Welfare Economics of Labor Migration


Should the United States allow immigrants and to what extent? This is a topic of hot debate because both the economics behind it is unintuitive and everybody’s goal or preference is different.

Are low skill immigrants taking our jobs away?

This is only true for a small portion of the population, the unskilled citizens, or citizens worse skilled than the average low skill immigrants. When low skill immigrants come, the wage in low skill occupations decreases as the labor supply increases (proportionally more than the increase in the size of the economy). Low skill citizens suffer and employers (the producer) benefit from a lower cost of labor. From standard welfare analysis, we know the gain for the producers is definitely greater than the loss of the low skill citizens, resulting in a higher social welfare.

Assume that our country has an excess of higher skill labors, meaning some skilled workers accepted a lower skill job because the high skill job market is saturated or because the low skill job’s salary is attractive. But wait, could a free market be saturated? Because for each high skill job, there has to exist some low skill job to complement it. For example, each company needs customer service (a low skill occupation). If few low skill workers are available, wage will increase, attracting some high skill workers. The customer service will still exist but rather small. This assumption of excess high skill labor is reflected in the high wage of low skill jobs that attracts immigrants.

After the influx of immigrants, many high skilled citizens in low skill occupations will switch to high skill jobs as the wage in low skill jobs decreases (relative to high skill jobs). High skill jobs of course mean higher productivity. When the citizens shift to a higher skilled worker makeup, the country’s GNP (only counting citizens) is bound to increase since the total productivity increases. This resonates with the increasing social surplus I mentioned earlier. A higher productivity benefits both producer and consumer, including low skilled citizens who are worker under a lower wage.

Conclusions: if we allow low skill immigrants

  1. Low skill citizens can be better off or worse off depending on the situation.
  2. High skill citizens are better off
  3. Citizens become richer, on average.

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