Question

1. (a) “….Immigrants aren’t the principal reason wages haven’t gone up; those decisions are made in the boardrooms that all too often put quarterly earnings over long-term returns…The point is, I believe that in this new economy, workers and start-ups and small businesses need more of a voice, not less. The rules should work for them. And I’m not alone in this. This year I plan to lift up the many businesses who’ve figured out that doing right by their workers or their customers or their communities ends up being good for their shareholders. And I want to spread those best practices across America. That’s part of a brighter future.” remarked former US President Barack Obama during the 2016 State of the Union Address.   

The President effectively joins a long raging debate on the effects of immigrants on the wages of natives. Using an appropriate economic model, analyse the validity of his argument. Identify any caveats in your analysis (use an appropriate graphical illustration).

Answer 1

This argument is also validated by 2019, Nobel prize winners Abhijeet Banerjee, Duflo and Cramer.

There argument goes like this. When new labors arive in the form of immigration, it is widely believed that due to more supply, wages will go down. Supply shifts from S1 to S2 and wages go down from W1 to W2.

These nobel laureates propose that at the same time thses people also spend in the economies where they work and contribute. It leads to aggregate demand shifting right from AD1 to AD2 and hence aggregate supply also goes up creating more potential in an economy from Y1 to Y2. This theory is also supported by economic data and hence popular belief that immigrants reduce wages is not supported by facts. For natives it creates supervisory jobs which are better paid.

Hence, business people should be thinking positively about wages so it also contributes to economi growth not only for the natives but for host economies as well.

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