More Immigrants = Higher Wages + More Jobs?
Yes, it’s possible.
For our final semester project for the course International Economics, my partner and I chose to learn more about Mexico’s international trade and policies. One of our topics was labor flows and migration, particularly from Mexico to the United States.
And what I found out blew my mind.
Labor migration from Mexico to its neighboring country, the U.S., has long been a controversial topic. More so because people usually tend to believe that more immigrants mean more availability of labor and thus, a decline in wages that hurts even domestic workers.
How?
The reasoning follows that the more labor available in a country, the lesser it is valued. This is believed to cause the bargaining power to shift from being in the hands of the laborers to those of the hirers.
So, when more number of people are demanding a fixed number of available jobs, they will have to forego a higher salary just to make sure they get a job. If they insist on only working for a higher paycheck, then they may lose their job to someone else who is willing to work for less. Employers benefit because they can now pay less; workers lose out because of these lower paychecks.
However, there’s a flaw in this kind of reasoning.
It assumes that all immigrants will necessarily be looking for a job.
But not all want a job. Some want to create jobs.
(Eureka! Moment #1)
It turns out that besides causing an increase in labor supply, labor migration can lead to a simultaneous increase in the demand for labor because of two reasons.
One is when immigrants-turned-entrepreneurs create new jobs.
The other is when jobs that no one used to do before now get done because of the inflow of unskilled labor. (Eureka! Moment #2)
“Mexican workers are especially concentrated in building cleaning and maintenance, food serving and preparation, construction and manufacturing. One third of Mexican women in the United States work as maids and housekeepers and one fifth as cooks. Given the nature of these occupations, their low pay and the low unemployment rate in the United States, it is likely that many of these jobs would not exist or would be vacant were it not for the presence of Mexican immigrants.”
So, what happens if both supply and demand for labor increase?
In economics, when there is a simultaneous increase in the supply of and demand for a commodity (here, labor), then the price (here, wages) for that commodity can either increase, decrease, or remain the same.
So, an increase in both the supply of and demand for labor does not necessarily lower wages. (Eureka! Moment #3)
Here’s a diagram to help you get the picture.
The diagram to the left assumes only an increase in the labor supply, which would, as seen earlier and in the diagram, cause a decrease in wages.
This is because demand for labor, or the number of job openings, is assumed to remain the same, while the number of people vying for those jobs goes up. (Again, assuming that all immigrants want a job and don’t want to create them.)
In economics lingo, this is a classic example of a shift in the supply curve. Here, the rightward shift in the supply curve (i.e. increase in labor supply), paired with the same demand curve, causes a downward movement on the demand curve.
Why?
Because for the market to reach equilibrium, demand needs to be equal to supply. Simply put, the number of job openings (demand for labor) should match the number of people who want to get one of those jobs (supply of labor).
So, let’s get this straight. The demand for labor, i.e. number of job openings, will stay the same. But because
On the other hand, the diagram to the right assumes both an increase in the labor supply as well as demand.
Based on the extent of the increase in supply and increase in demand, wages can either increase, decrease, or stay the same.
- If the increase in demand > the increase in supply, wages increase. (As seen in the diagram to the right)
- If the increase in supply > the increase in demand, wages decrease.
- If the increase in supply = the increase in demand, wages stay the same.
Pretty neat, huh?
On top of that, there are also arguments that jobs taken by immigrants may have been outsourced or offshored instead of ever being offered to native workers.
So, in such a situation, the decrease in wages of jobs that the average domestic worker takes up cannot be blamed on the influx of those migrants who primarily take up jobs that would have otherwise been outsourced. (Eureka! Moment #4)
On the contrary , if such jobs are now being offered to immigrants, it is good for the country. Why? Because it will ensure that the money that domestic companies are paying to these immigrants is used, at least in part*, within the country. [*Where does the other part go? More on this later!]
How?
When such immigrants get their paycheck, they spend this money in the local store to buy food, clothes, etc. This matters, because it gives a boost to the local economy and in turn, helps the nation’s economy to grow.
But, had these jobs been outsourced, then the domestic company would have had to pay foreign workers, who would usually end up spending this money in their own country. So, here, money once paid wouldn’t necessarily find its way back into the domestic country’s economy.
So, the conversation around more immigrants causing a decrease in wages?
Not always true.
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