The title of this post is a nod to Alfred Marshall, who stressed that supply and demand analysis required we think about “both blades of the scissors.” Prices are not set by supply or demand alone – it is the interaction between the two that is crucial. It is for this reason Greg Mankiw once wisely commented that he was neither a supply-side economist nor a demand-side economist. He was a supply-and-demand economist.

This came to mind because I recently saw a journalist make a remark on Twitter I’ve seen in numerous forms before. Speaking out against immigration, this journalist declared it was obvious that increases in immigration – legal or otherwise – would decrease the wages of American workers, because “the law of supply and demand applies to labor too: more labor means cheaper labor.” This is doing analysis with one blade of the scissors.
Just as one-bladed scissors are terribly ineffective at being scissors, doing supply-and-demand analysis with only supply is equally ineffective. That’s why the term invoked by the aforementioned journalist is “the law of supply and demand.” We need to look at both blades of the scissors here.
When the supply of labor increases, what happens to the demand for labor? Does it stay fixed? Well, no. This is because increasing the supply of labor also makes labor more productive. Adam Smith lays it out in the opening lines of The Wealth of Nations:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
The more workers there are, the more extensive the division of labor can become. The more extensive the division of labor becomes, the greater the “improvement in the productive powers of labour.” The greater the productive powers of labor become, the greater the demand for labor becomes. Thus, increases in the total size of the labor force don’t just shift the labor supply curve to the right. The labor demand curve also shifts to the right. This is true whether the increase in the labor supply is due to immigration, a proverbial “baby boom,” or the large-scale entry of women into the workforce.
One example of this change in specialization can be seen in this paper by Giovanni Peri and Chad Sparber. They make the point that immigrant labor and native labor are not perfect substitutes. Immigrants and natives have different skill sets and strengths relative to each other, particularly in the market for workers with relatively little formal education. Native workers had advantages over immigrant workers in terms of communication and interaction skills, and native and immigrant workers specialized according to their comparative advantage. Thus as more immigrant workers began doing manual labor, more native workers shifted away from manual labor and into higher paying jobs in which they had a comparative advantage such as doing supervisory and coordination work. Thus, the division of labor reorganized along lines of greater specialization, increasing the productivity and efficiency of the labor force. This is just one of several mechanisms by which increases in the labor supply can increase labor productivity and wages.
Another way to see this might be to look at it from the other side. Right now, a major concern for many thinkers is a sort of inversion of Paul Ehrlich’s life work – rather than a population bomb, they worry about an impending population implosion. One country with rather dire looking projections is South Korea. According to current projections, their population in 2100 should be similar to their population in 1950. But in 1950, the median age for South Korea was just under 18 years old, while in 2100 the median age is projected to be just under 60 years old, with only about half of the total present-day population. The total working-age population, then, is projected to crash pretty hard.
When considering that kind of scenario, almost nobody feels tempted to respond “Wow, that will be so great for future generations! They’ll only have about half as many people engaged in productive work, and with such a low supply of workers, those workers will be so much wealthier because of it! After all, supply and demand applies to labor, so the fewer laborers there are, the wealthier laborers become!” Societies are impoverished, not enriched, by the loss of productive workers. And societies are enriched, not impoverished, by gaining them.
READER COMMENTS
Jon Murphy
Jan 17 2025 at 10:22am
Good stuff here, Kevin. One point I’d add is that an increase in supply (all else held equal) reduces the marginal price, not the price for everything in that market (absent certain conditions). The equilibrium price is the marginal price for the marginal worker.
MarkW
Jan 17 2025 at 12:12pm
Nice. Immigrants also increase demand for labor because immigrants aren’t only workers, they are also consumers.
steve
Jan 17 2025 at 11:02pm
Nice piece by Alex Nowrasteh on illegal immigration. He is looking at it mostly from the POV of what Biden did but the conclusion he reaches is that illegal immigration is mostly driven by job availability in the US. It’s now down below 2019 levels due to employment opportunities also decreasing. Lots of pretty detailed data. Of note, he claims that a number of Biden policies aimed at decreasing illegal immigration probably increased it.
https://www.alexnowrasteh.com/p/biden-didnt-cause-the-border-crisis
Steve
Mactoul
Jan 18 2025 at 1:23am
Resolute enforcement of border can always cut immigration to zero irrespective of labor demand. Labor demand could be satisfied by Gulf kingdoms kind of work permits which are not bundled with paths to permanent residency.
Why is such a system anathema to liberals saving a few like Prof Caplan?
Jon Murphy
Jan 18 2025 at 7:18am
The evidence indicates otherwise
Monte
Jan 18 2025 at 5:25pm
Actually, the piece you linked to is by David Bier. More importantly, I think the issues pointed out by the commenters concerning the data are valid.
Richard W. Fulmer
Jan 18 2025 at 9:53am
Simpson’s Paradox makes explaining the benefits of immigration more difficult. While the immigration of poor people may well result in higher wages for both immigrants and “natives,” the nation’s average wage will likely fall.
David Seltzer
Jan 18 2025 at 11:36am
Kevin: “Prices are not set by supply or demand alone – it is the interaction between the two that is crucial.” Yes. That’s why reasoning from a price change is not to be done.
Ahmed Fares
Jan 21 2025 at 9:42pm
re: an example of a one-bladed scissors
This popped up in a Twitter/X feed (I agree with it.).
The same idea mentioned in an econlib article (emphasis added):
Interpreting Modern Monetary Theory
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