The Wall Street Journal gets it wrong on the immigration question
Gerard Jackson
The question of immigration is a sensitive issue in the US. Unfortunately the Wall Street Journal's recent contribution to the immigration debate is based on faulty economic reasoning.
Apparently taking her cue from the Cato Institute Mary Anastasia O'Grady argued that the real problem is not immigration per se but "the serious mismatch between high demand in the US labor market for low-skilled foreign workers and the currently unrealistic US immigration policy" (Treating Immigrants Humanely 30 August 2004).
In plain English, the so-called immigration problem is really a labor shortage problem. This is a simplistic view that misconceives the true economic situation. Why there is an apparent shortage of unskilled labour is a question that apologists for immigration beg rather than ask.
I think we need to start with a couple of basic economic principles. When the demand for labour rises, so do real wages. When the supply of labour increases, real wages must fall if widespread unemployment is to be avoided. (For the sake of simplicity, I'm treating labour as homogeneous).
The demand curve for labour consists of a descending array of marginal productivities. The wage rate will be determined at the point where labour's supply curve intersects the demand curve. At this point the value of labour's marginal product will equal its wages. It's obvious that if the supply of labour increases the supply curve will shift to the right and down the demand curve until it reaches a new market clearing rate. It's equally obvious that the new rate will be lower than the old one. This is what native Americans instinctively understand and fear.
Although the above line of reasoning is economics 101, immigration supporters seem to completely overlook it, just as they overlook another basic and very important element: capital accumulation, the process that shifts labour's demand curve to the right by raising productivity and hence real wage rates.
When capital accumulation exceeds population growth labour becomes increasingly scarce relative to capital and so wage rates rise. Should the supply of labour exceed the rate of capital accumulation, real wage rates will fall. Now increasing the labour supply through immigration does not always cut real wage rates. What it can do is greatly retard the rate at which real wages grow.
The situation of New York maidservants on the eve of WW I provides an excellent example of this process. In 1913 these girls averaged $3.50 per week. (Living expenses were, of course, provided by the employer.) The supply of these girls was maintained by a steady flow of young black girls from the South and girls from Ireland and Germany.
The war had the effect of cutting off the foreign supply of girls while taking many others into factories and offices. This meant that from very early on in the war these maidservants' wages began to rise as employers competed against each other for their services. By 1918 their wages averaged $18 per week.
After the 1920-21 depression their wages dropped to an average of $14 to $15 a week. Adjusting for inflation, their real wages had more than doubled. The reason is not difficult to fathom. Immigration restrictions remained in force but an enormous amount of capital had also been accumulated in those four years, a process that continued for a number of years. It was this change in the labour capital ratio that maintained these girls' wage rates.
Let us now turn to three particularly interesting US periods with respect to immigration and wages. From 1855-95 there was an annual increase in real wages of 1.27 per cent but the period 1896-1916 saw the annual increase slow to 0.55 per cent. This latter period was marked by massive in immigration from Europe that averaged about one million annually. From 1900 to 1910, for example, immigration accounted for 55 per cent of population growth.
The 1917-55 period, however, saw the annual increase in wages rise to 2.47 per cent. Now immigration during the period 1930 to 1940 increased the population by 6 per cent; for 1940-1950 and 1950-1960 the respective increases were 5 and 9 per cent.
Though we must be careful of averages and bear in mind that they hide fluctuations, there is no doubt that above a certain level immigration had a negative impact on US wage rates. This could very well be the present case. A study by the UCLA Chicano Studies Research Center concluded that recent immigrants drove down local wages by 11 per cent
If this line of reasoning is correct, why is there a shortage of unskilled labour? This question returns us to capital accumulation. As I pointed out earlier, as capital becomes more abundant relative to labour real wage rates must rise. However, this means that labour intensive activities where productivity is more or less fixed and demand has not risen significantly find they are unable to pay the new rates. But this is to say no more than labour is more highly valued in other lines of production.
Trying to solve this so-called labour problem by lowering wage rates through immigration is regressive. What these producers are really trying to do is use immigration to offset the beneficial effects of capital accumulation. Taken to its logical conclusion this argument would have the US implement an immigration policy that would try to expand the labour supply in line with investment so that real wage rates never rose.
I would hazard a guess and say that the so-called rising demand for low-skilled labour could be a healthy signal that many low-paid jobs are being priced out of existence by the market place. A similar situation occurred during the industrial revolution. Agricultural wages in industrialising regions rose as farmers and landlords competed against manufacturers for labour made increasingly scarce by rapid capital accumulation. Will some bright spark now suggest that these regions should have imported foreign labour so as to drive real wage rates down? Yet that is basically what the Wall Street Journal is arguing.
A note on free market economics and immigration: There is a peculiar misconception about the place that a belief in free markets must mean support for open borders. It does not. This is like saying that a belief in hospitality means that one should allow any Tom, Dick or Harry freedom to enter one's home at will. Those who subscribe to this belief have yet to explain how a policy that would dramatically drive down wages rates would benefit American or Australian workers.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 1 September 2003