Illegal Immigrants Good, Minimum Wage Bad
January 22nd 2010 17:18
Greek economist Theodore Palivos wrote a paper in 2007 called "Welfare Effects of Illegal Immigration." Here is the abstract (w/ highlighting added by me):
In the paper, Palivos’ model, for the first part, assumes full employment in a competitive economy. He assumes that illegal immigrants are paid less than the value they produce, and thus less than domestic workers, for two reasons. First, there is a risk for an employer if he is caught employing an illegal immigrant; thus, the lower wage is a sort of tax for risk. Second, the employer has additional bargaining power, since he can higher a domestic worker at a slightly higher wage and force the immigrant to have to travel back to his home country. The immigrant, however, does not want to go back to his home country and be paid an even lower wage. As a result, the additional bargaining power slightly lowers the wage paid to the illegal immigrant.
Now, when illegal immigrants enter a country, it has two main effects on the domestic residents, which include legal immigrants. First, through the “exploitation” of illegal immigrants’ wages, domestic residents can increase their consumption, and consequently their welfare. Second, the capital stock, and the accumulation of capital for domestic households, increases. These findings remain the same even when the labor market is divided into skilled and unskilled labor.
Unfortunately, when one key assumption is added to the model, the positive findings disappear: a minimum wage. This changes the model in two important ways. First, unskilled labor in the economy now cannot have their wages fall below a certain minimum level, while illegal immigrants can. Second, the introduction of a minimum wage changes the economy from one with full employment to one with unemployment. With these conditions, more immigrants leads to lower employment of domestic workers and, thus, no longer increases the capital stock. Since one additional immigrant to the workforce removes one unskilled domestic worker from the workforce and since the capital stock does not increase, consumption now decreases for domestic residents. Hence, the welfare effects of illegal immigration have been reversed.
Conclusion: The findings of this paper are extremely important. They suggest that in a competitive economy with full employment, which many would argue was the case of the U.S. over much of the past 20 years, illegal immigration makes U.S. citizens better off in terms of what they can consume. However, when the labor market loses its flexibility, i.e. via a binding minimum wage, then illegal immigration increases domestic unemployment and leads to a loss of welfare. Given the fact that the probability of drastically slowing illegal immigration is near zero, these results suggest that the United States would be better off (higher consumption, higher employment) if the minimum wage were ended and the U.S. economy was made as flexible as possible.
Follow me on Twitter: @AGoldenDoor
This paper analyzes the welfare effect of illegal immigration on the
host country within a dynamic general equilibrium framework and shows that
it is positive for two reasons. First, immigrants are paid less than their marginal
product, and second, after an increase in immigration, domestic households
find it optimal to increase their holdings of capital. It is also shown that
dynamic inefficiency may arise, despite the fact that the model is of the Ramsey
type. Nevertheless, the introduction of a minimum wage, which leads to job
competition between domestic unskilled workers and immigrants reverses all
of the above results.
host country within a dynamic general equilibrium framework and shows that
it is positive for two reasons. First, immigrants are paid less than their marginal
product, and second, after an increase in immigration, domestic households
find it optimal to increase their holdings of capital. It is also shown that
type. Nevertheless, the introduction of a minimum wage, which leads to job
competition between domestic unskilled workers and immigrants reverses all
of the above results.
In the paper, Palivos’ model, for the first part, assumes full employment in a competitive economy. He assumes that illegal immigrants are paid less than the value they produce, and thus less than domestic workers, for two reasons. First, there is a risk for an employer if he is caught employing an illegal immigrant; thus, the lower wage is a sort of tax for risk. Second, the employer has additional bargaining power, since he can higher a domestic worker at a slightly higher wage and force the immigrant to have to travel back to his home country. The immigrant, however, does not want to go back to his home country and be paid an even lower wage. As a result, the additional bargaining power slightly lowers the wage paid to the illegal immigrant.
Now, when illegal immigrants enter a country, it has two main effects on the domestic residents, which include legal immigrants. First, through the “exploitation” of illegal immigrants’ wages, domestic residents can increase their consumption, and consequently their welfare. Second, the capital stock, and the accumulation of capital for domestic households, increases. These findings remain the same even when the labor market is divided into skilled and unskilled labor.
Unfortunately, when one key assumption is added to the model, the positive findings disappear: a minimum wage. This changes the model in two important ways. First, unskilled labor in the economy now cannot have their wages fall below a certain minimum level, while illegal immigrants can. Second, the introduction of a minimum wage changes the economy from one with full employment to one with unemployment. With these conditions, more immigrants leads to lower employment of domestic workers and, thus, no longer increases the capital stock. Since one additional immigrant to the workforce removes one unskilled domestic worker from the workforce and since the capital stock does not increase, consumption now decreases for domestic residents. Hence, the welfare effects of illegal immigration have been reversed.
Conclusion: The findings of this paper are extremely important. They suggest that in a competitive economy with full employment, which many would argue was the case of the U.S. over much of the past 20 years, illegal immigration makes U.S. citizens better off in terms of what they can consume. However, when the labor market loses its flexibility, i.e. via a binding minimum wage, then illegal immigration increases domestic unemployment and leads to a loss of welfare. Given the fact that the probability of drastically slowing illegal immigration is near zero, these results suggest that the United States would be better off (higher consumption, higher employment) if the minimum wage were ended and the U.S. economy was made as flexible as possible.
Follow me on Twitter: @AGoldenDoor
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