distributed in the same way in the immigrant population as they are in the native population. If they are not (for example, migrants are more or less skilled), then the general eq effect will not wash out.


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