Market Effects of Immigrant Labor

Market Effects of Immigrant Labor Alabama lawmakers are backpedaling, trying to fix a law they passed aimed at preventing illegal aliens from taking legal residents' jobs, Phillip Rawls explained Dec. 9 (Rawls 2011). The new law requires everyone to demonstrate proof of legal residence when obtaining some regulated privileges the state already oversees like permitting and access to services.

Compliance has caused problems for businesses and legal residents, although there has been some concurrent drop in unemployment for legal residents, which happened simultaneous with the new law if no direct correlation can as yet be established (Rawls 2011). This case displays the complex dynamics underlying the U.S. labor market in general, specifically demand for legal workers, demand for illegal workers, imported labor working in the U.S., and identifying exactly who benefits from enforcement and who pays those costs.

Supply and demand graphs provide useful demonstration of some of these dynamics. Figure I shows an equilibrium wage for labor, where "Supply" shows how many workers will provide labor at each wage. "Demand" shows how much the firm is willing to pay for labor, which implies this is how much each additional worker is worth to the firm. If only one worker was available, the firm would pay $9. At a cost of $2 per unit, the firm will be willing to pay 8 workers, for a total cost-production of 16 units.

This is the result of declining returns to labor, say increased cost of physical plant, crowding or expensive training for example. Since only 2 workers are willing to work for $2 but the firm wants to increase output beyond that, in order to do which it must pay higher wages, to draw more labor. The result is the equilibrium wage, which shows the maximum the firm is willing to pay, for the amount of available labor, here 5 workers / units of output, at $5 cost per unit.

This is not the price of the final product, but the price of labor. If the price of the final product were say $10 for all units, This firm would produce $10 at a cost of $9 with one worker, resulting in a profit of $1. At 8 workers costing $16, the revenue would be $80, with profit of $64. Obviously this is better for the firm but fewer than 8 workers won't accept the wage, actually only 2 of them will.

At 5 units of labor / output, the result is the best the firm can get at $25 labor cost with $50 revenue leaving a profit of $25. Figure 2 shows the results of imposing an artificial price floor, here a minimum wage, under which no employer is allowed to pay by law. The result is unemployment represented by the red line, where at the new wage of $6, the firm is only willing to pay for 4 workers, although 6 workers are willing to show up for that rate. The result is that 6-4 workers, i.e.

2, go unemployed, the firm produces 4 units of output instead of 5, at a cost of $24 instead of $25, but at a profit of $40-$24= $16, instead of $50-$25=$25 profit. The result is unemployment, higher wage cost for the firm, and less output for consumers (society). The gap is called 'deadweight loss.' This analysis omits price effects on product demand from these resulting costs for clarity and space.

Figure 3 demonstrates what the Alabama law is trying to accomplish, reducing the supply of workers by prohibiting employment for any worker without proof of legal residence. Since the minimum wage is set by law outside Alabama's power to change, reducing the supply of labor through enhanced enforcement will allegedly remove the red line of unemployment in Figure 2. Remaining workers will get jobs at higher than equilibrium wage, the Supply curve shifts to the left, and wage and output stabilize until something else changes like input cost or legislation.

Were firms able to hire workers at less than minimum wage, say like in Figure 4, where the cost of paying illegals including the enforcement cost results in lower demand for legal minimum wage workers, the result would be a total average cost between the two supply lines, increased outcome for the firm, at less than average minimum wage cost. The new Alabama law seems to attempt to drive off the black line "illegals" by mandating stiffer enforcement for services and privileges like business or auto licenses, Rawls (2011) explains.

This creates an interesting distribution of costs if firms derive profit, but the cost of enforcement is being pushed onto others not employing illegals. If the black line in Figure 4 were closer to the gray "Legals" labor supply, there would be less incentive for firms to cheat. If the "Legals" labor supply was any higher to the left, i.e. wages were higher than minimum, and there were illegal workers, the result would be lower average wage for all of them but unemployment for the legal workers.

Raising the cost of the black line in Figure 4 to the level of the gray line would get rid of any incentive to hire undocumented workers but instead Alabama has chosen to increase the burden of enforcement outside the firm. The result is a direct subsidy by all other businesses who want to get a license, or individuals who want to license a car (cutting into auto sales and thus theoretically raising price there), with that cost given directly to the owners of firms who hire illegal workers, in theory.

The firms who break the law profit at the expense of the rest of the society, and deliver higher profits to their owners drawn off from all neighboring business who may or may not break the law hiring illegals, and/or specific businesses in regulated industries, here auto sales among others. The Alabama law brings up another interesting aspect of the labor market picture which.