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The Impact of Immigrants on Native-Born Wages

Despite the critical role that immigration plays in preventing labor shortages that might impede economic growth, many critics of immigration argue that foreign-born workers reduce the wages of native-born workers with whom they compete for jobs. However, this argument relies on an overly simplistic understanding of labor supply and demand that fails to capture the true value that immigrants bring to the economy. If you are to accurately gauge the economic impact of immigration, the role that immigrants play in creating jobs is just as important as the
role they play in filling jobs.

To analyze the impact of immigration on the U.S. economy as a whole, particularly in the studies relied upon in this debate, economists typically use one of two models: ?static? or
?dynamic.? This, in its own right, is an oversimplification, but illustrates the key issue. The static model is the simplest and most frequently used by critics of immigration, yet it is the least realistic because it fails to account for the multi-dimensional role that immigrants play as workers, consumers, and entrepreneurs. The dynamic model, on the other hand, offers a more nuanced portrait of immigrants as economic actors. The net economic benefits of immigration are apparent in both models, but are larger and more consistently positive in the dynamic model.

Under the static model, economists assume that immigrant workers serve only to increase the labor supply, which results in slightly lower wages and thus higher profits for the owners of
capital. In other words, if there are more workers competing for a job, an employer might pay a lower wage for that job and pocket the difference. For instance, under a popular version of the analysis that utilizes the static model, the 125 million native-born workers in the United States in 1997 would have earned an average of $13 per hour if not for the presence of immigrants.

However, the 15 million immigrant workers who were actually in the country increased the labor force to 140 million and, under the static scenario, thereby lowered average wages by 3 percent
to $12.60 per hour. Nonetheless, the net benefit to the U.S. economy of this decline in wages would have amounted to about $8 billion in added national income in 1997.

Despite the seeming simplicity of this logic (more workers competing for jobs results in lower wages for workers and higher profits for businesses), the assumptions underlying the static
model bear too little resemblance to economic reality. Recent evidence supports the contention that the impact of immigration on wages is not as simple, or negative, as the static model would suggest. A 2004 study found that, despite the large influx of immigrants without a high-school diploma from 1980 to 2000, the wages of U.S.-born workers without a diploma relative to the
wages of U.S.-born workers with a diploma ?remained nearly constant. More importantly, thanks in part to the work of Ottaviano and Peri, we now know that the dynamic response of
small and medium sized businesses to this phenomena means that nearly all U.S. born workers, especially those with a high school education or better, have benefited from higher wages due to the presence of this low skilled, often undocumented, immigrant labor. The inability of the static model to explain this finding rests in part on the fact that the model
incorrectly assumes immigrant and U.S.-born workers are perfectly interchangeable; that is, that they substitute for each other rather than complement each other in the labor force. Common sense alone suggests that this is not always the case. For example, less-skilled foreign-born construction laborers enhance the productivity of U.S.-born carpenters, plumbers, and electricians, but do not necessarily substitute for them. More broadly, the different educational and age profiles of foreign-born and native-born workers indicate that they often fill different niches in the labor market.

More importantly, the static model fails to account for the fact that immigrants spend money or invest capital, both of which create jobs and thus exert upward pressure on wages by
increasing the demand for labor. This amounts to more than a minor omission given the scale of immigrant purchasing power and entrepreneurship. For instance, in 2004, consumer purchasing
power totaled $686 billion among Latinos and $363 billion among Asians.4 Given that roughly 44 percent of Latinos and 69 percent of Asians were foreign-born in that year, the buying power
of immigrants reached into the hundreds of billions of dollars.
The dynamic model accounts for many of these additional economic contributions by immigrants. In the dynamic scenario, immigrant workers spend some of their wages on housing and consumer goods, which in turn increases the demand for labor by creating new jobs. Rising labor demand then increases wages relative to what would have existed if immigrant workers had not been present in the labor market. Businesses in turn invest more capital, expand, and hire more workers across the spectrum of skill levels. The result is a larger economy with higher employment.

So, please think in a broader way before coming to a conclusion.

Posted by: tech_savvy   Posted on: 04/04/07 You are currently: a Guest | Members login | Terms of Use

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