The Economist: Lower immigration boosts wages

The Economist: Lower immigration boosts wages

By Leith van Onselen in Australian EconomyImmigration

February 17, 2020 | 9 comments

The latest Edelman Trust Barometer survey revealed that more than half of employees globally are concerned about job competition from low-wage migrants, as well as foreign competition more broadly:

These concerns extend to Australia, where 48% of employees are concerned about job competition from migrants:

Interestingly, the open borders zealots at The Economist have released a new report on the US Economy, which reveals that lower rates of immigration are helping to boost wages, especially for Americans at the lower end of the labour market:

In both 2018 and 2019 nominal wages rose by more than 3%, the fastest growth since before the recession a decade ago. Americans at the bottom of the labour market are doing especially well.

In the past year the wages of those without a high-school diploma have risen by nearly 10%. Intriguingly, this has come as America has turned considerably less friendly to immigrants…

For the first time in half a century America’s immigrant population appears to be in sustained decline, both in absolute terms and as a share of the total. Net migration to America (ie, the difference between people arriving and people leaving the country) fell to 595,000 in 2019, the lowest in over a decade…

The number of highly qualified immigrants continues to rise… It appears instead that the overall decline in the foreign-born population is a result of falling numbers of low-skilled migrants…

Gordon Hanson of Harvard University suggests that if the impact of reduced low-skill migration is showing up anywhere, it will be in three particular occupations: housekeepers, building-and-grounds maintenance workers, and drywall installers.

These occupations rely heavily on immigrant labour and the services they provide cannot be traded internationally. Average wages in those occupations are rising considerably faster than wages in other low-paid jobs, according to calculations by The Economist.

Intriguing evidence also shows up geographically. According to research by William Frey of the Brookings Institution, a think-tank, five big metro areas saw absolute declines in their foreign-born populations in 2010-18. Wages in those areas are now rising by 5% a year, according to our calculations…

The apparent short-term boost to wages may encourage politicians to go further. Inspired by the president, some Republican senators are pushing to cut immigration by half in order, they say, to boost workers’ wages.

The economics is simple: continually increasing labour supply via immigration necessarily reduces workers’ bargaining power and ergo wages growth.

Yet, The Economist was quick to dismiss its own empirical evidence, cherry picking findings from old academic papers to argue against lower immigration:

The lesson from all these papers is that, over time, the economy adjusts to a fall in the number of immigrants. In the short term, native workers may well see a wage boost as labour supply falls. But businesses then reorient production towards less labour-intensive products; natives take jobs previously occupied by foreign-born folk, which may be worse paid; and bosses invest in labour-saving machinery, which can reduce the pay of remaining workers.

Even the apparent short-term benefits to wages are a poor economic argument for tough immigration restrictions. Migrants have economic effects far beyond the labour market. They spur innovation and entrepreneurship and they help create trade links between America and their home countries. Both low- and high-skilled migration are linked with higher productivity.

As America ages, it will need a lot more people willing to work in health care. Study after study finds a positive association between immigration and long-run economic growth—and therefore, ultimately, the living standards of all Americans. The Trump administration’s immigration restrictionism may achieve a temporary boost in wages of the low-paid now, but at a cost to the country’s future prosperity.

Talk about a biased conclusion. Why has The Economist deliberately ignored the many ‘costs’ of high immigration on productivity and living standards?

For instance, allowing employers to pluck cheap migrants in lieu of paying higher wages to local workers discourages companies from innovating and adopting labour saving technologies, which would boost the economy’s overall productivity. It also prevents creative destruction by enabling low productivity companies to remain in business.

Put another way, stemming the flow of low-wage migrants into the economy would force the least productive businesses to shrink and go bust, transferring workers, land and capital to more productive businesses, thus raising average productivity across the economy. 

Further, all businesses, observing higher wages, would invest more in labour saving technologies, training and restructuring to raise productivity.

There’s a reason why road construction in developed countries involves a handful of workers operating heavy machinery, whereas in low-wage developing countries roads are often built using dozens of workers with picks and shovels. The high cost of labour in developed countries forces construction companies to invest in labour saving machinery, which lifts productivity.

Growing the population via high immigration without commensurately increasing the stock of household, business and public capital to support the larger population also necessarily ‘dilutes’ the economy’s capital base.

This leaves less capital per person and lowers overall productivity, resulting in ‘capital shallowing’

*Finally, high immigration unambiguously increases infrastructure bottlenecks and traffic congestion, increases land prices and worsens housing affordability, erodes the natural environment, and in already built-out cities requires new infrastructure to be built that is much higher cost than in the past due to diseconomies of scale (e.g. requires tunneling and land buy-backs). These necessarily also reduce an economy’s productivity.

Sadly, The Economist is so wedded to its neoliberal agenda that it is incapable of providing a balanced assessment of the economics of immigration.

Leith Van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.