Here’s yet more evidence (pdf) that immigration is good for natives’ wages:
We find that all European countries experienced a decrease in their average wages and a worsening of their wage inequality because of emigration. Whereas, contrary to the popular belief, immigration had nearly equal but opposite effects: positive on average wages and reducing wage inequality…
Public fears in European countries are misplaced; immigration has had a positive average wage effect on native workers.
This seems counter-intuitive. Immigration represents an increase in labour supply, and increased supply means lower prices. Conversely, emigration reduces labour supply which should raise wages.
However, this intuition is wrong, for three reasons:
1. In the long-run, the capital stock should increase in response to an increased labour supply, and this raises the demand for labour.
2. Immigrants are imperfect substitutes for native workers: the arrival of a Polish builder, Indian IT worker or American investment banker does not mean increased competition for electricians or lawyers.
3. Skilled immigration can have a positive external effect upon others’ wages. The IT specialist who helps get a foreign firm operating in the UK, in effect, helps that firm increase employment of native workers. The American investment banker creates a demand for nannies and cleaners. The Polish brickie helps builders and electricians to get more work done, and so on.
Now, the effects here are small - only a couple of percentage points over 10 years. And they are contingent upon the premise that immigrants, on average, have a higher skill composition than natives. And I appreciate that concerns about immigration are not really rooted in its effect upon wages. But even so, this is more evidence that immigration does not have adverse labour market effects.
I reckon there are three policy implications here.
1. A cap on highly skilled immigration is a stupid idea.
2. Insofar as emigration reduces the wages of stayers, there is more reason to worry about the possibility that higher incomes taxes might encourage high earners to migrate. Fortunately, there is - so far? - little sign of them doing so, but this weakens a little my prior support for higher taxes.
3. It’s important to ensure that the capital stock can adjust upwards in response to immigration. Exactly how to do this is of course a matter of debate: is it more important to maintain aggregate demand and get banks lending, or to reduce red tape and capital taxes and barriers to entrepreneurship? Whatever the answer, the question becomes a little more important.