In an earlier post today, I listed the factors that I believe are most widely agreed to be behind the increase in wage and income inequality. Here they are again: Globalization, “labor-saving” technology, much diminished union power, declining minimum wages, “financialization” of growth, tax incentives favoring capital (though these numbers are all pretax, the incentives still play a role), and what Harold Meyerson the other day called shareholder vs. stakeholder capitalism.
You will note, perhaps to your dismay, that immigration is not on the list. That’s not because I think it doesn’t matter. It’s because its impact on the growth of inequality is small, maybe 5% according to one careful study by David Card, a very highly regarded researcher in this field. That’s not nothing, but it’s probably a lot less than you thought.
How can this be? In fact, there’s an important lesson here: start with supply and demand analysis, but don’t stop with it.
The intuition behind the notion that immigration explains the growth of wage inequality is that if immigration increases the relative supply of low-skilled workers without a commensurate increase in relative demand (employers suddenly need a bunch of new low-skilled workers), the pay of low wage workers will fall relative to that of high wage workers, i.e., increased inequality.
Makes sense. Just like it makes sense that increases in the minimum wage will lead to widespread unemployment or that federal stimulus will crowd out private investment and lead to higher interest rates. Yet evidence solidly tilts against these results too. It’s actually what makes empirical economics interesting. The dictates of supply and demand will often rule, except when they don’t.
So why doesn’t the simple model work in this case?
The answer, as Card and others have shown, is that, in the words of economics, immigrants and native born workers are “imperfect substitutes.” That means they don’t compete with each other in the job market as much as, say, immigrants compete with other immigrants and natives with natives.
According to this research, if you want to see immigrant competition driving down wages, don’t look at competition between immigrants and natives; look at competition between immigrants. This study provides a pretty intuitive explanation of this finding and why it’s so important.
I don’t want to claim this is a slamdunk case. There’s research that finds larger effects (pinning maybe as much as 20% of the increase in inequality on immigration; see the work of economist George Borjas). But the Card findings are more widely accepted.
I know…they certainly aren’t intuitive and this is a very tough case to make. A lot of people know jobs are getting harder to find, paychecks are shrinking, and there are more immigrants around, so they make the obvious supply/demand connection. And yes, there are lots of native born Americans who know for a fact that they lost their job to an immigrant worker.
But that’s all the more reason to take a close look at this research. The obvious answer doesn’t appear to be the right one here.