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April 13, 2006

What (Some) Economists Have To Say About The Economic Effects Of Immigration

The "some economists" refers to those interviewed in the latest survey by the Wall Street Journal:

Nearly 80% of economists who responded to questions about immigration in the latest WSJ.com forecasting survey said they believe undocumented workers have an impact on the bottom rung of the wage ladder. Twenty percent believe the impact is significant, while 59% characterize the effect as slight. The remaining 22% said there is no impact...

About half of the economists said the presence of illegal immigrant workers has slightly reduced the overall rate of inflation in the economy, while 8% said the inflation rate has been reduced significantly. But 41% said they believe undocumented workers have had no impact at all on inflation.

Okay, let me try this again.  To the extent that wage costs exert pressure on the pace of consumer- or output-price increases, it is wage growth in excess of productivity growth that matters.  If the wages of any particular subset of workers are lower because their productivity is lower, there are absolutely no consequences at all on prices or their growth rates.

In fact, the low productivity explanation for low wages seem to be exactly what most of the survey respondents have in mind:

On balance, nearly all of the economists – 44 of the 46 who answered the question – believe that illegal immigration has been beneficial to the economy. Most believe the benefits to business of being able to fill jobs at wages many American workers won't accept outweigh the costs.

I could be wrong, but I'm guessing that the opinions of most of those surveyed are based more on gut feeling than research.  If it's research you are looking for, try out Alan Krueger's suggestions (and tip your along the way in the direction of Brad DeLong).

April 13, 2006 in Immigration | Permalink

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Listed below are links to blogs that reference What (Some) Economists Have To Say About The Economic Effects Of Immigration:

» US immigration debate: "Card is well ahead of Borjas on points" from New Economist
Like many other econobloggers, I have been following US political debates over immigration with some interest. But what about the underlying economics? Has immigration been a net gain or loss for the US economy? Brad DeLong has posted a useful review o... [Read More]

Tracked on Apr 17, 2006 4:45:00 PM

Comments

“To the extent that wage costs exert pressure on the pace of consumer- or output-price increases, it is wage growth in excess of productivity growth that matters. If the wages of any particular subset of workers are lower because their productivity is lower, there are absolutely no consequences at all on prices or their growth rates.”

This of course is the cost-push fallacy of inflation. Cost-push fallacies of inflation attribute the cause of inflation to a whole host of reasons: rising energy prices, rising health care costs, increases in wage costs, monopolies, and on and on. Cost-push fallacies have existed for hundreds of years and have been criticized by economists such as Ricardo, Wicksell, Fisher, and Cassell. The price level is not determined by cost-push but by changes in the velocity augmented money supply per real output. P = MV/Q. No attempted was made to explain how wage-costs affected money, velocity, or real output.

Read this economic blog at your own risk. It could be damaging to one’s rational thinking. Note well: Alan Krueger’s paper also contains poor economic reasoning.

Posted by: tom | April 13, 2006 at 11:33 PM

Is having "cheap labor" for business a good thing?

Because we have cheap labor do we invest less and hold down our over-all living standards?

Would we be better off with more expensive labor that would lead to more investment and higher productivity?

I do not know the answer to these question, but I suspect that having an ample supply of "cheap labor" is a negative for most of us.

Posted by: spencer | April 14, 2006 at 09:25 AM

tom -- The relationship between unit labor costs and prices is an implication of the standard New Kenynesian or New Classical Synthesis framework. You may not like that framework, but I would note three things: (1) It is, by a long shot, the dominant paradigm of moden macroeconomics; (2) It is not necessarily inconsistent with the notion that inflation is ultimately a monetary phenomenon; (3)Monetarists are really just Keynesians who choose a different point (or points) of emphasis. A very nice primer on the New Keynesian framework can be found here: http://www.richmondfed.org/publications/economic_research/economic_quarterly/pdfs/summer2004/goodfriend.pdf

Also, if you have specific objections to Kreuger's comments, I would be glad to engage them (and even accept them if yourargument is a goode one). But its a little hard to evaluate the simple assertion that his reasoning is poor.

spencer - My answer is a simple one. If the labor that comes and goes is market-driven, the outcome is probably the right one. I realize, of course, that there are lots of distortions that can drive a wedge between market outcomes and "the best" outcomes, but I'm convinced a supply of competitvely cheap labor is one of those cases.

Posted by: Dave Altig | April 16, 2006 at 08:37 AM

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