Econ 2010, Assignment #2: Immigration and wages

1

Let's see if we can get an idea as to the economic effect of those living and working in the U.S.

in violation of immigration, residency, and labor laws. We'll confine out attention to their effect

on wages.

I think this is an interesting and important exercise, if for no other reason than the part that

immigration played in the presidential election of 2016.

All right, the first question is: how many people are in the U.S. unlawfully?

2

Who knows. On a

number of occasions, I've come across the number

12 million

. So let's go with that.

Well, the first question we have to answer is this: how many people are participating in the labor

market, i.e. have jobs or are looking for jobs? That's the labor they're supplying and as you

should know, supply is one of the determinants of the price of something. When the supply of

labor goes up/down, what would we expect? Answer: wages to go down/up. After all, the wage

is the price of labor.

Let's assume that people in this group - those unlawfully in the U.S. - participate in the labor

market at the same rate as lawful residents do. What rate is that? Go figure. This is how. Go

to

Appendix B

in the

2019 edition of the Economic Report of the President

(https://www.whitehouse.gov/wp-content/uploads/2019/03/ERP-2019.pdf) and find

Table B-22

.

Get the number for the

civilian non-institutional population, over 16 for 2018

.

Put that

number in 1).

From that same table, get the number for the

civilian labor force, total, over 16

for 2018

(this number is NOT employment).

Put that number in 2

). When you divide 1) into

2), you get the

labor participation rate for the country.

Do that and put the number in 3

).

Go out 4 decimal places.

This number tells you what percent of the working age population has or is looking for a job.

You should get

a number a less than .7

(meaning 70% of those 16 or older have a job or are

looking for a job).

In what follows, use .7 as the labor participation rate of illegal

immigrants

. So if there are 12 million individuals unlawfully in the U.S. over the age of 16 in

the country, and they're participating in the labor market at the same rate as legal residents, how

many of these 12 million individuals are participating in the U.S. labor market?

Put that

number in 4).

OK, we need to realize that there is not just one labor market in the country. There's a market for

medical doctors, for lawyers, for teachers, for accountants, and so on. My guess is that the vast

majority of those in the country unlawfully are participating in the low-wage end of the labor

1

The terminology used in referring to individuals in the country through illegal entry and re-

entry, or as an overstay is based on and is consistent with the terminology used by the American

Immigration Council. See https://www.americanimmigrationcouncil.org/research/immigration-

prosecutions#.

2

Per Title 8 of the U.S. Code, "unlawfully" means they have entered the U.S. without proper

inspection, have entered the country after having been deported, or have overstayed a visa. See

the website given in the previous footnote.

market. They have jobs as semi-skilled construction workers; jobs providing janitorial and

housekeeping services; in food service, and so on. So let's suppose these individuals have jobs

that put them in the bottom 40% of the income distribution. We'll call the sectors of the labor

market where wages are such that a person selling their labor in that market ends up in the

bottom 40% of the income distribution, the low-wage labor market.

Figure out what 40% of the civilian labor force

is (40% of the number in 2), and

put that in

5

). Now figure out what percent of 5) the number in 4) is.

Put that in 6

). Realize: this is the

percentage decrease in the supply of labor to the low-wage labor market if those working here

unlawfully were prevented from participating in that labor market, e.g. by adopting laws that

would induce employers not to hire people who are in the country unlawfully.

Now we're ready to figure out what the impact of taking this many workers out of the low-wage

labor market would be, on wages. Look at the graph.

wage Supply of labor

Demand for labor

labor (workers)

So what happens to the wage when the supply of labor to the low-wage labor market goes down?

It increases. The question is: by how much?

Here's how we figure that.

If we have S = D and then supply changes, price - in this case, the price of labor, the wage - will

change so that supply and demand are still equal. Now, if S = D, and they both change, in order

for these two numbers to still be equal, it must be that

the % change in S = the % change in D

(Think about that. Me and a friend are the same height at the beginning of 7th grade, 60". Say

his height increases by 5% and mine by 10%. Can we still be the same height? No. The only

way we'll be the same height at the end of the year is if the percentage increase in my height =

the percentage increase in his height.)

Here supply is changing because those in the country unlawfully are no longer participating in

the labor market, and you've figured out what that percentage is. So that percentage is the

number on the left-hand side of this equation.

OK, what will the percentage change in demand be? Answer: the same as that percentage. What

will cause demand to change, to fall that much? Answer:

higher wages.

Recall: the percentage change in the demand for something (whether it is a good or input) due to

a change in its price will be determined by the own price elasticity of demand and the percentage

change in that something's price. That is:

% change in D for labor =

the own price elasticity of demand for labor X the % change in the wage

Therefore, if we know what this elasticity is, we can figure out what would happen to the wage.

What is that number? Who knows. Let's pick a high and low value and figure the % change in

wage for each. Use

- 1.25

for elasticity and figure out what the % change in wage would be.

Put that

number in 7).

That's your low estimate of the percentage change in the wage. Now

suppose that elasticity is smaller (in absolute value), that it's just

- .5

. Figure out what the %

change in wage would be in that case,

put that number in 8

). That's your high estimate.

3

OK, how big a deal is that for someone in the bottom 40% of the U.S. income distribution? That

would depend on the income of a person in that group. I mean if the average person in that

group is making $100,000 a year it's one thing, but quite another thing if that person is making

$15,000 a year.

Well, according to the U.S. census, the average income of a person in the bottom 40% of the

income distribution is about

$25,000 a year.

Take your two percentage changes in the wage of members of that group, and using $25,000 as

the current income of someone in that group, figure the increase in the income ($) of the average

person in the bottom 40% of the income distribution if the percentage decrease in the labor

supplied to their labor market went down by the percent in 6). Assume that if a person's wage

goes up/down by x% their income goes up/down by x%. Add each of those to $25,000 and

put

the higher income in 9) and the lower income in 10).

3

Say you know that one number,

a

, equals two other numbers multiplied by each other (

b

x

c

).

What would the number represented by

c

have to be? Answer:

a/b

. So if you know that

a

=

b

x

c

, and the values of

a

and

b

, you can figure out what

c

is. Check it out. What is

c

if you know 6

= 2 x

c

?

What do you think? Is this a big deal - for those individuals - or not? What do I think? Well, it

certainly could be a deal to those individuals. But now let's see how wages would change,

percentage-wise, if those working unlawfully in the U.S. are spread throughout the labor market.

So, take the number from 4) and divide that by the number from 2

).

Multiply it by 100 and

put a % sign behind it.

Put that percent in 11).

That's the decrease in the total supply of labor

if those working unlawfully are prevented from doing so. Suppose that the elasticity of the total

demand for labor is

- .5.

What would decreasing labor supply by the percent in 11) do to wages,

percentage-wise?

Put that percent in 12).

Obviously, this calculation tells a diff