Mr Beazley the demand for labour slopes downward!

Mr Beazley responded to Ms Vanstone’s comments yesterday by saying that he likes lots of migrants but doesn’t want wages to go down.

But if the demand for labour has some elasticity firms will hire more workers only when they are cheaper. So if labour supplies increase the real wage must either fall or, if they are sticky downwards, unemployment will be generated.

Indeed this is one primary means for getting ‘gains-from-trade’ in immigration. If labour markets are competitive and workers are paid close to their marginal product then, as the supply of labour increases, the value of labour at the margin will decline as will its reward. But the value of complementary inputs – capital and land - will be increased at the margin so their marginal values rise.

Since total output rises with the extra immigrant workers but the additional labour only gets a fraction of the extra output as wages it must be the case that the amount of output accruing to non-immigrants will rise. These are the ‘gains-from-trade’ one gets from a labour immigration. They are equivalent to a labour market liberalisation.

What is true is that the functional distribution of income with continued labour migration turns against labour towards owners of property and capital. If this is seen as adverse it might act as a constraint on the pace of immigrant entry or it might suggest levying capital gains taxes and redistributing the proceeds. Such taxes and redistributions are not very plausible but I never lose sleep about this when the migrants, as in the current debate, are skilled. The wage losses will tend to accrue mainly among well-heeled workers and the existence of more skilled workers will augment the demands for those less skilled.

The extent of gains-from-trade depends on the flexibility of local wages. Unless wages can adjust downwards the gains to residents will not occur – if migrants get jobs a pool of unemployed locals will develop. Hence we can be more humanitarian and get more skill gains from labour migration if we have efficient local labour markets. This is one reason for seeking comprehensive labour market reform in Australia – a minor reason compared to other far more direct advantages.