Immigration, the Minimum Wage, and Labor Demand Elasticity
By Bryan Caplan
Adam Ozimek has an interesting objection to my claim (here and here) that empirical work on the disemployment effect of the minimum wage contradicts empirical work on the wage effect of low-skilled immigration:
Bryan’s immigration example is missing an important point. When
immigrants move somewhere they don’t just increase labor supply, but
also increase demand for goods and services, and businesses in turn will
increase their labor demand. This is shown in the figure below, which
has the perfectly inelastic labor demand that the minimum wage results
imply but has not just labor supply but labor demand shifting out as a
result of immigration.
Unless I’m seriously confused, Adam’s diagram doesn’t have perfectly inelastic labor demand. Perfectly inelastic labor demand is vertical. And given vertical labor demand, the effect of increased labor supply would be to reduce total labor income (lower P times constant Q means lower PQ). So workers’ demand for goods should fall, not rise.
In all fairness, though, Adam can probably fix his figure and restate his argument. What would I say then?
1. You could just as easily argue that the minimum wage increases workers’ income, leading to higher demand, offsetting the effect of the minimum wage. Advocates have made this argument before. So the severe tension between the minimum wage and immigration literatures persists.
2. More importantly, the magnitude of these effects almost has to be small. Low-skill workers only spend a tiny fraction of their income on goods produced by other low-skill workers. The same goes for every other narrow category of worker.
3. If these secondary effects really mattered much, supply-and-demand analysis would be pretty useless in the real world. A price floor on sugar could increase incomes in the sugar industry, increasing their demand for sugar, thereby eliminating the surplus caused by the price floor. Since supply-and-demand analysis is useful in the real world, we should presume that these stories are mere curiosities.
4. If we’re going to adjust for secondary effects, we need to adjust for all of the major secondary effects. The minimum wage and immigration also affect the income of employers and competing workers, so it’s not even clear whether total demand goes up or down.
Adam closes by pointing out that I’ve made an argument similar to his. Me:
When immigration increases, physical skills become more plentiful
relative to demand, but language skills become more scarce. Since most
jobs are a mix of physical and language skills, and people can change
jobs, immigration might actually increase native wages.
But Adam overlooks a key point: In this passage, I’m taking a macroeconomic perspective. The effect of the Mariel boatlift on Aggregate Demand can easily be large. But the total effect of the Mariel boatlift on demand for low-skilled labor in Miami? Probably trivial.