Doesn’t supply and demand dictate that new immigrants will steal jobs and drive down wages for U.S. citizens? A leading immigration economist explains why not.
Published in Foreign Policy In Focus.
Facts or no facts, many people simply do not want to believe that undocumented immigrants coming to this country don’t steal jobs and undermine the American economy. When economic studies come along that challenge their preconceptions, they don’t take kindly to the troublesome conclusions.
Recently, economist Giovanni Peri, an associate professor at the University of California, Davis, and visiting scholar at the Federal Reserve Bank of San Francisco wrote a paper for the Fed summarizing recent research in immigration economics. Evaluating the data, Peri concluded that, “on net, immigrants expand the U.S. economy’s productive capacity, stimulate investment, and promote specialization that in the long run boosts productivity. Consistent with previous research, there is no evidence that these effects take place at the expense of jobs for workers born in the United States.”
In other words, immigrants aren’t stealing jobs that would otherwise go to native-born U.S. citizens, and in fact they are stimulating the economy in a way that results, on average, in higher wages for U.S. workers.
As the paper’s findings disseminated on political blogs, some commentators reacted negatively and raised criticisms of Peri, believing that his findings contradicted basic economic laws of supply and demand. While a portion of naysayers were not interested in engaging with the economic research—their objections being politically motivated—other readers raised legitimate questions. And even Americans who identify as progressives might wonder if immigration does not threaten unions and undermine standards set by organized labor.
Foreign Policy In Focus senior analyst Mark Engler discussed these topics with Professor Peri, asking him to clarify his findings and respond to some common criticisms
Engler: A common objection to your conclusions about immigrants in the U.S. economy is that the findings seem to violate the law of supply and demand. If the supply of low-wage workers in the economy is increasing, why doesn’t that drive down wages?
Peri: People seem to understand the story of supply and demand. What is a little harder to understand is the idea of “complementarity” versus substitution, which is just as basic in economics.
If two workers are completely identical, supply and demand takes effect—just as if you put more corn on the market, the price of corn will decrease. But if you have workers who do jobs that are not the same, and if they specialize in types of tasks that are complementary, this can increase wages and productivity for both.
An extreme example of this would be if you have an engineer and you add a construction worker. With the engineer by himself you’re not going to do much. But with an engineer plus a construction worker, you can build a building. Therefore, the productivity of the engineer goes up a lot. And the wages for both workers increase.
What I try to address in much of my research is how immigrants are really taking jobs that complement the skills of a lot of native workers. And in fact, the inflow of immigrants pushes some of these native workers to take complementary jobs. That can have positive effects. In economics, this story of complementarity is, in its essence, just as simple as the story of demand and supply.
Engler: Nevertheless, many native-born workers don’t see themselves as complementary. They see themselves as threatened, as competing for the same jobs.
Peri: One of the differences between immigrant workers and native-born workers is that the native worker is likely to have a better understanding of the language. This by itself differentiates the tasks that a native worker can do.
Individually, you will have a lot of personal stories of people feeling threatened. But if you look at the data about what types of occupations Americans have taken in the last 40 years, in particular in states where there are lots of immigrants, the trend has been toward native-born Americans taking on the types of occupations that are a more in the line of “construction supervisor” or “taxi dispatcher,” rather than “construction worker” or “taxi driver.” This, on average, has produced gains.
At an individual level, if you were a native-born agricultural worker in California thirty years ago and you’re still picking strawberries today, you might have lost out. But you have to really look hard to find native-born workers still doing these jobs. It’s far more common to see these workers taking jobs a little further up the scale—working, for example, as a farm manager.
The aggregate data shows that the average American worker may have upgraded his or her job because of immigration—that therefore there has been a reward for the native worker.
Engler: I think part of the confusion is that people perceive the economy as having a set, finite number of jobs. When someone new comes in to the economy, the idea is that this person takes away a job from someone else. How would you address this?
Peri: Right. The labor market in the United States is a very dynamic market. Every month, hundreds of thousands of jobs are destroyed and hundreds of thousands are created. Of course, in a recession, you have more of the former. But, in general, when a new worker comes into a dynamic set-up, the presence of more workers creates more opportunities for firms and more opportunities for investment. So the natural effect of more workers in the economy is that more firms are created, more supply is generated, and more workers receive a salary, increasing demand. In equilibrium, the economy expands.
There is no reason in the long run that one more worker would decrease wages. Just look at U.S. employment in the last 40 years. The number of people working has doubled. And wages have also increased 30 or 40 percent.
The question is, How long does it take for an extra worker to generate the needed investment of the firm and to ultimately create demand, so that one extra worker becomes an expansion of the economy and not one less job for a native worker? My analysis indicates that these mechanisms are relatively fast. So even within one or two years, you don’t observe much job loss, but instead, states with more immigration simply expand their economies a little faster. And over four to 10 years, you also observe the extra investment needed so that capital per worker doesn’t change that much and you have a productivity effect.
Engler: But real wages for non-managerial workers in the United States haven’t increased much in the last 30 or 40 years. They’ve been almost stagnant.
Peri: Here you have to distinguish median wage from average wage. The wages of highly educated workers have actually increased quite a bit in the last 30 years. What have done badly are wages for workers at lower levels of education. Economists are trying to understand the reasons why. Two big candidates are the impacts of technology and the impacts of trade and off-shoring.
Some people are also looking at immigration as a possible reason—including me, David Card of Berkeley, Christian Dustmann of University College London, and others. Yet the studies don’t seem to find much of a negative impact of immigration on wages. In fact, some find no impact on employment and a little bit of a positive impact on wages. And the aggregate data shows no impact in terms of displacement.
Engler: Can you comment on the work of George Borjas, a Harvard economist who has argued that immigration does create downward pressure on wages for lower-wage workers. He’s contended that it resulted in a wage decrease of as much as 7.4 percent for the poorest tenth of the workforce between 1980 and 2000.
Peri: Borjas wrote a paper in 2003 that spurred a lot of academic debate. [The statistics have since been contested, but] people in the media often quote the old numbers. The more recent numbers that even Borjas would support suggest that there might be a negative 3 percent wage effect on the least educated workers. But even his work shows a positive effect on intermediate and more-highly educated workers. So even his version is relative; it shows some negative effects and some positive effects.
I have taken issue with some of Borjas’ estimates, saying that he has not adequately taken into account the mechanism of complementarity. He has assumed that native and immigrant workers are perfectly substitutable at lower levels of education. My studies over the past three to four years show that, in fact, native and immigrant workers do take different jobs, do have some different skills, and do specialize in different productive tasks. And this reduces direct competition. If you account for that, you get a very small impact—or no impact—for those at the lowest levels of education.
In my most recent paper, I do an analysis based on an overall average [of wages throughout the workforce]. I don’t decompose the data to assess the impact of immigration on people of different skill levels. In other studies, I did decompose this and looked at distribution. When I did that, my study showed that the biggest benefits of immigration go to intermediate and highly educated workers; however, for the less-educated, it’s essentially a wash, or zero impact.
I’m not alone in my position. David Card and other economists working on this also say that it’s hard to find the negative effect that George Borjas claims. All in all, I don’t dispute his idea that there’s a bigger benefit for the highly educated than for the less-educated. But I would say that immigration does not really create a loss even for the less-educated. It’s more of a wash.
Engler: How would you respond to those who argue that new immigrants undermine unions and job standards created by organized labor?
Peri: I would say that if what your union is defending is a specific job classification, in construction for example, immigration will create some difficulties for you. If you instead focus on protecting the worker, you allow native workers to move into higher-skilled construction jobs that might require more language and communications skills. If your sole focus is on keeping immigrants out, you’re not going to be able to capitalize on the gains of immigration.
Engler: It sounds like one of the points you are making is not so much that new immigrants hurt native workers, but that new immigrants themselves are the ones who end up with lower wages—that they are the ones who end up carrying that burden.
Peri: In some ways, immigrant workers are competing with themselves. Newer waves of workers, to some extent, are making things more difficult for the immigrants who came just before them. But for immigrant workers, the benefit is the big jump in wages they get over what they might have earned in their home countries, even if low by U.S. standards.
Engler: What do you think is the political relevance of your research?
Peri: I know that the issue of immigration stirs strong sentiments. I try to keep my analysis strictly to the economics. I try to look at the data and see what it shows.
Engler: But clearly, given that anti-immigration folks often base their arguments on the idea that immigrants are driving down wages for U.S. citizens, stealing jobs, and harming the economy, your work has implications for the political debate.
Peri: Absolutely. What I see is that when you dispel the argument that immigrants harm the economy, people [who are opposed to greater immigration] move quickly to other arguments. These people say, okay, maybe that’s not true [that new immigrants hurt the economy], but immigrants still increase the risk of terrorism and create a cultural clash. At that point, I emphasize that I am only doing research on one aspect of this issue.
But to the extent that it’s part of the rhetoric of anti-immigrant groups to say, “We know immigrants steal jobs and have a negative economic impact,” I always say that our research shows the contrary. If you poll serious economists who work on this, including George Borjas, they will agree that there is no evidence of big displacement or negative impact on wages. Some will tell you that there is a small negative effect on the bottom 10 percent of American workers, and others will argue that there is no evidence of that. But the consensus is that for the economy as a whole there is a positive effect on productivity, employment, and wages.