The title of this post is a nod to Alfred Marshall, who stressed that supply and demand analysis required we think about “both blades of the scissors.” Prices are not set by supply or demand alone – it is the interaction between the two that is crucial. It is for this reason Greg Mankiw once wisely commented that he was neither a supply-side economist nor a demand-side economist. He was a supply-and-demand economist.
This came to mind because I recently saw a journalist make a remark on Twitter I’ve seen in numerous forms before. Speaking out against immigration, this journalist declared it was obvious that increases in immigration – legal or otherwise – would decrease the wages of American workers, because “the law of supply and demand applies to labor too: more labor means cheaper labor.” This is doing analysis with one blade of the scissors. And just as one-bladed scissors are terribly ineffective at being scissors, doing supply-and-demand analysis with only supply is equally ineffective. That’s why the term invoked by the aforementioned journalist is “the law of supply and demand.” We need to look at both blades of the scissors here.
When the supply of labor increases, what happens to the demand for labor? Does it stay fixed? Well, no. This is because increasing the supply of labor also makes labor more productive. Adam Smith lays it out in the opening lines of The Wealth of Nations:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.
The more workers there are, the more extensive the division of labor can become. The more extensive the division of labor becomes, the greater the “improvement in the productive powers of labour.” The greater the productive powers of labor become, the greater the demand for labor becomes. Thus, increases in the total size of the labor force don’t just shift the labor supply curve to the right. The labor demand curve also shifts to the right. This is true whether the increase in the labor supply is due to immigration, a proverbial “baby boom,” or the large-scale entry of women into the workforce.
One example of this change in specialization can be seen in this paper by Giovanni Peri and Chad Sparber. They make the point that immigrant labor and native labor are not perfect substitutes. Immigrants and natives have different skill sets and strengths relative to each other, particularly in the market for workers with relatively little formal education. Native workers had advantages over immigrant workers in terms of communication and interaction skills, and native and immigrant workers specialized according to their comparative advantage. Thus as more immigrant workers began doing manual labor, more native workers shifted away from manual labor and into higher paying jobs in which they had a comparative advantage such as doing supervisory and coordination work. Thus, the division of labor reorganized along lines of greater specialization, increasing the productivity and efficiency of the labor force. This is just one of several mechanisms by which increases in the labor supply can increase labor productivity and wages.
Another way to see this might be to look at it from the other side. Right now, a major concern for many thinkers is a sort of inversion of Paul Ehrlich’s life work – rather than a population bomb, they worry about an impending population implosion. One country with rather dire looking projections is South Korea. According to current projections, their population in 2100 should be similar to their population in 1950. But in 1950, the median age for South Korea was just under 18 years old, while in 2100 the median age is projected to be just under 60 years old, with only about half of the total present-day population. The total working-age population, then, is projected to crash pretty hard.
When considering that kind of scenario, almost nobody feels tempted to respond “Wow, that will be so great for future generations! They’ll only have about half as many people engaged in productive work, and with such a low supply of workers, those workers will be so much wealthier because of it! After all, supply and demand applies to labor, so the fewer laborers there are, the wealthier laborers become!” Societies are impoverished, not enriched, by the loss of productive workers. And societies are enriched, not impoverished, by gaining them.
