Immigrants and “Low Wage” Jobs
One of the great absurdities in the debate over immigration policy is the frequently repeated claim that the U.S. economy is generating more “low wage” jobs than can be filled by the domestic workforce. This line has been endlessly repeated in news stories on the issue.
Quick trip back to econ 101: recall the concepts “supply” and “demand.” What makes a job a “low wage” job? In econ 101 world, a job will be a “low wage” job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising.
Immigration has been one of the tools that have been used to depress wages for less-skilled workers over the last quarter century. Many of the “low-wage” jobs that cannot be filled today, such as jobs in construction and meat-packing, were not “low-wage” jobs thirty years ago. Thirty years ago, these were often high-paying union jobs that plenty of native born workers would have been happy to fill. These jobs have become hard to fill because the wages in these jobs have drifted down towards a minimum wage that is 30 percent lower than its 1970s level.
In response to this logic, the “low wage” job crew claims that if the wages in these jobs rose, then businesses couldn’t afford to hire the workers. It’s time for more econ 101. Businesses that can’t make money paying the prevailing prices go out of business – that is how a market economy works. Labor goes from less productive to more productive uses. This is why we don’t still have 20 percent of our workforce in agriculture.
So the economic side of the debate over immigration is a question about employers wanting access to cheap labor. That part is pretty simple. There are other questions in this debate about human rights and basic decency. It’s outrageous to threaten people with deportation and imprisonment who have worked in this country as part of a conscious government policy. (No one enforced employer sanctions. That was a deliberate decision by the government.)
There is another side to this debate that gets less attention. The fact that immigrants are mostly less-skilled is not an accident. The current “die at the border” policy (so-called because you get the opportunity to work in the United States if you are willing to risk death in a dangerous border crossing) ensures that the flow of immigrants will be primarily less-skilled workers. Workers in developing countries with few employment opportunities might be willing to take this risk, in addition to the risk that they could be subsequently deported if they get picked up for a traffic ticket or some similar offence.
However, an established doctor, lawyer, or economist in the developing world will not try to slip over the border to work off the books in the United States. This fact ensures that the highly educated people who design immigration policy, and their professional colleagues, will not be subjected to the same sort of competition as less-skilled workers.
We could design an immigration policy that encourages highly educated people from the developing world to work in the United States. Such a policy would provide enormous economic gains, while also making income distribution in the United States more equal. While this could create a problem of “brain drain” from the developing countries, it is easy to design mechanisms to ensure that developing countries benefit from this immigration flow as well.
Since professionals are not working under the table (many actually have to be licensed by the government at regular intervals), it would be very easy to apply a modest tax to the earnings of immigrant professionals. This tax could be paid to the immigrants’ home country, so that they can educate 2-3 doctors, lawyers, economists, etc. for every one that comes to work in the United States.
U.S. trade negotiators have not pursued such policies, because trade and immigration policy has been deliberately intended to redistribute income upward. We can debate whether this is a desirable goal for trade policy, but only if the media stops making silly claims about “low wage” jobs.


37 Comments:
At 10:44 AM,
Anonymous said…
Ref: The Menace of an Unchecked Housing Bubble.
The elimination of the mortgage interest deduction for home owners would significantly help deflate the housing bubble, increase government revenues, and help decrease the disparity between the working class and the affluent. It is an unfair subsidy to the wealthy.
At 11:59 AM,
Anonymous said…
Thank you for this blog! I loved ERR, and BTP looks like a very promising continuation/replacement.
How do you respond to the studies that say that immigration has had a minimal impact in lowering wages, even for high school dropouts? (Sorry, don't have the refs here, but I'm sure you've seen them, they were reported in the Economist, among other places.)
When assuming that more American workers would mow lawns etc. at somewhat higher wages, aren't you effectively saying supply elasticity of labor in these groups is significant? Do that run counter to progressive positions on such things as taxes and the minimum wage?
The Wall Street Journal last week editorialized: "Nice to see the left finally being interested in wages(...)" Don't know if adopting neoclassical assumptions on the labor market is wise in the long run..
At 2:09 PM,
colorless green ideas said…
but dean, we've gotta make sure that those doctors and lawyers can afford their lexus!
is their any evidence that government licensing programs do anything other than raise the barrier to entry? i've always been skeptical government licensing, but more open to professional certification.
At 2:16 PM,
colorless green ideas said…
This comment has been removed by a blog administrator.
At 4:19 PM,
Anonymous said…
Sure, but who wants to spend $3 for an orange at the supermarket? How about $5 for a head of lettuce? Makes for a pricy salad at your local Shenanigans restaurant.
It would certainly be nice to have immigrant doctors and lawyers and even economists who could come to the US and give us cheap services, but let's face it: licenses and certifications just don't translate. A doctor in Guatemala can't come here and practice medicine. Economists in Ecuador (all 3 of them) probably do better in their home country anyway.
At 10:54 PM,
colorless green ideas said…
anonymous, that's the whole point: licenses and certifications currently don't translate. they easily could if they were written into the trade agreements along with all the other specifications and regulations.
At 11:38 PM,
Dean Baker said…
I'll make a few quick points here.
First, perhaps the most important study showing a small impact of immigration on the wages of high-school dropouts was by David Card. Card is an outstanding economist, whose work I take very seriously.
I read his peice about 6 months ago, but the 3 objections I would make (based on memory) are:
1) its key measure is the gap in wages between high-school grads and high-school droputs. If immigration also has an effect (albeit smaller) on the wages of high school grads, this measure will understate the impact on high school dropouts.
2) the study compares wage gaps across cities, with the implicit counter-factual that the gaps would be equal everywhere in the absence of immigration. In fact, there is reason to believe that areas with more rapid growth might have smaller gaps (that is what you find at the national level), so that we might think that in the absence of immigrants the fastest growing cities would have the smallest high school/non-high school wage gap. (Of course, there is a problem that immigration does contribute to growth -- no one said this is easy.)
The third problem relates to the quality of the data. My colleague at CEPR recently did a study indicating that the current population survey (CPS) overstates employment because it disproportionately excludes people who are not employed [http://www.cepr.net/publications/undercounting_cps_2006_01.pdf]. This effect is largest among young African American men. In other words, the people who are likely to be hardest hit by the effect of immigration are the one who are most likely to be excluded from the survey.
For these reasons, I am skeptical of the results of the Card paper, in addition to the fact that I find it hard to believe that when wages of so many formerly good paying jobs have fallen sharply -- and these jobs are now largely filled by immigrants, that the size of immigrant flows did not play a role.
On the issue of flows of immigrant doctors and other professionals -- of course you have to establish the infrastructure to support the flow. No one builds a show factory in China to export shoes to the United States, until there is an agreement assuring that the shoes can be sold in the U.S. without obstructions.
Similarly, there are not large numbers of doctors in Guatemala and economists in Ecuador who meet U.S. standards in these professions, because they have no reason to meet these standards. On the other hand, if trade agreements had focused on facilitating the flow of highly skilled professionals (instead of shoes), there would be no shortage of peopel in the developing world who would get the necessary training to take advantage of this opportunity.
At 3:51 AM,
Anonymous said…
"Many of the “low-wage” jobs that cannot be filled today, such as jobs in construction and meat-packing, were not “low-wage” jobs thirty years ago."
I'm a contractor in Hawaii- my highest paid carpenter gets $38/hour.
Granted, he's not gonna buy a new Gulfstream on that, but he's not gonna have a hard time putting shoes on the kids' feet, either, even with regular at $3.28/gal.
Just sayin'...
At 5:33 AM,
Dean Baker said…
sorry, the author of the study noted in my last post is John Schmitt, and the title is "Missing Inaction: Evidence of Undercounting of Non-Workers in the Current Population Survey (CPS." This is more interesting information than the URL.
At 11:15 AM,
SqueakyRat said…
"What makes a job a “low wage” job? In econ 101 world, a job will be a “low wage” job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right."
Probably you explain it better in Econ 101, but this makes it sound like you're talking about the supply of and demand for jobs rather workers to fill them.
At 2:07 PM,
Tom Faranda said…
I find it a little surprising (to say the least) that you seem to feel we should continue to ecncourage a "brain drain" from the Third World. We have been picking off Dr.'s, engineers, nurses, scientists, from the developing world for decades. It has been devastating for certain countries. They train them and put their limited resources into devleoping these professionals - who then head to the U.S. for the big bucks. Read "The Elusive Quest for Growth" by Easterly, who touches on this issue.
At 6:43 AM,
Tim Worstall said…
"In econ 101 world, a job will be a “low wage” job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising."
No it doesn’t. It tells us that those are low productivity jobs.
At 11:49 AM,
wkwillis said…
anonymous
Oranges at three dollars each?
Oranges take about five seconds each to pick, including the 60 seconds to shift the ladder in between picking each two dozen oranges, assuming no mechanized equipment. Oranges cost 60 cents at the supermarket. That works out to a cost of 2 dollars and forty cents to pick an orange, one orange every five seconds, or about one thousand five hundred dollars an hour.
Kid, fruit pickers never made that kind of money. Yeah, they used to be able to afford to buy cars and houses, but they could afford to buy cars and houses at a lot less than fifteen hundred dollars an hour.
Figure the price of oranges will go up about five cents each to cover paying Americans twice as much an hour to work one half as hard.
At 1:32 PM,
Isaac said…
Tim Worstall quotes and then writes
"In econ 101 world, a job will be a “low wage” job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising."
No it doesn’t. It tells us that those are low productivity jobs.
This is wrong: Mr. Worstall confuses a feature of equilibrium with the process by which equilibrium is reached. In equilibrium, true, wages will reflect the marginal productivity of workers (not the productivity of all workers in that job). Mr. Baker is quite correct, though, that if there are fewer workers then wages will rise and only the more productive producers will survive to pay those wages. Hence, at the end of the day wages will reflect marginal productivity, but it will be a higher marginal productivity than at the beginning of the day.
At 3:31 PM,
Jake said…
Dean,
It sounds like you are advocating easing restrictions on immigration for all immigrants. Are you?
Currently, it is very difficult to enter the United States legally. If immigrants from Mexico or wherever could more easily get through immigration red-tape, they would have a much reduced incentive to come in illegally.
At 4:24 PM,
Mike Liveright said…
Elasticity
It seems to me that discussions about Illegals, Wal-Mart, and Minimum Wage need to be based on:
1) An understanding on the elasticity of the Low Wage Wage/Demand curves. If we, as a society, push for higher low wages, by reducing the number of illegals, require that the employers pay legal wages, require Wal-Mart to pay for its health care, or increase our minimum wages, then there will be some decrease in the number of people employeed at these low wages, an increase in the wages paid for those employeed, or the costs of the resulting services/products.
If the elasticity is low and the percent of cost/wages is low, then increasing the low wages results mainly in transfering from the stock holder to the employee.
2) Similarly, we need to know how much of the cost of the resulting product/service is due to the low wage wages, and who is consuming it. If there is a small percent of the final cost due to the wages, then we can push for higher wages without effecting the final selling price. simialarly if the product is primarly sold to the "richer" then increasing the low wages would tend to transfer from the richerto the poorer.
At 10:33 PM,
Anonymous said…
Two items:
Companies that pay fair wages (NYC's MTA, other gov't and large employers)do not have any trouble getting people to do the "jobs that Americans don't want to do" -it's just that they won't line up to do them at less than a living wage.
The underlying problem isn't immigration and it isn't NAFTA/CAFTA - it is CHINA, et al, that keep the price of manufactured goods so artificially low that Western hemisphere nations cannot compete. Plus we pay a hidden price because of increased competition for oil and other raw materials, harbor dredging costs to allow huge container ships, and environmental damages, at the piont of manufacture and also, in our landfills as we dispose of these expendable commodoties.
Without this sword hanging over Mexico, Central and South America, their manufacturing base would increase and jobs would be in their home countries.
At 9:51 PM,
save_the_rustbelt said…
Illegals are rapidly taking over the non-union construction industry in many areas of the country, which is taking middle class jobs (dry walling, painting, carpentry) and turning them into low wage jobs.
Illegals do not call OSHA or wage-and-hour so they are perfect employees for less than scrupulous contractors.
So which comes first, the chicken or the egg?
At 2:30 PM,
TGGP said…
Giving tax money to the countries immigrants come from is a horrible idea. They left because their governments have ruined the possibility of prosperity in their countries. They will squander money stolen from immigrants living in America just as they squandered money seized from them before they left.
At 8:07 PM,
Anonymous said…
at Mr. 10:33 Anonymous ("Two items...")
Your arguments are politically biased, and lack supporting evidence.
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At 5:07 AM,
Ace said…
I hope this debate continues in one form or another. I find the idea of importing educated workers unsustainable. It doesn't create a stable foundation for America's growth. Maybe if there was a requirement for immigrants to give back and teach in their respected professions.
Ace
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At 12:14 AM,
Ashok Kumar said…
Unemployment is the worst case, but these can be minimized through education to everyone. In India, Government has made compulsory education to the all the children's and i hope in future there are more job openings and everyone gets benefited.
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