Wage rates, Immigration and Jobs

By: Gerard_Jackson

On the other hand we have the opposing fallacy that immigrants steal jobs. In fact, back in July 2004 John Stone, former head of the Australian Treasury, accused illegal immigrants of stealing jobs from Australians. So which is it? The first fallacy actually rests on very important economic truth that too many economists ignore: so long as there is sufficient capital and land to employ people and the free market prevails persistent widespread unemployment cannot. What is missing, however, is the price of labour. I have no doubt that if the hourly wage rates for those agricultural jobs that Americans are said to look down their noses at were to jump to $30 there would be an abundance of applicants.

(Although it is true that labour will always find work so long as the means to employ it is available, this does not in itself mean that real wage rates will rise. If the labour supply rises faster than the means of employment, i.e., the supply of capital goods, then real wage rates must fall if full unemployment is to be maintained. A situation of full employment being one where there are always jobs for those who are willing and able to work).

This brings us back to the fallacious view that immigrants are doing jobs that Americans do not want. But this is not the real situation at all. The reason why Americans won't do these jobs is because they get higher wages in alternative lines of work. In other words, low paying jobs are in those areas that cannot compete for sufficient labour. Therefore, what these employers and their supporters are really saying is that they cannot pay market wage rates.

When capital accumulation grows at a faster rate than the workforce real wage rates rise. Reverse the situation and real wage rates will fall. So when the rate of capital accumulation exceeds the growth in the labour force certain labour intensive activities become less profitable because they can no longer compete for labour at the going rate. This means that labour ‘shortages' appear in the low-paid areas of the economy. As every economist and economic commentator is supposed to know, these labour shortages will be particularly felt by marginal producers.

Another — and very important — way of viewing this problem is to see it as an inability of marginal producers to raise labour productivity by an amount that would enable them to pay competitive wage rates. Unable to pay the market rate these producers have tried to resolve their problem by using large-scale immigration to cut real wages by increasing the supply of labour. These employers and their supporters argue that without immigrant workers they will have to abandon their businesses. Two points need to be raised here. The obvious one is that changes in economic conditions are always forcing businesses to close while new ones open. This process is most marked in technology. For example, should canal owners have been protected against railways and railways against the cars?

The less obvious point is that the use of immigrant labour in these circumstances damages the economy by keeping open suboptimal firms. In the absence of cheap labour many of these economic activities would have to cease, meaning that the land and capital they use would be employed in more profitable activities where wages are higher. It will be argued that the products of these activities would have to be imported. This situation would be beneficial for foreign exporters — particularly in poor countries — and American consumers. The former because they now have another market, and the latter because their purchasing power has risen. This reveals another economic fact: as countries become more capital intensive their more labour intensive activities in the tradable area will tend to move to more labour intensive countries. This is why Taiwan's shoe industry is gradually moving overseas.

Putting it in a nutshell, using immigrant labour to expand the supply of labour will exert a downward pressure on real wage rates, starting with the unskilled and semiskilled. However, situations can emerge where capital accumulation has exceeded the size of the workforce to such an extent that increasing the labour supply will actually raise real wages. This is not the case in America or Australia. As an aside, it was suggested to me that highly qualified women with children are able to resume their careers by hiring cheap nannies. This results in a net benefit to the economy. But this is the fallacy of composition. Just because a very well-off families can benefit from cheap labour that does not mean that the families of unskilled workers will also benefit — quite the opposite.

What the masses benefit from is capital accumulation and not open borders. To see how this happens let us take a brief look at the wages of New York maidservants for the years 1914-1922 On the eve of WW I the average weekly wage of a maidservant was $3.50: by 1922 it had risen to about $14 — a 300 per cent increase in money terms — while for the same period the consumer price index rose from 30 to 50, a 66 per cent rise. This means that these girls' real wage rate had more than doubled in real terms 1 . This even was neither isolated nor rare. In 1947 the wages of unorganised US domestic servants were 2.72 times as high as they were in 1939, while the wage of the highly unionised steel workers had risen by on 1.98 times the 1939 level 2 . The reason for the substantial increases was capital formation. In other words: economic growth 3 .

Now what would have happened if those middle class families who could no longer afford to hire domestics had demanded that the government allow a free flow of cheap female labour into the country to drive down real wage rates? They would have been justly ridiculed for their selfishness and economic illiteracy. Yet this is exactly what many businessmen are demanding.

(By the same logic, marginal producers should also demand that those companies who invest in cost-reducing technologies should have their profits taxed away to protect marginal competitors against the threat of financial extinction).

Porous borders will undoubtedly find the unskilled Joe Blows being forced top compete against immigrant labour. Looked at from this angle one could argue that using immigrants to provide cheap nannies for well-off families is a direct form of income transfer from the poor to the better off. Given above facts and basic economics one is left wondering why the open borders mob at the Wall Street Journal are so blasé about the economic and social consequences of allowing millions of illegal immigrants to effectively drive down wage rates. Is the WSJ — a paper that prides itself on its economic sophistication — completely oblivious to the fact that its nostrums for dealing with illegal immigration 4 amount to a policy of using uncontrolled immigration to completely offset the beneficial effects of capital accumulation?

1. (1967=100, Handbook of Labor Statistics, US Department of Labor Bureau of Labor Statistics. Also Benjamin M. Anderson, Economics and the Public Welfare , LibertyPress, 1979 first published 1949. p. 87.

2. There is also Mountifort Longfield's brilliant Lectures on Political Economy , 1834. In this book he shows how capital accumulation raises real wage.

2. The Impact of the Union in F. A. Hayek's A Tiger by the Tail: The Keynesian Legacy of Inflation, The Institute of Economic Affairs , 1978).

4. It always refers to illegal immigrants as being merely “immigrants”, thus allowing it to smear critics as “nativists”.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

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