In the labour market, you can't have the best (or the worst) of both worlds

In yesterday's post about new research on the disemployment effects of the minimum wage, I mentioned this post by Bryan Caplan. One part of Caplan's post in particular caught my attention:

Research doesn't have to officially be about the minimum wage to be highly relevant to the debate.  All of the following empirical literatures support the orthodox view that the minimum wage has pronounced disemployment effects: 

1. The literature on the effect of low-skilled immigration on native wages.  A strong consensus finds that large increases in low-skilled immigration have little effect on low-skilled native wages.  David Card himself is a major contributor here, most famously for his study of the Mariel boatlift.  These results imply a highly elastic demand curve for low-skilled labor, which in turn implies a large disemployment effect of the minimum wage.

This consensus among immigration researchers is so strong that George Borjas titled his dissenting paper "The Labor Demand Curve Is Downward Sloping."  If this were a paper on the minimum wage, readers would assume Borjas was arguing that the labor demand curve is downward-sloping rather than vertical.  Since he's writing about immigration, however, he's actually claiming the labor demand curve is downward-sloping rather than horizontal!

The reason that part of the post caught my attention is that it highlights something I have noticed before. There are at least some people who truly want to believe things about the labour market that are highly likely to be mutually exclusive. Consider these two true/false questions:

1. True or False: Increasing the minimum wage will substantially reduce employment of low-skilled (or low-wage) workers.
2. True or False: An increase in immigration substantially reduce the wages of low-skilled (or low-wage) native-born workers.

The word substantially in both cases is important, since it suggests that the effects are large. You may believe that Statement 1 is true and Statement 2 is false, or you may believe that Statement 1 is false and Statement 2 is true. However, there are at least some people who believe that both of these statements are false - these optimists believe in the best of both worlds (higher minimum wages are good since they raise wages without increasing employment by much; and immigration is good for both immigrants and the native-born population). And there are at least some people who believe that both of these statements are true - these pessimists believe in the worst of both worlds (higher minimum wages are bad because they increase unemployment; and immigration is bad because it reduces the wages of the native-born population). The last two groups of people (the optimists and the pessimists) are unlikely to be correct, and here's why.

Let's say that Statement 1 is true (and the latest research that I blogged about yesterday suggests that may be the case). If minimum wages substantially reduce employment of low-skilled workers, then that suggests the demand for labour is relatively elastic (the labour demand curve is relatively flat). If the labour demand curve is relatively flat, then if there is an increase in the supply of labour (as would occur with an increase in immigration), then the effect on the equilibrium wage would only be small - immigration would not lead to a large decrease in wages of low-skilled workers (and indeed, that is what the Mariel boatlift research by David Card found - see here and here for the latest debate about the effects of the Mariel boatlift). That would make Statement 2 false, so it's unlikely that both statements are true.

Let's say that Statement 1 is false. If minimum wages don't substantially reduce employment of low-skilled workers (and that's what this influential paper by David Card and Alan Krueger (ungated) finds), then that suggests the demand for labour is relatively inelastic (the labour demand curve is relatively steep). If the labour demand curve is relatively steep, then if there is an increase in the supply of labour (as would occur with an increase in immigration), then the effect on the equilibrium wage would be large - immigration would lead to a large decrease in the wages of low-skilled workers. That would make Statement 2 true, so it's unlikely that both statements are false.

Even if you believe that there is monopsony power in the labour market that ensures that increasing the minimum wage would increase employment (a common theoretical argument supporting the findings of Card and Krueger), an increase in the supply of labour in such a market would decrease the marginal cost of labour and decrease wages (consider extending the diagrams here, with an increase in supply). So Statement 1 would be false, but Statement 2 would still be true.

All of this is enough to make one wonder: Given that David Card has research that supports 'false' for both statements (possibly making him an optimist?), what does he really believe about the elasticity of demand for labour? It would be interesting to know (the closest I could find easily was this 2006 interview, which discusses his research on immigration and on the minimum wage, as well as a lot of other labour economics research he has conducted).