What does the aggregate demand curve for labour look like? I ask because the evidence seems inconsistent.
On the one hand, the minimum wage seems to have had a small (that's small, not zero) effect in cutting demand for labour. This suggests demand is price-inelastic; a rise in price cuts it only slightly. The demand curve is steeply downward sloping.
On the other hand, quite big inflows of immigrants have only tiny effects on wages. A big rise in supply doesn't affect wages much. That suggests demand is quite elastic - the curve's flattish.
So, which is it? It could be both. Maybe demand for low-skilled labour is price-inelastic but demand for average workers (immigrants) is more price-elastic. If so, the aggregate demand curve is kinked.
Casual empiricism lends credibility to this. Many low-skilled jobs are in industries like care homes, pubs or hairdressing, where offshoring or capital-labour substitution is diffcult. So demand for workers in these industries should be more price-inelastic than demand for other jobs.
But equally, casual empiricism suggests there might be more than one kink. You rarely hear of big-earning lawyer or chief executive jobs being offshored or replaced by technology (sadly).
So perhaps the demand curve for labour is inelastic at high and low wages, but elastic in the middle.
This raises at least three questions:
1. Could my optimistic view about the economic effect of immigration be wrong? Maybe if the labour supply curve shifts out far enough, it will cross the inflection point at which the demand curve becomes more inelastic. If so, further big immigration will cut wages a lot.
2. If the demand curve is (at least doubly) kinked, does macroeoconomic analysis of the labour market make sense? Jobs and workers differ in important respects, so why aggregate them? Feel free to throw in the backward-bending supply curve as an extra complication.
3. Does this help explain the apparent economic insecurity felt by much of middle England (and I guess middle America) despite a healthy macroeconomy? If labour demand is elastic in the range of wages that many people earn, then middle-income workers are vulnerable to supply or demand shocks, even if high and low earners are less so; this paper (pdf) by Dani Rodrik is a neat discussion of this.