Immigration, wages and other myths, part I
Gerard Jackson
There are a great many myths both in the US and Australia concerning the economic and social regarding of immigration.
According to one school of thought high immigration rates raises domestic demand, stimulates economic growth, create jobs and generate economies of scale. Another school argues that immigration creates deficits, encourages foreign borrowing, reduces wage rates, degrades the environment, raises unemployment, causes diseconomies of scale and aggravates the current account deficit
One could be forgiven for thinking economics has nothing to say on the matter. In fact it makes some very illuminating observations.
The idea that increased immigration in itself generates growth is simply not true. It is true, however, that if a country with a sub-optimal population could raise real per capita incomes if it increased immigration and had the proper institutions in place.
The reason is that its present work force is not large enough to fully utilise the country's land and capital structure. Germany in the late fifties and during the sixties is a good example of this. The country accumulated capital so quickly it ran into labor shortages.
By importing workers it made more efficient use of its resources and thereby raised per capita incomes. So long as capital accumulation exceeded the rate of population growth real living standards would continue to rise. It is obvious from this that if population growth exceeds the growth in capital accumulation living standards must fall.
One thing should be abundantly clear: it is capital accumulation that raises living standards not population growth. This explodes the fallacy that immigration expands demand, especially for housing. To begin with, demand springs from production. Thus for immigration to expand demand it must by definition raise production. But this does not mean that per capita output would rise even though aggregate output would.
In the absence of increased investment or an underutilised capital structure real incomes would fall. Even if the newly-arrived immigrants brought sufficient capital with them and this was spent on housing real wages would still fall because housing is a consumption good and not a capital good, i.e., spending on housing does not raise real wages because it does nothing to raise productivity.
If their capital was changed into dollars by the central bank the result would lead to inflation as the money supply expanded. If they bought dollars from Australians to buy housing then the money stock would remain unchanged but nothing would be added to investment.
On the other hand, if they invested the money in companies this would add to economic growth, but only to the extent that it displaced domestic consumption.
But if our immigrants are thrifty their savings will actually promote growth and raise future incomes. Moreover, if these immigrants have a strong work ethic and entrepreneurial tradition then their business activities funded by their high savings rate will generate higher incomes.
A peculiar argument has emerged that even if immigrants depressed real wages this would raise profits, investment and perhaps eventually real wages in the long run. (See Katherine Betts' The Great Divide, pp. 54., Duffy & Snellgrove,1999). If this were so then countries with the lowest wage rates, e.g., Ethiopia, would be enjoying an economic boom.
Even if wages were depressed, which would only be in low-wage labor intensive industries, and profits did emerge, the effect would be to attract competitors who would compete away the profits with more labor intensive techniques. This means that productivity in the industry would actually fall even as output and employment expanded.
The reason is simple. Capital goods come out of savings. There is no reason to assume that a fall in real wages in one particular industry will expand the pool of savings even though it expands, either directly or indirectly, the demand for labour.
If a country is enjoying genuine growth aggregate profits must exceed aggregate losses, meaning the demand for labour is growing as real wages and productivity rise. In this case, 'cheap' immigrant labour would have to be either largely specific or quarantined if its price is to be kept low.
But capital would still have to be competed for and it would be this competition that would lead to more labor intensive techniques being used to employ these immigrants. However, as labour is not specific and cannot be quarantined — at least in a free market — the case is purely hypothetical and merely serves to demonstrate why the argument is wrong.
One argument for a larger population is that it leads to economies of scale. Once again, economies of scale require savings and this implies an already growing economy. If the population is stagnant or falling behind investment labour shortages will not emerge and the cry for an increased immigration intake will not be taken seriously.
I therefore suggest that the economies-of-scale argument will take care of itself. Others argue that economies of scale lead to diseconomies of scale as our cities become more congested. They wouldn't be more congested if economic policies allowed markets to develop regional areas.
A free labour market would allow particular regions to adjust wage rates and other costs in accordance with market conditions.
If the diseconomies-of-scale argument had any substance the American mid-west would never have been developed because no one would have left the north east of the country.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 6 December 2004