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Immigration Reduces Unemployment And Increase Wages

Much of the opposition to immigration comes from the idea that immigrants take jobs that could be done by ''native'' workers. But according to new research by Javier Ortega, published in the latest issue of the Economic Journal, immigration is much more likely to have positive effects on natives'' wages and employment rates.

According to Ortega''s analysis, what happens is that when immigrants come to a country, firms create new jobs because hiring a worker becomes cheaper on average. As a result, natives get jobs more easily since more jobs are available. At the same time, they can obtain higher wages from firms since during wage negotiations, the higher availability of jobs makes the competition for workers among firms that much tougher.

Where Ortega''s analysis differs from previous theories – which assume that immigrants and natives compete for a scarce number of jobs – is in the idea that immigration itself may affect the number of available jobs. He argues that immigration will lead to increased job creation – it will boost labour demand – in the host country, which will result in lower unemployment and higher wages for the natives of the country.

The reasoning behind this is as follows: due to their weak bargaining position in wage negotiations – perhaps stemming from their poor language abilities or the costs they have already paid in order to emigrate, which makes them inpatient to start working – immigrants will accept relatively low wages. The result of this is that firms will now pay a lower average wage and will therefore increase their demand for labour since the cost of hiring a worker has become cheaper.

Immigrants will be better off as they will now enjoy better employment prospects and higher wages. Natives will be better off for two reasons:

 

  • First, unemployment will fall as the increase in labour demand means that natives will now have access to these newly created jobs.
  • Second, due to the relatively high availability of jobs, natives will now have a stronger bargaining position in wage negotiations and will therefore earn higher wages. Hence, immigration makes everyone better off.

What assumptions do we need to make for Ortega''s results to hold? Very realistic ones:

  • First, an economy in which firms cannot include a nationality criterion in the vacancies they create. This is frequently a characteristic of legislation.
  • Second, firms that pay lower wages to immigrants than to natives. Again, this is the case in such countries as Germany, the United States and the Netherlands.
  • Finally, we need an economy in which finding a worker is costly for firms (there are costs associated with publishing ads, interviewing candidates, etc.) and it is easier for them the higher the number of potential candidates. This too seems reasonable.

''Pareto Improving Immigration in an Economy with Equilibrium Unemployment'' by Javier Ortega is published in the January 2000 issue of the Economic Journal. Ortega is at the Université des Science Sociales in Toulouse.