To Keep Foreigners From Driving Down Wages, Let Them In

The Washington Examiner’s excellent Conn Carroll is the latest, but surely not the last, to gloss over the crucial truth that the only “closed economy” is the world economy. A failure to recognize this has Carroll making a case against foreign labor that arguably contradicts his case.  

In a recent piece for the Examiner, Carroll ascribed to “libertarian scholars” the view that when foreign labor is allowed into the U.S., “Employers get cheap labor, immigrants get higher pay,” and “American workers aren’t hurt” by this turn of events. Carroll has a quibble with the libertarian narrative, and writes that they’ve long been incorrect “that adding to the supply of cheap labor never reduced native wages.” Conn is making a supply/demand argument about wages that ignores not just the globalized nature of work, but also what drives wages.

Let’s start with his assertion that immigrants push down U.S. wages stateside. Logic says quite the opposite. To see why, imagine if all willing foreign labor were kept out of the U.S. altogether. If so, the “supply” of labor to all manner of U.S. businesses wouldn’t change as much as the location of it would. Outside the U.S., workers who would otherwise be willing to work inside the U.S. are quite a bit less valuable. And for obvious reasons unrelated to supply and demand.

Outside the U.S., investment in production and processes is quite a bit less robust. By extension, compensation outside the U.S. is greatly reduced as a consequence of this lack of investment. Which is just a reminder that when the willing and able are barred from working in the U.S., they don’t disappear as much as they’re working however they can, albeit much less productively. If we accept as true Carroll’s view that supply and demand dictate wages, logic dictates that we roll out the red carpet to foreign workers. Again, the supply of workers doesn’t disappear when it’s outside the United States as much as workers more desperately take whatever wage they can get. As always, the world economy is the only closed one.

About what’s written above, Carroll implicitly acknowledges it as so. As he notes, “immigrants get higher pay” in the U.S. Well, of course. That’s why they’re coming here. If it were about supplying their labor cheaply, they wouldn’t come to the United States. They would instead take what they can get outside the U.S. Many do just that as evidenced by the global nature of U.S. production. If readers doubt this, they need only consider how much in the way of Apple iPhones or Boeing airplanes are made in the U.S.

As Apple, Boeing, and every U.S. manufacturer of market goods remind us, they yet again rely on a global labor force to produce what they bring to market. They pay less for labor outside the U.S. because investment in production processes is as previously mentioned not as robust as it is here. Opposite what Carroll contends, productivity born of investment is what powers wages, not supply and demand.

Readers can surely debate the good and bad of immigration into the U.S., but they can’t as credibly debate its impact on U.S. wages. That it’s positive is a statement of the obvious. The minute a foreigner sets foot in the U.S., this individual is immediately much more valuable thanks to the massive investment in production processes that is yet again much less evident outside the United States.

Bringing it to a close, if wages were governed by supply and demand then it would by extension be true that U.S. compensation had declined over the decades as more and more women shed homemaking duties for the work force. Except that wages rose, only for investment to migrate to those earning higher wages as evidenced by routinely massive capital inflows into cities like New York, Los Angeles and San Francisco. The latter is a reflection of just how productive the people in those cities are.

Wages are quite simply driven by investment, not supply of people. The more people who live and work in the U.S., the more that wages will rise as a function of where workers are located. While there may in fact be costs related to immigration, lower wages is decidedly not one of them.

Republished from RealClear Markets

Author

  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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