Economist Writing Every Day

Economists overwhelmingly favor looser immigration controls. Allowing people to immigrate would improve the allocation of scarce labor and capital and it is a far cheaper way to aid poorer families than sending direct payments or trying to develop an entire country. Let’s cover some static analysis basics for migrating workers and their dependents.

Workers, Labor Markets, & Output Markets

There are two markets to consider: The new home country and the old home country. If workers leave the old country in search of the higher wages in the new country, then world employment remains unchanged. Employment obviously rises in the new country and falls in the old country. With identical laborers (a terrible assumption that’s the least charitable to immigration), wages in the new country fall and wages in the old country rise. This logic illustrates the cheap aid of which economists are fond.

Labor is one of the inputs of production. All else constant, more consensual labor contracts indicate more output. With reallocated laborers the old country produces less output and the new country produces more output. And, even though world employment remains unchanged, world output rises. This is because the foregone output in the old country is less than the additional output in the new country. This is not a heroic assumption driven by handwaving – the wage differential between the two countries implies a marginal product differential.

Dependents, Labor Markets, & Output Markets

What about dependents? These might be children or elderly people who don’t supply labor. But by virtue of consuming output, they increase the demand for labor which produces that output. Demand for labor falls in the old country and rises in the new country. The result is higher wages in the new country and lower wages in the old country. The effect on employment is more complicated. Because the marginal product of labor in the new country is higher, fewer additional workers are necessary in order to supply the additional output than if the same amount of output was demanded in the old country. Without diving into a more complete and more complicated general equilibrium model, it seems that there is less world employment when we move demanders to more productive countries.*

Key Indicators

What is the static effect of immigrants on average wages or average labor productivity? Again assuming identical labor, the additional workers in the new country cause the marginal product of labor to fall, lowering the average wage and the average productivity (this is a mathematical implication concerning averages). However, because the marginal product is still positive, the total output of the new country increases. The inverse is true in the old country. The average wage rises because there are fewer laborers and a higher marginal product of labor. The total output of the old country falls.

The RGDP per capita is more contingent on specifics. If the percentage increase in new country output is greater than the percentage change in population, then RGDP per capita rises. However, we know that this is not what happens in the static analysis. Due to diminishing marginal product of labor, n+1 laborers produces less than 1/n additional output. Said another way, the 101^st worker increases output by less than 1%.  We can argue for reasons that RGDP per capita increases IRL, but that requires a more complicated model than the static partial equilibrium model can provide without seemingly arbitrary assumptions.

Note that we can’t quite discuss inflation. More workers increases the supply of goods and lowers the price level. More dependents increase demand and increase the price level. The inverse effect is also true. If, for some reason, policy makers cared to prevent a higher price level, then they would prefer to permit working immigrants rather than dependent immigrants. The output would be lower priced than the alternative (assuming an unrelated monetary policy).

*This result is contingent. Dependents often arrive in the new country with productive workers such that the family’s demand for goods is higher in the new country than it was in the old country.