Does immigration matter?

Sometimes, I worry that dead tree columnists might not have a full grasp of the Heckscher - Ohlin - Samuelson model. Polly says:

Near-full employment should mean pay rises - but cheap imported labour helps keep it low.

She misses a point. Immigration is not necessary to hold wages down. In the HOS model, free trade in goods alone is sufficient to make British wages converge towards third-world levels. This is the factor price equalization theorem, familiar to any economics student.
The thinking here is simple. Imagine we move from a world of restricted trade to freer trade - say, because India and China join the global economy. The UK will then import more goods which require unskilled labour, such as textiles. Demand for unskilled labour in the UK will therefore fall - and so will wages.
If HOS is right, then, immigration is a red herring. Trade alone holds wages down. Which means that a policy of restricting immigration - even if it's feasible - will do nothing to raise wages of the unskilled. It will merely reduce foreigners' liberty, with no offsetting benefits.
The question is how far the HOS model actually describes reality. An early paper by Adrian Wood (Jstor only, I'm afraid) claimed that it did. This was controversial at the time. But since then, we've seen the emergence of offshoring, which allows us to import low-wage serivces as well as goods, and the boom in Chinese and Indian exports. So maybe HOS is more true now than 10 years ago.
If so, Polly shouldn't be moaning about immigration, but about all international trade.
There's more: Tim gives Polly a fuller fisking.

Comments

[The Pedant-General]

"If so, Polly shouldn't be moaning about immigration, but about all international trade."

Doesn't she do that as well anyway?

[angry economist]

Plus another factor is increasing economic activity rates in the UK - i.e. more people actively seeking work or in work.

Increasing activity means a larger pool of potential employees. This actually affects the unemployment measure - driving it up - and has been occurring alongside an increase in total employment.

[Piyush]

Given that we now have a 'services' economy, isn't the free trade in labour ( and not just goods) also an aspect you need to consider and isn't that effectively what Polly's point is ?
It needs Polish plumbers to move over here to drive down the cost of plumbing services - it doesn't happen by free trade in pipes and fittings.

[Sam]

I see Piyush has beaten me to it, athough I was going to point at what is probably one of the fastest-growing labour-intensive industries in the developed West - personal care for old people.

It's not especially skilled, it's really difficult to mechanise, and the market demographic is growing. And you can't import the service without importing the people (unless, of course, we set up retirement homes in rural Poland. It would be amusing to see the export of old people in the balance of trade figures...

[chris]

The existence of non-tradeable services like personal care violates one of the assumptions of the HOS theory. The question is how important this is.
Put it this way. If imports of cheap clothing put UK textile workers out of jobs, these might retrain as care workers. If so, they'll put downward pressure on care home wages. So even though care home services aren't tradeable, they're still vulnerable to the pressures of international trade.

[dearieme]

If we are off-shoring chav jobs, why don't we off-shore chavs? Let them go to foreign football games and then refuse them re-entry.

[Phil]

So are you saying immigration policy in and of itself doesn't have any effect on wages? The government doesn't seem to think so, if Patrick Wintour's right:

"Ministers have in the past defended migrant numbers, arguing an open society is a thriving society and saying they have helped keep wage inflation down."

http://politics.guardian.co.uk/homeaffairs/story/0,,1842992,00.html