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Tuesday 14 February 2012

The trouble with teaching macroeconomics: minimum wages and immigration

                I’m in the middle of lecturing on our second year macroeconomics course. There is so much ground to cover in a short amount of time, so on many occasions I have to stop myself launching into a long discussion about why the world is much more complicated than the simple model I’m presenting. One example that will be familiar to many is the impact of minimum wages on employment, where the evidence may not fit the standard textbook model. (The work of Card &  Krueger is well known, but those in the US may be less familiar with similar work in the UK. Some recent work discussing international evidence is here.)
                I used to be more comfortable about using the standard labour market model, coupled with the variant involving imperfectly competitive goods and labour markets, to analyse the impact of immigration. The idea that immigration was initially unpopular because it led either to lower real wages for the indigenous workforce, or an increase in the amount of involuntary unemployment generated by imperfect competition, seemed to accord with popular perceptions (although see here (10/2/2012) for a discussion of the origin of such perceptions). And I was always careful to add that any decline in real wages would disappear in the long run, as it would be eliminated by increased investment. However work in the UK has suggested that in this case the simple model may be seriously misleading once again.
In early January the Government’s independent Migration Advisory Committee (MAC) published a report which was widely reported as finding that “an increase of 100 foreign-born working-age migrants in the UK was associated with a reduction of 23 natives in employment for the period 1995 to 2010.” However further reading of the report finds this result is not at all robust. At the same time the National Institute published findings that found no impact of immigration on unemployment. The two pieces of analysis are compared by Jonathan Portes here. Ian Preston at the Centre for Research and Analysis of Migration (CReAM) at UCL notes (16/1/2012) that ‘There have been studies in several countries and the preponderance of evidence is strongly suggestive that employment effects are small if they exist at all.’ (Here is a recent US study focusing on the impact on poverty.)
What about wages? The MAC study’s summary of empirical work on the impact of immigration on wages concludes “The majority of studies estimate that migrants had little impact on average wages, differing in their assessments of whether migrants raised or lowered average wages.”  There seems to be a common finding that immigration lowers wages a little at the bottom of the income distribution, but raises them at the top. This is hardly consistent with the simple textbook labour market model.
Perhaps we can content ourselves that the textbook model might still be reliable for much larger changes in migration or minimum wages, but that for more modest changes factors like heterogeneity due to skill shortages or monopsony can account for the empirical evidence cited above. However, even if I did have time to make these qualifications to the basic model in my lectures, would students remember them, or just remember the predictions of the model?                 


  1. If you assume perfect capital mobility, the immigration of capital should follow the immigration of workers. The aggregate labour demand curve should then be roughly horizontal (except for land). (There might be an irreversibility here, with irreversible investment, so that the labour demand curve looks like \_ )

  2. Wouldn't expected immigration also increase investment bringing the long run much closer. We all predicted a fair number of immigrants, and once immigration started, we all predicted that the trend would continue, so if investment decisions were more forward looking than the model suggests then the effect becomes less anomolous..


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