Immigration and the Labor Market: A Basic Analysis

Regional Economist, October 1997 | Go to article overview

Immigration and the Labor Market: A Basic Analysis


The accompanying figure shows the effects of an influx of immigrants into an economy. To keep things simple, there are only two types of workers in this economyskilled and unskilled-both of whom produce only one good, called GDP. The total number of workers is fixed, and there is no capital used in production, which means that all income paid to workers must equal the value of all output produced.

The vertical line S, the supply curve for labor, represents the fixed number of unskilled workers in the market. The diagonal line AD represents the market demand for unskilled labor. Because the height of each point along the demand curve represents the value of extra output produced by the last unskilled worker hired, total output equals the sum of all these points up to S-the area OABS. Each unskilled worker receives a wage, W^sub 1^, where the supply of labor equals the demand for labor, making the total amount paid to all unskilled workers S times WI, or the area OW^sub 1^BS. This fad, coupled with the fact that there is no capital in this economy, means that the triangle W^sub 1^AB represents the total amount paid to skilled workers. Now suppose / unskilled workers immigrate to the economy, making the new number of unskilled workers S+/, or S *. Because there are now more workers overall, the economy is able to produce more GDP. The new amount of GDP is the area OACS *. The larger number of unskilled workers means that each worker is now paid a lower wage, W^sub 2^. …

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