Friday, September 15, 2006

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.


Anonymous said...

The latest RBA quarterly statement has Firms unable to grow because of lack of skilled personnel which I would suggest would mean a rather high marginal product of labour.

It must be admitted however the PR signs of the policy is of unskilled labour which boost your case however if most come from the UK you would assume they are skilled labour

derrida derider said...

A pretty bloody simplistic model, isn't it? No GE here - the extra profits as a result of the skilled labour being paid less than its marginal product results in no change in capital investment, it's comparative static (no transition paths so you don't know at a given time how much of the supply shock is unemployed and how much has hd a wage adjustment), the skilled labour is competing with other labour rather than being a complement to less skilled labour (if you can't hire a brickie you won't be hiring brickies labourers).

hc said...

DD, I agree it is simple but I am not sure it is 'pretty bloody simplistic'. If the decline in the marginal product of labour drags in capital inflows that will tend to provide gains top non-labour, non-capital assets. The main such asset is land, resources.

The adjustments are instantaneous here which simplifies things but dioes not change the story much. Presumably temporary migrants go straight into jobs.

I do mention the complementary effects on other sectors - these should boost overall gains from immigration and reduce the overall unfavourable effects on unskilled workers.

Damien Eldridge said...


I have posted some comments on the impact of immigration on wages at the following site: