Tuesday, 12 June 2018

Immigrant restrictions and wages for locals

A simple economic model of demand and supply tells us that, if there are two substitute goods and the supply of one of them decreases, then demand for the other substitute will increase. This leads the price to increase for both goods. If the two 'goods' here are the labour of immigrants and the labour of locals, then a decrease in the supply of immigrant workers should lead to an increase in the demand for local workers, and higher wages for both groups. However, that simple analysis ignores that there is often another substitute for labour - mechanisation (or capital). So, it is by no means certain that restricting the number of immigrant workers will raise the wages of local workers, because employers might substitute from immigrant workers to technology, rather than from immigrant workers to local workers.

Which brings me to this new paper (ungated earlier version here) by Michael Clemens (Center for Global Development), Ethan Lewis (Dartmouth College), and Hannah Postel (Princeton), published in the journal American Economic Review. In the paper, Clemens et al. look at the effect of the 1964 exclusion of Mexican braceros from the U.S. farm labour market. At the time, the exclusion was argued for because it would lift wages for domestic farm labourers. However, looking at data from 1948 to 1971, Clemens et al. find that it had no effect. That's no effect on wages and no effect on employment of domestic farm workers.

They argue that the reason for the null effects is that farmers shifted to greater use of mechanisation (which they had not adopted in great numbers up to that point). They provide some empirical support for this. Crops where there was an existing technology that was not in wide use (e.g. tomatoes, where expensive harvesting machines were available that could double worker productivity) didn't suffer a drop in production after the bracero exclusion, because farmers simply adopted the available technology. In contrast, crops where there was no new technology available (e.g. asparagus) suffered a large drop in production (because farmers couldn't substitute to new technology, and fewer workers were employed).

The lesson here is that when prompted to change, producers will usually adopt the cheapest available production technology (as I have noted before). But that isn't necessarily the production technology that policy makers want them to adopt. In this case, instead of a production technology that made use of more local workers, the farmers opted for a production technology that made greater use of mechanisation. So, even if as a policy maker you believed that reducing immigration would improve wages for local workers, it isn't certain that would be the result of polices that reduce immigration (more on the effect of immigrants on local wages in a future post).

[HT: Eric Crampton at Offsetting Behaviour]

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