In the discussion of perspectives on Social Security, I suggested that wages tend to rise with productivity, so that indexing Social Security to wages leads to higher benefits than indexing it to prices. Eric Krieg asked,

Arnold, why are wages and productivity neccessarily linked? Could international competition ensure that wages are static while productivity soars? Or could the opposite happen?

I think that in some of the classic models of international trade, in which “labor” is homogeneous and “capital” is homogeneous, you can get the result that when you open up trade between a high-wage country and a low-wage country, the workers in the high-wage country see their wages decline. Allowing more immigration would have a similar effect.

However, my instinct is to believe that immigration will not drive down real wages. I think that with heterogeneous labor, a native worker might be displaced to another industry, but this would not necessarily mean having to take a lower wage. But it probably depends on the how the consumption pattern of the immigrants affects the demand for skills, and how this in turn fits in with the skills of workers who are displaced. I do not see an unambiguous conclusion emerging.

Since this raised a new issue, feel free to post comments on this thread.