The Folk Theory of Labor Markets

A common mistake I see some conservatives make when embracing excessive government regulation of immigration is the belief that lowering the number of immigrants will increase native born workers’ wages. This comes from a failure to fully understand basic economics.

The idea that if the supply of something increases its price will tend to fall is widely known. Less known however is the fact that this principle contains an assumption: ceteris paribus. A Latin phrase thrown around by economists ever since Alfred Marshal included it in his classic 1890 textbook Principles of Economics, it means “other things held constant.”

When we increase the supply of labor, the demand for labor does not remain constant. It increases too.

The Folk Theory of Labor Markets mistakenly conceives of an economy with a fixed amount of jobs where immigrants are just more competition for an unchanging amount of employment opportunity. Reality is very different.

Our labor markets are dynamic, not static. When someone works a job, he’s paid only a fraction of the GDP his labor generates. That surplus value creates more jobs beyond the one he filled, jobs that would not exist if that person was not in the labor force in the first place.

The Folk Theory of Labor Markets is clearly disproven empirically. If it were true, rural workers would tend to be paid more than urban workers. The opposite is the case. Where we find the densest concentration of workers, there we also find higher average wages.

What if there were ever to be a massive migration of immigrants concentrated in one city in a short amount of time? Would there at least be some kind of a short-run downward pressure on wages? The Mariel Boatlift in October 1980 provided a natural experiment for such a research question, offering something of a labor market stress-test.

In 1990, leading labor economist David Card published one of the most cited papers in the economics of immigration to answer this very question. Ten thousand Cubans suddenly descended on Miami and were quickly given legal residency, growing Miami’s labor force by 7% in a matter of months. The data revealed no negative effect on the city’s wages or the unemployment rate.

The peer-reviewed literature since then has robustly confirmed the positive effect immigrants have had on the wages of native-born workers in the long-run. The seminal paper on this subject was first published in 2006 by Giovanni Peri. Applying data from 1990-2004 to a general equilibrium model, Peri showed the significant, positive effect immigrants have had in raising our wages.

All this evidence implies that the RAISE Act, a bill currently before Congress that would cut legal immigration in half, is misnamed. Immigrants’ presence here gives us a raise. If this bill passed, it would be a demotion – a demotion not just for America’s native-born workers, but a demotion of the very dynamism of America itself.

Eric Shierman lives in Salem and is the author of A Brief History of Political Cultural Change

 

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  • John Fairplay

    Given the tremendous number of immigrants – legal and illegal – that have been entering the country every year, it’s pretty surprising middle class wages have been flat for 40 years.

    Be careful about using cherry-picked data – like the experience of one City, or a time of rising wages (1990-2004) that goes against a longer term trend – to try and prove something. If you theory is correct, wages should have been skyrocketing from 2005-1016 as illegals poured into the country. Is that what happened?

    • Eric Shierman

      Middle class wages are higher now than they were 40 years ago. They are not flat.

      I don’t think anything written above would suggest immigration is a silver bullet. Nothing causes wages to skyrocket. Immigration’s effects are merely positive and measurable.

      That’s hardly cherry picked data in Peri’s research, which contains two business cycles. It would be great if this data went all the way back to 1787, but US Census data before 1990 didn’t track immigration as well.

      I’m not sure we’d necessarily call the level of immigration in the past 40 years “tremendous” when compared to the era of open American borders before 1924, but Peri’s research covered the peak immigration levels during the last 40 years. Immigration declined during the time period you mention (2005 – 2016). That’s probably been a factor in our slower growth.

      • Bob Clark

        Maybe, dear Eric, you should take the doors off your house and car; and hang a welcome sign up for all to join you. This will add to the dynamism of your personal experiences and what doesn’t kill you; makes you stronger supposedly. But I shall give you examples of cultural decay from immigration and subsequent economic stagnation when I can find the book I read only a year or so ago.

        • Eric Shierman

          This is not analogous either. We ought not to have a private property type right over other people.

          Let’s bring the false analogy of private property down to a smaller scale for reductio ad absurdum purposes. Suppose there is a neighborhood made up of 10 landowners. 8 out of 10 of them vote to keep out all visitors. One out of 10, Larry, votes to let them in because he wants to rent his house to them. The other no vote, Dan, just wants to entertain visitors. When the 8 put up a fence around the neighborhood, they don’t merely keep visitors off their own property. Rather, they keep the visitors off Larry and Dan’s property, against their will. Similarly, when we close national borders, we aren’t doing the same thing as deciding who comes into our homes.

          I have a fence around my home, so does my neighbor. We decide who comes into our own homes, but we don’t tell each other whom we can and cannot have visit our homes.

          • Bob Clark

            Well, it still raises my point that we need personal space. I just moved from the City of Portland a few years back, mostly because of a surge in population mostly created by in-migration artificially induced in some measure by government policy. I couldn’t even go a block any longer in the City without almost hitting someone either when
            driving or biking. There is collective space too, and this deterioration in my quality of life caused by a surge in local population doesn’t show at least explicitly in the economic data but it is real for me. And I hardly think I am alone.
            Also, my point about the Trojan Horse still demonstrates, even though mythical, the government or some entity needs to “check those coming in the door (even though in this case they were fooled) for risks.”

          • Eric Shierman

            It’s fairly easy to find personal space in Portland. It’s not hard to find personal space in Manhattan or Hong Kong either. However all of these places have different densities in their commons than my hometown of Estacada.

            Just how much collective ownership over the free movement of people would you give to government? When I see conservatives make that kind of an argument, it tends to depend on progressive premises that they arbitrarily reject in some circumstances and embrace in others.

            You had the freedom to move to a density more to your liking. Was that not more efficient than having an internal passport and giving government the power to decide who can move where?

            The cost you mentioned certainly can certainly show up explicitly in data. In the rankings of cities, objective data for traffic congestion is a factor that is usually weighed. It’s a metric that puts downward pressure on Portland’s rankings, but the presence of those those new people has also lifted many other metrics. If we allowed government to regulate where we could live, would you really expect the metrics in these livability rankings to go up as a result?

            Finally, the Trojan War is not analogous to immigration because putting soldiers inside of a wooden horse is not analogous to people freely moving to where they want to live.

            I’m not necessarily opposed to some kind of a rational screening policy, so long as the expected costs of the risks being screened are higher than the cost of the screening. If that’s all we did, we’d have an open border policy again like we did for most of our history. What I’m opposed to is the central planning of imposing quotas, particularly the reduction of those quotas by 50% across the board.

      • Bob Clark

        Oh, just off the top my head…there was the Trojan Horse catastrophe where the immigrants were interested in exacting a rather negative outcome for the receiving country.

        • Eric Shierman

          Aside from originating in myth, this is not even analogous to immigration. The Achaeans were an invading army.

  • Bob Clark

    The Cubans were great addition as are others fleeing bad conditions who seek to apply themselves in productive endeavors in the United States. However, this is not always the case with immigration; and what you get instead is a dilution of culture and quite possibly an expansion of the welfare state (which actually mutes the ability to discern a drop in positive economic activity since the Federal government just prints up more monies to dole out welfare monies to a location of immigration).
    Also, you must adjust rural versus urban wages for differences in the cost of living. The cost of housing is much less expensive in rural areas, for example.
    Trump is correct in revamping immigration to focus on the more skilled as they bring a more immediate synergy and dynamism in economic growth stemming from like the technology sectors. But even here culture is of utmost importance, as through the millennia it is demonstrated societies who became dependent on new arrivals to do their dirty work have often become complacent and lost their economic drive.
    Open borders is not a good thing, and neither is closed borders. It is a balancing act depending on existing conditions.
    If a tighter labor market through less immigration draws folks off of welfare, then you also have positive economic gain from public sector savings which can be redirected to more productive activities or returned to taxpayers.

    • Eric Shierman

      I’ll get to culture eventually. Sometimes I wonder if the bad economic arguments I hear are not people’s true motives on this issue when culture and race are hiding in the back of someone’s mind as their real reason for opposition. What is the evidence that current immigration levels are harmful via some kind of a cultural externality?

      Whenever someone wants the government to increase regulation, I put the burden of proof on him. I’d like to know the marginal trade off between a less dynamic economy in exchange for a more stable culture.

      Might less immigration lead to cultural stagnation? The more homogeneous a society is the more supportive it tends to be for welfare state spending. Perhaps America’s long history of open borders inoculated us from this, compared to other OECD countries.

      Where is this evidence of “societies who became dependent on new arrivals” losing economic drive? This sounds like one of those sweeping and inaccurate depictions of Roman History. Rome became interdependent with the rest of the world first, then it became great.

      When you talk of an optimization point in between closed borders and open borders, how would a government bureaucrat know where that is? Wouldn’t individual employers know better? If you think that it’s good for the economy for businesses to be forced to scrape the bottom of our labor pool barrel, what do you think that balance is?

      I’m interested in the idea of moving our existing levels of immigration from a family-based selection to a merit-based selection, but we’re not going to guarantee ourselves more high-skilled labor than we already get, as you say, to “bring a more immediate synergy and dynamism in economic growth stemming from like the technology sectors” if we cut the number of legal immigrants in half.

      • Bob Clark

        Dear friend, I somehow ended up putting my sarcastic reply in the Fairplay segment below. Peace be with you.

        • Eric Shierman

          No worries my friend. I’m just glad you replied.

  • James Waldman

    This doesn’t make sense on a few levels (doesn’t pass smell test): first, you make a point about general incomes, not specific. I can’t imagine incomes for low-skilled workers didn’t go down in your Miami example. So they were hurt. Not the people consuming low-skilled workers, just those workers; kind of like slavery. Second, despite your Latin phrase, if I have 10 companies bidding to build my house the bid will be lower than if only 2 were. (No studies or stats req’d). The money I save can be used to consume elsewhere, which is a net benefit to the market (or GDP in your article) but not the workers building my house. I can now by a few more things I don’t really need at WalMart. The question is do we maximize benefit to GDP (that is govt tax receipts) as a whole or strike a balance with GDP and humans? I vote with finding a balance in the short-run, while in the long-run maximizing market efficiency. One way to do that would be to have an immigration policy that regulated the flow of immigrants based on incomes to specific industries. As to other points in the article, as I often quote: “There are 3 kinds of lies; lies, damn lies and statistics.”

    • Eric Shierman

      Anyone who wants to make generalizations about labor markets, like you do, is going to have to talk about general incomes, but that does not ignore specific incomes. An average necessarily takes into account all specific incomes.

      While it’s certainly possible to error in a statistical analysis, data lies less often than anecdotes do. Indeed the three kinds of lies line tends to only be uttered by those finding themselves being contradicted by the evidence.

      There is a link to David Card’s work in the article above; click on it. If you did, you’d at least notice in the abstract he specifically points out that there was “no effect on the wages or unemployment rates of less-skilled workers.” So apparently, what you can’t imagine is how markets can be that flexible, but that’s one thing that’s been making America great for a long time.

      Notice that your ten companies analogy has the same ceteris pariubus assumption. The only piece of information you added was an additional 8 bidders. The reader now assumes that’s the only thing that has changed, and thus all other variables are held constant. If however you add those bidders at the same time the number of people wanting to have a home built was increased by an even greater magnitude, then you could find the price of the project going up compared to a situation with only two bidders but less demand.

      The workers building that house do benefit from living an a competitive market economy. They will have a higher standard of living. They too will be able to buy more things at Walmart.

      When they have to live in a heavily regulated economy where the government is making political decisions to impose a “balance,” the increase in the costs they see will be larger than the increased benefits.

      Given the evidence of the research David Card has published, and the preponderance of the scholarly literature that has followed, there’s no ground to identify short-run gains to balance with long-run gains. This is a common problem for most forms of government intervention into the economy.

      To get this back to the actual bill in Congress right now, is the RAISE Act an example of “the long-run maximizing market efficiency” you mentioned? How is cutting the number of LEGAL immigrants in half a balanced approach?

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