Papers based on natural experiments of immigration have failed to find a significant impact of immigration on wages - in the short run.
However, I think they overlook three mechanisms by which immigration could, in the longer term, produce a downward drag on wages: a) by reducing the power of labour, b) by increasing the cost of housing, and c) by the increase in the burden on infrastructure. In my view, a) and b) are likely contendors for a downward effect on real wages from immigration. Contrary to intuition, I think c) is wrong i.e., immigration, most of the time, reduces the burden on infrastructure per person.
a) Many immigrants are dependent on their jobs in their new country. They often need the cash. They often need the job to stay in the country. They may also strongly desire the cash to support dependents, whether they have joined them or remain abroad. This means they have less ‘reservation utility’ - AKA, a stronger preference to avoid joblessness. This is great news for employers wishing to get away with paying workers less for the same effort.
The lower reservation utility will reduce the collective power of labour. Research suggests that decline in the power of labour is a driving force of stagnating wages of developed countries in recent decades. However, the cause of the decline in the power of labour has largely been posited to be i) decline in legal protection, ii) changes in the nature of work, iii) changes in cultural attitudes to unions etc, iv) trade liberalisation. Immigration does not typically feature as a possible cause of the decline of the power of labour. I think this should be investigated.
Note: this point is dependent on immigrants having a low reservation utility. Immigrants with capital reserves who are not dependent on jobs for their residency do not have this issue. If you’re seeking to shore up wage growth for your population, focusing on attracting already-rich immigrants may be the best way to do so.
b) The higher the population, the higher the demand for housing. The higher the demand for housing, the higher the cost of housing. Immigration will increase the cost of housing. Even if it has zero effect on nominal wages, this means that real wages will fall once adjusted for RPI inflation.
Note: this will be mitigated by planning regulations that allow the supply of housing to increase - and will be most worsened by planning regulations that do the opposite.
c) Immigration adds to the population. This drives up demand for rail capacity, road capacity, water usage, electricity usage, etc. This has to be ultimately paid for. Thus, immigration could in theory increase costs on others in society, reducing disposable real incomes. However, this reasoning has assumed that the costs will be borne by others. In reality, the average immigrant in most countries pays more in taxes than the average native. I’m not sure if existing populations are really bearing the infrastructure cost!
If it was true that immigration was having no other effect on real wages, then immigration would pay for itself in terms of the burden on infrastructure.
However, I think that immigration does have downward effects on real wages through a) and b).
This has implications not just for average real wage growth, but for inequality and social mobility. If immigration reduces real wage growth through increase in the cost of property and reduced power of labour, this is equivalent to an increase in the value of property and the value of capital and profits. This makes those with capital and property richer, and it makes it harder for those without to acquire it. It increases inequality and makes social mobility harder.
But even if we weren’t concerned with inequality and social mobility for their own sake, and preferred to focus on ensuring that most people have real wage growth… immigration policy which is open and makes no attempt to mitigate for its adverse effects on real wage growth will work counter to this goal.
At the same time, we should wish to benefit from immigration and bring benefits to would-be immigrants. Immigration brings a generally hardworking boost to the labour force. That they pay more than the average native goes some way towards them paying their own way towards the costs of adapting to a larger population. It also brings the richness of different cultures and perspectives. Immigration is generally of great benefit to the immigrants - hence them uprooting themselves from their homes.
So, the question is not how to completely minimise immigration, but rather how to manage it in such a way that mitigates its downsides on real wage growth.
I alluded to this in my notes at the end of a) and b). Attracting immigrants who will not drag down the bargaining power of labour - which generally means already-rich immigrants - will help to mitigate the effects of immigration. Ensuring that planning permission allows an increase in housing adequate to offset the increased demand from immigration will help to mitigate the effects of immigration.
More on Planning
Planning is a fraught issue. Lots of people oppose more liberal planning laws. Some of those people are thoroughly uninterested in maximising real wage growth, reducing inequality, or helping social mobility. Some of those people also want highly restricted immigration. At least, in those cases, their desired outcomes are not in tension.
However, many on the progressive side of the conversation are both very keen for more immigration and very sceptical of new housing on environmental grounds. I’m reminded of a conversation in 2017 with a second generation immigrant who viewed Brexit as a xenophobic movement and believed in loose immigration policy. She also voted Green in her local elections in an attempt to block local housing development. In fact, the Green Party is the epitome of ignoring the implications of their policies - huge planning restrictions and open borders.
If progressives want all of loose immigration, an avoidance of an increase in inequality and decrease in social mobility, and real wage growth, they should liberalise planning (as the Labour Party currently promises to do). But progressives cannot have their cake and eat it too - they must pick two of loose immigration, tight planning, and real wage growth.
How does this compare to fertility rate?
Fertility rates also affect the size of the domestic population. However, the downward effect on real wages is only through mechanism b). This is since natives tend to have existing support networks and guaranteed residency that make their reservation utilities higher than that of poor to middle income immigrants.
Further, the effect through mechanism b), though real, is slower than that of immigration. Whereas immigrants immediately require new housing units, expansion in family size will increase the size of housing unit. This generally provides less added pressure on infrastructure. The demand for more housing units comes a couple of decades down the line as the children grow up - which gives much more time for the housing to be built even given a set of regulatory and logistical restrictions.
Therefore, whilst a higher fertility rate is not without its eventual pressures on real disposable income, they are much more easily dealt with than those of immigration.
This is a smart argument. I’ve found liberals in favor of open borders insist that wages aren’t dragged down but immigrants themselves who came prior struggle to find work with a relentless downward pressure on wages in the informal economy in particular; it’s a race to the bottom for workers in industries like construction and farming, anything involving manual labor. I used to be against more immigration of the educated but I see the logic in your argument. I was against it mostly because we aren’t in need of more white collar workers, but immigrants also start companies that create jobs, so I’m ambivalent. I also saw a piece in the Free Press about how blacks in Chicago are angry at the local govt for taking in unlimited immigrants who are a drain on resources that are already scarce for existing black and Latino communities, about which I see a deafening silence, because that is happening in most if not every sanctuary city. Liberal concern for the downtrodden is starting to feel like a luxury belief.
Interesting read. I have one little objection. I do not follow how a lower reservation utility leads to a decrease in the force of labour. You say employers "get away with" paying less for the same effort - I would argue they are paying less for the same output, for no one really pays for effort. So if the immigrants are willing to do *the same work* for less money, how is that a decrease in the force of labour? Now if these people are providing a lesses level of work for lesser pay, that's a different story - but presumably employer could have already hired lousier workers for less pay before the immigration event occurred.
Furthermore, if an employer can hire someone to do the same job for less pay, wouldn't that reduce the price of their product, all else being equal and assuming competition pressure? This would therefore increase the real purchasing power of wages.
Finally, a brief comment on the housing issues you outline. It is my impression may immigrants into the UK, particularly from South Asia or Arabic countries, have a culture of sharing housing with a large number of family members - something that we would perhaps classify as cramped but does not appear to them as such. This may or may not have some implications for housing, or rather housing demand per capita.