Study: Immigration suppresses wages, raises cost of living

A new study on the US labour market shows that immigration suppresses wages of incumbent workers and lifts their cost of living. In a nutshell:

  • Immigration suppresses wages by increasing competition among workers for positions. It also lifts the housing rents paid by workers, raising their cost of living.
  • High-skill priority immigration has a suppressive effect on high-skill wages and low-skill immigration has a suppressive effect on low-skill wages.
  • Therefore, both groups suffer a reduction in economic welfare (‘utility’) when immigration of the same type (high skill or low skill) is increased.
  • Immigration is great for landlords, whose income increases as demand for housing outstrips or pressures supply.
  • Immigration, therefore, increases inequality.

Below are key extracts from the study:

Evaluating a skill-selective immigration policy…

First, I consider the effects of the United States adopting a skill-selective immigration policy similar to the UK. Such a policy would lead to a 46% increase in high-skill immigrants…

Table 1 reports changes in average welfare in annual wage units by worker characteristics in gateway and other cities under fixed and free migration. The columns labeled ‘Δ$’ show the change in the dollar amount, and the columns labeled ‘Δ%’ express the change as a percentage of welfare in the absence of the specified policy reform.

Negative welfare impacts from immigration

In the fixed migration case (columns 1 and 2), the average welfare impact on high-skill natives in gateway cities is equivalent to a reduction of almost 3% in annual consumption: $3,304 and $2,114 for high-skill men and women, respectively. The reduction is considerably more severe for high-skill immigrants, equivalent to around an 8% loss in annual consumption: $7,497 and $5,344 for men and women, respectively.

The impacts are less substantial in other cities. Among low-skill workers in gateway cities, average welfare improves by around 1% for natives ($569 and $463 for native men and women, respectively), and by 0.4% for their immigrant counterparts ($146 and $116 for men and women immigrants, respectively). The average gains for low-skill workers in other cities are similar to those in gateway cities.

In the free migration case, the negative impacts on the average welfare of high-skill natives and high-skill immigrants in gateway cities are attenuated. The welfare losses of those who move from gateway cities are substantially mitigated. This is shown in columns 5 and 7 of Table 1.

The difference between the change in welfare of movers and forced stayers represents the ‘gains from internal migration’. The gains are equivalent to an almost $1,000 increase in annual consumption for high-skill natives in gateway cities. The welfare gains for low-skill natives become slightly smaller…

The additional rental income accruing to landlords is sizable, and it could on average result in welfare gains if redistributed…

Evaluating a skill-neutral immigration policy

Next, I evaluate a skill-neutral policy, one that increases the stock of immigrants by the same amount as the skill-selective policy, but maintains the US skill composition of immigrants in 2007. This involves a 25% increase in immigrants.

Table 2 reports the changes in average welfare under the skill-neutral policy. The arrival of new immigrants has more positive wage effects on high-skill natives and less negative wage effects on high-skill immigrants relative to the skill-selective policy.

This is because a larger portion of new immigrants in this case is low-skill, and so the negative wage effect is counterbalanced by the complementarity between high- and low-skill labor. But the rising housing costs lead to a decline in the welfare of both low- and high-skill workers.

Nevertheless, because all workers are free to migrate within the United States, the negative impacts in some cities are attenuated. The migration responses of low-skill workers to this second policy are more pronounced. This is because the most adversely affected group in this experiment is low-skill immigrants…

Finally, there is a significant increase in rental income accruing to landlords from increased immigration. This suggests that an appropriate tax scheme on rental income would be an important consideration if policy-makers want to redistribute the gains and losses from immigration more evenly.

Who would have thought? Making workers compete for jobs with migrants lowers their wages, increases their cost of living and raises inequality. Exactly what MB has argued from the get-go.

Now watch as the immigration boosters and fake left ignore these findings.

Unconventional Economist
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  1. Awesome! Thanks for this Leith. One I’m putting in the archives for future reference. It would be great to see something like this in the Conversation but, not holding my breath…..

  2. The immigration boosters are not ignoring these findings, the LNP and big businesses sole aim is to undermine Australian workers and youth in order to make more money for themselves and the foreigners they serve.

    • Display NameMEMBER

      Moderate independents is the only hope for sensible policy in the short and medium term. And then only by blocking the most egregious legislation in what is likely to be a minority government. And preferably in both houses. When a major party can put up a transparent fiction such as the “gas transition” you know they just don’t give a tinkers if you know they are talking BS anymore.

  3. Professor DemographyMEMBER

    It’s interesting how the authors’ descriptions focuses on the positive side of the analyses. Indeed, if you don’t read the tables you could almost read the entire opposite conclusion with supporting quotes if you were motivated to do so. That’s what will happen if you point others to the paper I suspect.

    • Typical bias. Everyone in academia is conditioned to talk up immigration even if the evidence shows that it is welfare destroying.

      Just look at the Grattan Institute? They love it despite immigration making everything they argue for on housing and infrastructure much worse.

      • Professor DemographyMEMBER

        Yes. I’d even prefer if they adopted a more open and honest immigration supporting stance. This would involve at least saying that immigration is positive but we have to really make sure we do x, y and z to make it beneficial and currently we are not doing those things and thus it stands to reason that many Australians see immigration as negative.

        • I actually believe that lower levels of immigration is positive – like the levels we saw pre-2005. The problem is that it was run way too high pre-COVID and is projected to run even hotter ahead. That’s the issue IMO.

          • Professor DemographyMEMBER

            I agree with that because I think looking after x, y and z at the moment would suggest we have much lower immigration for some time to be able to do that. I think the post 2005 levels may have, to be totally charitable to the notion, been appropriate to a booming mining economy with an unemployment figure with a 3 handle for example. And we still should couple that with pegging the minimum skilled immigration wage to the median wage of the industry/roles they are supposed to be contributing to.

        • Professor, by its very nature, our radical immigration economy can never be “open and honest”. Over 15 years, Big Australia I was a corrupt LibLab deal, passed down through six prime ministers, but kept right away from voters. Similarly, Morrison and Albanese have made it very clear that the even-more-extreme Big Australia II is nothing for voters to see.

  4. Tables and chats are all very complex. No average punter will read beyond the headline and that is the problem.

    You need billboards on motorways with simple messages such as;

    “Excess Immigration Destroys Your Living Standards”
    “Illegal money is entering Australia preventing your kids from owning a home”
    “You cannot buy houses in most other countries unless you are a citizen. Why do we allow it in Australia?”
    “In Australia, most skilled immigrants earn far less than a median wage, are they really skilled?”
    “Laberal, Nats and Greens wants massive immigration growth which will crush your wages and living standards – Vote Blah”
    “Company profits have gone up while wage growth has gone down, excess immigration is part of the problem”.
    “The rights of Australia’s citizens should come before migrants and business interests”

    We could go all day.

    • Such billboards would not be allowed to be put up due to being deemed “raysist”. Some Human Rights XYZ org or some advertising “standards” board would deem them inappropriate and would probably block them.

  5. Jumping jack flash

    Importing cheap workers lowers wages for sure, but I struggle to see how it directly raises their costs of living. Maybe living costs as a percentage of their total wages, as wages reduce overall?

    And you can’t really attribute rising energy and communications costs (which is a result of simple gouging of essential items) with imported labour.

    Rising costs of living would imply that inflation is rising, and that simply doesn’t happen and hasn’t happened (until just recently and it had nothing to do with utilising immigrant labour, in fact the opposite is true) because their entire strategy for using imported cheap labour is to suppress inflation. Rising inflation is erroneously attributed to rising interest rates, and all central banks have signaled (by now) that it will require “sustained” inflation [in wages] before any of them will even think of raising interest rates because of it.

    The problem is that in the New Economy where businesses don’t actually produce anything, the ONLY way to increase revenue to be able to increase wages for workers is by increasing prices, ie, inflation.

    Slowly they are realising this.

    • Tell that to anyone living in Sydney and Melbourne who have seen their housing and infrastructure costs surge on the back of humungous immigration-driven population growth.

      Every new infrastructure project built to accommodate a bigger population costs more than the existing infrastructure (due to diseconomies of scale). This raises the costs for incumbent residents (e.g. toll roads and other user pays charges).

      Immigration also drives up housing prices and rents.

      Rising congestion across our major cities are also costs borne by the incumbent population.

      The inflation argument also doesn’t hold much water given real wages plummeted over the pre-COVID period of extreme immigration.

      Finally, the averages don’t tell the full story. Mass immigration benefits the wealthy elites, while harming ordinary residents.

  6. Not sure what the relevance is to Australia when the (undefined) ‘immigration’ in the US is a very different dynamic that may not compare well, if at all?

    Narrow focus of one article without broader context and MB has made a negative interpretation vs. broader and related literature; a sandwich does not make a picnic.

    Even many workers, unions etc. of the ‘left’ understand that dog whistling ‘immigrants’ as a cause of lower employment, welfare, well being etc. has no basis but is to divide employees, local and immigrant; when there are no immigrants then it’s unions and employee rights that are then nobbled….

    That’s the objective of US radical right libertarian economic ideology that MB promotes along with Koch think tanks, NewsCorp and the LNP; not very right on let alone socially centrist?

    • Well it is likely to be worse here for wages, cost of living as our per capital immigration is a lot higher than the US. If it was less here then you might have a point.

    • “That’s the objective of US radical right libertarian economic ideology that MB promotes along with Koch think tanks, NewsCorp and the LNP; not very right on let alone socially centrist?”

      Except that the LNP kicked off mass immigration 15 years ago and maintained while in office. The others you mentioned are all onboard for it too.