The weight of the empirical evidence suggests that the impact of immigration on the wages of competing native-born workers is small—possibly reducing them by only 1 or 2 percent. Why does this effect seem so small? One reason is that it is easy to exaggerate the importance of immigration. Although immigration touches some hot button issues, the American economy is extremely large and complex, running at $7.6 trillion a year. This economy is the end result of ten of thousands of factors, many of which are far more critical than the country's immigration policy. Such factors include the rate at which the country saves and invests and the human capital of its own workers. It is simply not plausible that immigration, even across a decade, by increasing the supply of workers by 4 percent could seriously impact such an economy. However, although it is easy to exaggerate the aggregate effects of immigration, they should not be minimized. As measured by changes in wages, the economic benefits of immigration run as much as $10 billion a year. In addition, the economic benefits of immigration that operate only through lower prices, without displacing or disadvantaging competitive domestic labor, add to the positive effects of immigration.

Another reason why the potential effects seem small is that the aggregate increase in the supply of labor caused by immigration is itself small. And although the effect on the aggregate wage may be small, the effects in other dimensions may be larger. The two dimensions that have preoccupied the literature are subgroups of workers and local labor markets. The increase in the supply of workers may be larger for some types of workers—for example, less educated and black workers—because their skill distribution more closely resembles that of immigrants. Similarly, because immigrants are concentrated in relatively few geographic labor markets, native-born workers who live in those local areas may feel heavier impacts.

   

percentage change in the wage for a given percentage change in the number of workers, holding marginal costs constant) is given by -(1 - s)/σ,. The elasticity of factor price can then be written in terms of the output-constant elasticity of demand, and is thus given by (1 - s)2/e. It is well known that s is approximately 0.7, and Hamermesh concludes that e is approximately -0.3 (pp. 76-105). The elasticity of factor price that holds marginal cost constant, therefore, is about -0.3 (a 10 percent change in labor supply reduces the wage by 3 percent). However, this calculation assumes that the marginal cost of production is fixed. If immigration reduces marginal costs (because it reduces wages), it would lead to a reduction in the price of the output, which would in turn induce an additional reduction in the wages of native workers. No estimates are available about how much larger this impact is likely to be. Estimates of the elasticity of demand for labor vary somewhat depending on the level of skill considered. However, given the range of estimates it is difficult to be precise about how the elasticity for one type of labor differs from that of another. The basic point is that, in the relevant range of these elasticities, the impact of immigration on native wages will be small.



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