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Immigration's Effect on Wages

Simple economic models tell us that immigration brings lower wages because it creates a higher supply of workers without any change in demand.  However, these models do not take into account all potential factors. 


For example, immigrants tend to come to the United States with skills that apply to certain industries, so wages may only be affected in particular areas of the economy. Different education levels from the immigrants’ home countries allow those coming to the United States to specialize in different industries. Further, the demand that immigrants bring with them for goods and services may offset the excess supply that they bring to the workforce.  


If we assume that all industries require labor and capital as inputs to create their goods and services when immigration occurs, the amount of labor increases while the amount of capital remains constant. 


This excess labor drives down the marginal productivity of labor: the amount of output that each unit of labor, each worker, is responsible for.  The marginal productivity of capital increases on the other hand. These two effects lead, in theory, to wages decreasing and rental rates of capital increase.  


The first problem that this model faces is that it assumes that all immigrant workers are capable of entering the workforce for all industries, regardless of their education level or skill set.  However, as the St. Louis Federal Reserve Bank points out, this is not the case.  


The majority of immigrants come to the U.S. either not having completed high school or only having a high school diploma equivalent.  This leads immigrants to primarily join industries that do not require high levels of education, such as farming, textile manufacturing, construction and food manufacturing. In fact, according to a Pew Research survey, 64% of people in America believe that legal immigrants mostly fill jobs that U.S. citizens do not want.  


The way economists measure the effects of immigration on wages is through the elasticity of those wages.  Elasticity refers to the percent change in an outcome given a percent change in a factor of that outcome.  When accounting for education and the industry of choice for immigrants, the typical wage elasticity of immigration is -0.4.  


This means that if immigration levels increased by 1%, wages in immigrant-dominated industries would decrease by 0.4%.  This effect is undeniably significant for those industries because immigration levels have been known to vary by as much as 18% year-to-year which would cause a 7.2% change in wages.  However, this is not necessarily a bad thing.


The industries where wages are decreasing due to an increase in immigration are low-education industries. This, in turn, incentivizes U.S. citizens to pursue higher education.  If citizens want to make more money, they will have to enter into fields that require higher levels of education. Immigrants themselves may face the same pressure. 


Immigration will lead to an increase in the percentage of the population with higher education as immigrants and citizens feel the pressure to land specialized jobs and higher wages.


The opinions expressed in this article are those of the individual author.


Russell Reddecliff was an Economics intern for ONC during the Fall 2021 semester. 


Sources:

Bandyopadhyay, Subhayu. “Educational Attainment of Immigrants in the U.S. and Eighth District.” Federal Reserve Bank of St. Louis, 22 December 2020, https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2020/educational-attainment-immigrants-national-and-district-level

de Brauw, Alan. “Does Immigration Reduce Wages?” Cato Institute, https://www.cato.org/cato-journal/fall-2017/does-immigration-reduce-wages#.

“A majority of Americans say immigrants mostly fill jobs U.S. citizens do not want.” Pew Research Center, 10 June 2020, https://www.pewresearch.org/fact-tank/2020/06/10/a-majority-of-americans-say-immigrants-mostly-fill-jobs-u-s-citizens-do-not-want/

Sherman, Arloc, et al. “Immigrants Contribute Greatly to U.S. Economy, Despite Administration's “Public Charge” Rule Rationale.” Center on Budget and Policy Priorities, 15 August 2019, https://www.cbpp.org/research/poverty-and-inequality/immigrants-contribute-greatly-to-us-economy-despite-administrations

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