1 Immigration On page 168 the first full sentence is “Perhaps the key issue in the immigration debate is most receiving countries concerns the impact of immigrants on the labor market opportunities of native born workers.”

The case of substitutes 2 Here we want to consider what happens to the labor market when folks from another country come along and these folks are basically a substitute for the natives. In the short run it is felt the immigrants push the supply of labor out, resulting in a lower wage and a greater total amount of labor employed. But, as the wage is lowered some native workers are no longer interested in work and therefore some natives give up work.

The case of substitutes 3 In the long term after immigration and the resulting lower wage firms begin to see increased profitability. This will encourage an increased use of capital goods at both existing firms and new firms that enter the market because of lower labor costs. The end result is that the demand for labor will also increase. The increase in the demand for labor means the wage will begin to rise back to where it started. There is reason to believe that in the economy there are constant returns to scale and this would produce the result that the demand would shift out as much as supply and thus the native workers get paid what they did originally and employment is restored back for the natives. So, the problem is in the short run.

The case of complements 4 It may very well be that immigrants really make it easier for natives to switch to other lines of work in which they are more productive. When labor productivity rises the demand for labor will rise. Since the native workers are in greater demand the natives get a higher wage and because of this some natives are encouraged to supply a greater quantity of labor as there is movement up the supply curve. So our theory is suggesting the impact of immigration is only a temporary setback (in the case of substitutes). But the setback is real!!!!

5 The Economic Benefits of Immigration in US D employment $ S natives S natives + immigrants A B D C E Here we assume immigrants are substitutes for US labor w0 w1 N M

6 If there is no immigration the amount of labor employed would be N and the general level of wages would be w0. The payment to labor would be B + C. Now, remember the demand for labor is based on the value of the marginal product, so A + B + C must be national income (GDP) because without labor we get no output and thus A is that part of national income that goes to capitalists - here firm owners. With Immigration national income = A + B + C + D + E, labor gets C + E, and capitalists get A + B + D. Labor after immigration minus labor before = C + E - (B + C) = E - B --> the immigrant gain minus the native loss. Capitalist after minus capitalist before = A + B + D - A = B + D

7 The total change to laborers and capitalists D + E E goes to the immigrants, D goes to the native capitalists – this is called the immigration surplus. So, in this case domestic labor probably isn’t happy with immigration, but capitalists are tickled pink. IS = Immigration Surplus. IS = ½(w0 – w1)((M – N) =1/2(w0 – w1)(M – N)w1M/w1M = ½[(w0 – w1)/w1][(M – N)/M]w1M

8 IS = Immigration Surplus. IS = ½[(w0 – w1)/w1][(M – N)/M]w1M and as a share of national income (NI) IS/NI = ½[(w0 – w1)/w1][(M – N)/M][w1M/NI] = ½ (% change in native wage)(% change in employment)(labor’s share of national income.