Tuesday, May 15, 2007

Illegal Immigration’s Impact on Wage Rates


There’s absolutely no question that illegal immigrant labor puts a persistent downward pressure on all wage rates.David Ricardo pointed this out with his "Iron Law of Labor" (published in his 1814 treatise "On Labor") in which he showed that when labor markets are tight, wages go up.

Likewise, when labor markets are flooded with workers willing to work at the bottom of the pay scale, unskilled and semi-skilled wages overall will decrease to what Ricardo referred to as "subsistence" levels.

As the supply of any given commodity rises, relative to demand, the cost/price of that commodity goes down. The larger supply of labor provided by illegal immigration increases the supply of the labor pool relative to demand.Illegal immigration reduces wages in 3 ways.

1. Illegal immigrants, being willing to work for lower wages, then their American counterparts, set the wage floor lower than it normally would be.

2. Illegal immigrants increase the labor force size, thus increasing the "supply" of labor relative to demand. Increasing the supply of labor has the same effect as increasing the supply of any consumer good, it reduces the "price" of labor, which means it reduces wages. Illegal immigrants are currently employed in 7 million of America's 143 million jobs. There are a total of 150 million workers considered to be "participating" in our labor force. The subtraction of the 7 million illegal workers would reduce this number to 143 million participating workers. The effect of such a "supply" reduction would be to increase the "price" of labor by basic supply & demand effect. Again, the increase in "price" of labor equates to an increase in wages.

3. As a result of the above 2 wage-suppressing effects, illegal immigration suppresses total aggregate labor income. Labor economist George Borjas puts the annual wage suppression at 4%, or $1700/worker. Multiplying that $1700/worker loss times 143 million workers gives a total loss of $243 billion dollars annually. That reduces potential consumer spending by $243 billion/year. The reduction in consumer spending reduces demand for production, and the demand for workers to provide that production. The result of this reduced demand for labor is a further reduction in wages.

Any 1 of the above 3 would reduce wages by itself, but the 3 together suppress wages even further. Again, the Borjas estimate of wage suppression from the immigration that occurred between 1980 and 2000 is $1700/worker/year, or 4% per year.

By the Numbers:

• By increasing the labor supply between 1980 and 2000, immigration reduced the average annual earnings of U.S.-born men by an estimated $1,700, or roughly 4 percent.

• Among those born in the United States who did not graduate from high school -- roughly the poorest one-tenth of the work force -- the estimated impact was even larger, reducing wages by 7.4 percent.

• The negative effect on U.S.-born black and Hispanic workers is significantly larger than on whites, because a much larger share of minorities are in direct competition with immigrants.

• The reduction in earnings occurs regardless of whether the immigrants are legal or illegal, permanent or temporary. It is the presence of additional workers that reduces wages, not their legal status, but it is the uncontrolled nature of illegal immigration that makes that situation so untenable.Source: Jorge Borgas, Kennedy School of Government at Harvard .

There are places in the United States where illegal immigration has big effects (both positive and negative). But economists generally believe that when averaged over the whole economy, the effect is a small net positive. Harvard's George Borjas says the average American's wealth is increased by less than 1 percent because of illegal immigration.

According to Dr. Borjas, "The economic impact of illegal immigration is far smaller than other trends in the economy, such as the increasing use of automation in manufacturing or the growth in global trade. Those two factors have a much bigger impact on wages, prices and the health of the U.S. economy."


unlawflcombatnt said...

Great post. I completely agree. I'd also add that the United States has a Working Age Population of 232.6 million workers, while only 146 million are employed. This puts the total surplus of potential workers at +86.6 million. And if there was ever any doubt about wage suppression from the increased labor supply, that doubt is refuted by a -1% fall in real weekly wages in 2007. These numbers debunk any fairy tales about a "shortage of workers." There is only a shortage of employers willing to pay enough to hire Americans.

Economic Populist Forum

JMK said...

Excellent points.

The problem is that too many people (especially politicians) deliberately try to make ILLEGAL immigration part of the overall immigration debate, when it's more accurately part of the "illegality debate."

Moreover, while H-1B Visas address a specific and real problem ("structural unemployment), there is no such "shortage" of low and unskilled workers.

All illegal immigration serves to do is to put a persistent and downward pressure on ALL prevailing wage rates, ESPECIALLY low and unskilled wage rates, BUT ultimately it puts a drag coefficient on other wage rates as well.

I'll be checking out the EPF very soon.


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