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Import Labor, Export Wages

Photo from The Cato Institute

By Vincent Bellomo

Minimum wage has once again entered the spotlight in American politics. The left argues that a higher minimum wage is needed to support workers with a “living wage.” They also argue that adjusted for inflation, the current minimum wage would be around $25 an hour. The right, on the other hand, argues that increasing the minimum wage would result in major unemployment. They state that businesses would likely cover the losses in increased wages by reducing their employment.

Both are accurate. When adjusted for inflation, the current minimum wage is pocket change compared to what it would be worth if it adjusted with inflation. However, increasing the minimum wage will also cause unemployment. How can we increase wages without causing mass unemployment or strangling businesses?

The answer lies in the right’s argument against raising the minimum wage. An increase in wages decreases labor. The inverse is also true, a decrease in labor increases wages—simple supply and demand. Senator Warren (D-MA) explores this point deeply in her book, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke. Senator Warren states that the increase in fixed-living expenses such as housing, insurance, and medical expenses caused many families to have both parents work full-time, doubling the household’s income.

The emergence of women in the workforce has led to the labor force doubling. Both parents now need to work full time just to make ends meet, creating a major risk. The inability of one member being able to work could subject the family to bankruptcy.

This isn’t an attack on women in the workforce, it is an example that an increase in the labor market decreases wages. Even when more jobs were created to meet the influx of women in the workforce and households’ income doubled, the standard of living for families did not. Why does this logic not apply when discussing the economics of immigration?

Economists and pundits tend to focus on the gross domestic product (GDP) when discussing our economy’s success. Of course, an increase in immigrants will increase the GDP, just as the increase of women in the workforce did. Any increase in our population that creates a positive output will increase our GDP.

China has the second-largest GDP in the world while New Zealand has the 53rd largest GDP. I’m sure most economists would prefer to live in New Zealand. Why? Among other reasons, New Zealand has a larger per capita income (average income) than China. What does this tell us? GDP per capita should be the determining factor of an economy’s success, not GDP.

According to a CATO institute report, immigration has a negative impact on wages. Numerous studies cited in the report, such as Card 1990, Card and Perri 2016, Borjas 2003, and Borjas and Katz 2007, all show a negative relationship between increased immigration and wages.

This relationship has an elasticity rating (the sensitivity of a product’s demand in response to its price) of -0.2 to -0.4. This means if the number of migrants was to increase by 10% at a -0.2 elasticity rating, wages would decrease by 2%. This goes to show that increased immigration would cause a decrease in wages.

However, I will not deny the net positive to immigration. Immigration increases our productivity, increases our GDP, and fills jobs that are generally unwanted by American citizens that would be too expensive to automate. Yet despite the net positive, the costs and benefits of immigration are not shared equally.

The benefits of immigration are reaped by corporations looking to hire more employees at lower wages. This increases productivity and decreases product prices for the consumer. The cost of immigration is carried by American workers. Their wages decrease or they lose their job.

While some of them gained better employment, it is not a reality for most. Only 66% of displaced workers in 2017 found work again by 2019. It is unknown whether this new employment pays more than their previous employment, but given that at least a third of workers are still displaced, it’s unlikely their new employment is any more prosperous than their previous positions. Others turn to new, rising industries in fields like STEM, which promises a future with higher-paying jobs. That is until the government imports high-skilled workers, once again decreasing their wages and job prospects.

The answer is clear. In order to increase wages, a decrease in the labor supply must be made. There are also many ways federal policy can be created to ensure that businesses receive enough incentives to stay in the U.S. rather than outsource overseas. Reducing corporate taxes and tweaking with immigration rates can ensure there is a benefit for corporations to station in the U.S. while still offering high-paying wages to American workers. Although, taxes are a topic for another time.


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