There is a raging debate about whether the President stretched or exceeded his executive powers, but let us set aside the legal and political questions for the moment and consider a (wonkish) economic one: How does the administration envision the demand for low-skilled labor?
Economists often divide the work force into people with different sets of skills. The workers answering want ads to do late night shelf-stocking are not usually the same people who would work as computer programmers. [This difference in worker skills plays a non-trivial role in driving inequality in this country, as returns to skill have been rising].
Let’s focus for a moment on those without any advanced degree and ask the wonkish question: how can we characterize the demand for their services? Economists often describe demand as either elastic or inelastic. Elastic demand for labor would mean that small changes in wages would bring about large shifts in labor demand. Inelastic demand would mean that employers pretty much want the same number of hours worked no matter what.
So does the administration think that the demand for low-skilled labor is elastic or inelastic?
Here’s why we care. The administration has prominently espoused two economic policies this year:
- a hike in the minimum wage, and
- this week’s move to allow millions of undocumented immigrants better access to employment.
But that inelastic demand scenario is the worst possible one for expanding the unskilled labor force. Without a binding minimum wage, it would mean that the expansion of the labor force would be most likely to drive down wages. With a binding minimum wage, it would mean that those new workers would be unlikely to find work. In either case, this would likely exacerbate problems with inequality.
What if, instead, the demand for labor is elastic? That would be good news for the expanded labor supply. The workers could be accommodated with minimal downward pressure on wages. But it would mean that a minimum wage hike would be disastrous – employers would dramatically pare back their hiring in response to an increase in the cost of labor.
It would be interesting to know which scenario the administration believes applies. It would make clear which of the two principal policies is inappropriate. As a colleague pointed out, there is one possibility that would rationalize both policies: if the undocumented immigrants newly able to seek work are actually skilled, but have been working in unskilled jobs because of their uncertain status. It would be interesting to see the data supporting this scenario, if true. But that did not seem to be what the President had in mind when he asked, “Are we a nation that tolerates the hypocrisy of a system where workers who pick our fruit and make our beds never have a chance to get right with the law?”