November 21, 2014 | By

An Economic Question about the President’s Immigration Action

Last evening, the President announced a plan to grant enhanced legal status to millions of undocumented immigrants. The plan had a number of components, but prominently seemed to allow millions of workers to seek employment without fear of deportation. 

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: 
  1. a hike in the minimum wage, and 
  2. this week’s move to allow millions of undocumented immigrants better access to employment. 
     
The effect of these moves on wages and employment depends critically on the demand for low-skilled labor in this country. If the demand for labor is inelastic, then the proposed increase in the minimum wage would arguably be a good thing. Inelastic demand would mean that employers would pay the higher wage without laying off many workers. 

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?”

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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