More on immigration, wages and other myths, part II
Gerard Jackson
In part I I criticised the argument that immigration could drive down wages and thus raise profits which could then lead to more investment. I fear a couple of readers have misunderstood my point.
One reader pointed out that supply and demand is "the argument that immigration could drive down real wages and boost profits". He then attacked it by saying that "if higher profits did emerge then competitors would compete away the profits".
This is true, but I think the argument is the standard one that increasing the supply of labour reduces real wages and boosts returns to existing capital. Obviously, this process would stimulate more investment (assuming that some of the profits increased total savings) until these profits were competed away.
But the fact remains that this would be a one-off gain to the value of existing (pre-immigration) capital at the expense of real wages.
This is a fairly common finding — for example several years ago a US NAS Rand Corporation report on immigration found a trivial overall economic effect, but there were winners (I think it singled out restaurant owners as an example) and losers — particularly low-skilled workers.
It was not my intention suggest that immigration of unskilled labour (unskilled labour was the subject of the argument1) would in fact generate real profits. I for one do not believe it would. Profits were only assumed because that was central to the argument.
All of which brings us back to the nature of profits: they are maladjustments between supply and demand, meaning that factors of production are undervalued in relation to the value of their products. In a free market this situation is usually brought about by changes in demand and technology.
It becomes clear that for any industry to gain genuine profits from a rise in the labour supply the increase would have to quickly drive wage rates down below the previous level
I could only imagine a sudden and significant increase in the quantity of labour achieving this effect and then for only a short time. As we are only assuming a gradual increase in the labour supply the possibility of profits arising from the under-pricing of labour does not, in my opinion, emerge to any significant degree.
The same goes for a natural increase in the workforce. If the level of investment remains unchanged then a rising workforce will see per capita investment fall and real wages and thus living standards also fall. Once again, there is no need for 'wage induced' profits to emerge because the capital structure would easily accommodate itself to the slowly growing labour supply without bringing about profit-generated maladjustments.
It should be clear that even if a sudden influx of labour drove down the real wages of the low-skilled below their market rates and thus generated profits, this would not and could not expand aggregate investment. You can only invest what has been saved.
In other words, unless savings expand then increased investment can only occur in this low-skilled area by diverting it from other activities. There is no other way. Hence these profits would be competed away not by raising savings but directing them from less profitable lines of investment.
It is fallacious to assume that per capita savings, meaning investment, will somehow automatically expand with the growth in population. If this were so then India and Bangladesh would indeed be wealthy countries.
Another fallacy is to fail to recognise that the so-called 'normal profit' rate, or rate of return, is really the rate of interest, i.e., the rate that would prevail in a state of general equilibrium.
As I have already stated, a growing population cannot in itself raise aggregate profits or investment. Therefore, if changes in population growth raise the return to capital this means that they must have changed the real rate of interest. This brings us, once again, to Austrian economics which basically defines capital as the material means of production.
It clearly follows that a growing population in the face of an unchanged savings pool will be employed in more and more labor intensive activities. Why this should raise the return to capital (investment) baffles me.
If this relationship really existed then labor intensive economies, like Ethiopia, would enjoy far higher returns on their investments than capital intensive ones, i.e., they would be more profitable.
Of course, if it is accepted that if the rate of interest is determined purely by time preference and that profits are maladjustments between supply and demand then the idea that changes in population will in themselves cause changes in the return to investment, i.e., the rate of interest, evaporate.
What all this boils down to is that a growing population would not drive down real wage rates so long as per capita investment rises. This is a fact that opponents of immigration ignore, especially if they are greens.
Two other points that were raised:
Now it is true, as one reader pointed out, that immigrants who bring in capital can lay claim to foreign goods and that if they do so there would no inflationary effect. Two things: a) it is highly unlikely that immigrants would spend all their capital on imports and (b) their capital is a claim on goods in general and not foreign goods in particular.
On the point of diseconomies of scale I now realise that I did not make myself at all clear. The reader is correct in assuming that "if residents of the north east were experiencing diseconomies of scale, establishing settlements in the mid-west would be the rational response to such problems?"
However, my badly presented point is that the anti-immigration argument seems to assume an absence of mobility. On the basis of that assumption the mid-west would not have been settled.
In addition, we must not overlook that the US was, next to the British Empire, the world's largest free trade area and that this allowed its regions to exploit their comparative advantage. Unfortunately the same cannot be said for Australia.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 13 December 2004