Is immigration behind wage, income inequality? Not so much.
Globalization, technology, union decline, and other factors have caused rich to get rich and poor to get poorer. Immigration plays only a small role.
In an earlier post today, I listed the factors that I believe are most widely agreed to be behind the increase in wage and income inequality. Here they are again: Globalization, “labor-saving” technology, much diminished union power, declining minimum wages, “financialization” of growth, tax incentives favoring capital (though these numbers are all pretax, the incentives still play a role), and what Harold Meyerson the other day called shareholder vs. stakeholder capitalism.
You will note, perhaps to your dismay, that immigration is not on the list. That’s not because I think it doesn’t matter. It’s because its impact on the growth of inequality is small, maybe 5% according to one carefulstudy by David Card, a very highly regarded researcher in this field. That’s not nothing, but it’s probably a lot less than you thought.
How can this be? In fact, there’s an important lesson here: start with supply and demand analysis, but don’t stop with it.
The intuition behind the notion that immigration explains the growth of wage inequality is that if immigration increases the relative supply of low-skilled workers without a commensurate increase in relative demand (employers suddenly need a bunch of new low-skilled workers), the pay of low wage workers will fall relative to that of high wage workers, i.e., increased inequality.
Makes sense. Just like it makes sense that increases in the minimum wage will lead to widespread unemployment or that federal stimulus will crowd out private investment and lead to higher interest rates. Yet evidence solidly tilts against these results too. It’s actually what makes empirical economics interesting. The dictates of supply and demand will often rule, except when they don’t.