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Does immigration reduce wages?

Summary:
Critics of immigration often point to the fact that the post-WWII decades were a sort of golden age for American workers, with rapid growth in real wages up until about 1973. They argue that the immigration changes of the 1960s opened the floodgates, leading to much higher rates of immigration and lower wage gains for workers.Some people argue that it’s simply a question of supply and demand—more supply of workers means lower wages. Economists often reply that more people also means more demand for goods (and hence labor) so the impact on wages is unclear.  The US has lots more workers than Canada, but similar wages.Here I’d like to set aside the demand issue, and focus on the supply of workers. Is it plausible that immigration explains slower real wage gains

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Critics of immigration often point to the fact that the post-WWII decades were a sort of golden age for American workers, with rapid growth in real wages up until about 1973. They argue that the immigration changes of the 1960s opened the floodgates, leading to much higher rates of immigration and lower wage gains for workers.

Some people argue that it’s simply a question of supply and demand—more supply of workers means lower wages. Economists often reply that more people also means more demand for goods (and hence labor) so the impact on wages is unclear.  The US has lots more workers than Canada, but similar wages.

Here I’d like to set aside the demand issue, and focus on the supply of workers. Is it plausible that immigration explains slower real wage gains after 1973?

For this hypothesis to be correct, it would have to be true that growth in the number of workers accelerated after 1973. After all, if it’s “just a question of supply and demand”, then what clearly matters is not immigration per se, rather what matters is the total supply of workers. Immigration is just one input into that total supply; natural population increase is another.

Here’s a graph of total employment in the US since January 1948:

Does immigration reduce wages?

Between January 1948 and January 1973, employment grew at 1.45%/year.  From January 1973 to January 2020, employment grew at 1.38%/year.  So the supply of workers actually grew more slowly during the late 20th century immigration boom than during the post-WWII decades.  And the slowdown for non-farm payrolls was even more dramatic, as during the earlier period there was still a lot of labor moving from farms to the cities.

To be clear, this doesn’t prove that immigration didn’t reduce wages, ceteris paribus.  That would require a more sophisticated study.  What is shows is that the “common sense” argument that more supply of workers obviously leads to lower wage gains doesn’t explain why wage growth slowed after 1973—some other factor must have been involved.  (I suspect that a slower rate of productivity growth was the main problem, with a lot of wasteful spending on fringe benefits such as medical care being another factor.)

It is possible that immigration affected real wages in certain industries, especially the wages of less skilled workers.  If so, the US might want to consider switching to an immigration policy where the productivity of immigrants more closely matches that of the existing US population.  Because many illegal immigrants are low skilled, that would mean shifting our legal immigration toward higher skilled workers.  My own view is that low skilled immigration is fine, but politically it’s a tough sell.

This post was motivated by a tweet that showed a stunning decline in US population growth, to a rate of barely over 0.1% in 2020-2021.  This is partly due to Covid, which reduced births, increased deaths, and reduced immigration.  But population growth has been slowing for decades.

Some might point to the fact that a smaller labor supply during Covid has been associated with more rapid wage gains.  But it is real wages that matter most, and real wages have fallen over the past year.  

BTW, the following map shows that the Covid pandemic has led to some unusual population changes:

Does immigration reduce wages?

Some of these changes, such as rapid growth in Texas and Idaho and population decline in Illinois and West Virginia, have been going on for years.  But some changes are surprising, such as the decline in population in Massachusetts and DC, and the fast growth in Montana.  That might reflect people leaving dense areas for supposedly (but not really) safe low-density areas.  Or it might reflect people who work from home choosing to live where they can go hiking in the mountains.  (Or some of each.)

New York and California have consistently relied on international immigration to offset domestic outmigration.  With the flow of foreign migrants sharply reduced by Covid, their populations declined significantly.

PS.  Montana does have a slightly lower death rate from Covid than Massachusetts (but much higher than DC).  But after the initial wave in the spring of 2020, Montana has been hit harder than Massachusetts.  So fleeing to low-density areas doesn’t seem to make much difference.   On the other hand, the difference between states may be partly behavioral, so if cautious Massachusetts migrants to Montana continue their safe practices in their new home, they might be safer after all.  

PPS.  Reduced immigration is a factor in the current labor shortage, as this Washington Post story illustrates:

Helen Muradyan, a second-year resident physician, stopped working last month.

Not because her skills aren’t needed. To the contrary: The Southern California community hospital and health clinic that employed Muradyan struggle to find staff even during normal times. The pandemic worsened their staffing shortages.

“At one point we were operating at 150 percent of capacity,” Muradyan told me. “We worked day, night. We worked without breaks or anything, without seeing our loved ones, without seeing our family.”

But Muradyan, an immigrant from Armenia, had to stop working — because the U.S. government couldn’t be bothered to process her application to renew her work permit. Eventually, her existing work permit expired, and her employers had to terminate her.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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