Does low-skilled immigration depress wages for natives

  “Good Economic for Hard Times”, a new publication by Abhijit Banerjee and Esther Dufflo discusses the evidence in regard to immigration after separating the emotions and politics involved in the matter.

 

The US National Academy of Sciences, from time to time, appoints panels to summarise the scientific consensus on an issue. One such panel was appointed to summarise the consensus on impact of immigration on wages in the US. Their finding is :

 

“Empirical research in recent decades suggests that findings remain by and large consistent with those in The New Americans National Research Council (1997) in that, when measured over a period of more than 10 years, the impact of immigration of the wages of natives overall is very small.”

 

Banerjee and Dufflo argue that the classic supply-demand theory not apply to immigration as the issue is multidimensional and we would not be able to isolate all relevant factors to enable study of impact of one factor on wage variation due to immigrations. They have discussed several such factors which are relevant, , which the basic supply-demand framework overlooks.

 

Firstly, immigrant workers increase demand for goods and services, which creates jobs, mostly for other low-skilled people. This tends to increase their wages for low-skilled jobs and thus compensate for increased labor supply that would otherwise suppress wages. They are quick to point out that this positive impact on wages would not be seen if the workers keep their spending minimal and try to take back the money earned back to their home countries. This is likely to happen in the case of guest workers that are in the country for a short while and go back to their countries to spend. Such effects are seen in border towns of EU countries where workers travel across the border for work in the morning and get back the same night. In such cases the supply of extra labour force would have the effect of suppressing wages.

 

 Secondly, the availability of low-skilled migrant workers might slow down the process of mechanization, as the availability of low-wage workers makes it less attractive to make the required investment to mechanize. Banerjee and Dufflo give the following example to illustrate their argument:

 

In December 1964, Mexican immigrant farm laborers were kicked out of California, on the grounds that they were depressing wages for native Californians. Their exit did nothing for the natives: their wages and employment did not go up.” The reason is that as soon as the Mexicans were thrown out, farms in places that used to rely heavily on them did two things, First, they mechanized production and Second, they switched out of crops for which mechanization was not available. A similar trend can be observed in the farms of India. On account of the National Rural Employment Guarantee program (NREGA), a wider variety of wage employment is available to rural workers. Rather than wait for the workers and pay them higher wages, farmers are moving more and more towards crops for which mechanization is available and they are also mechanizing all possible operations in existing crops.

 

Thirdly, employers may want to reorganize production to make effective use of the mew workers, which can create new roles for the native low-skilled population. Where there were more migrants, more native low-skilled workers upgraded from manual jobs to jobs with more complex tasks and that required more communication. Such operational upgradation is consistently observed across geographies.

 

Fourthly, immigrants are willing to perform tasks natives are reluctant to carry out. When you look at any restaurant in Telangana and Andhra Pradesh you will find that most of the service staff are from Orissa. I have had occasion to speak to managers and Owners of some of these restaurants and they all tell me that they are willing to hire locals too, but that none of the locals are willing to do the job. So when there are more migrants, the price of those services tends to go down, which helps businesses be more profitable. Since locals are, in any case, unwilling to take up those jobs, their wages are not suppressed in any case.

 

It is clear that the supply-demand theory is just good enough to describe the labour market. Labour markets are much more complicated. Even though there is enough evidence for this, politicians and citizenry do not accept this understanding, as this evidence-based understanding is contra intuitive to the simplistic model that most people have already internalized.