In the long term, standard economic theory predicts that capital and technology will adjust to immigration and changes in the economic situation, and that labour is fully mobile. In practice, the assumption of perfectly competitive markets with perfectly mobile labour and capital may not hold, and this model therefore may not accurately describe what happens in all cases. Empirical analysis is used to ascertain whether the evidence supports the theoretical model.
Economic theory suggests that in the longer term, migration may have no effect on employment and wages, as changes in the volume and composition of labour supply will over time be absorbed by changes in the structure of the economy, for examplethe output mix5 between industries. If markets are competitive and labour is perfectly mobile across industries, then changes in relative factor supplies6 (skilled and unskilled labour, capital) will not have a long-term effect on relative wages.
Instead, adjustment happens through changes in the output mix and relative scale between industries. For example, if there is a large increase in a country’s supply of skilled labour, skilled wages are likely to fall and the economy will become relatively more competitive in the production of goods that are skilled-labour intensive.
Production of such goods will expand, raising the demand for skilled labour and lifting the wage back towards its equilibrium level. The shift away from manufacturing and towards services in the UK is an example of how an economy might adapt to the changing skills composition of the population. Of course, there may be many other possible explanations for this shift. It is also true that these economic adjustments can take a considerable length of time and come with other social consequences.
In addition, the economy may adjust through changes in technology, resulting in the development and utilisation of technology that makes more use of the available labour supply in the economy. For example, employers may respond to an increase in low-skilled labour supply by switching from a capital-intensive production model to a more labour-intensive approach that makes less use of mechanised production methods.7 Immigration can act to support or inhibit such adjustments. This argument was highlighted in evidence provided to the House of Lords Committee
“[The wine industry] is highly labour intensive in California and highly mechanised in
Australia, the reason being that it is very easy to get unskilled workers in California but not in Australia” (House of Lords, 2008b, p 117b).
Immigration – particularly of skilled migrants – may lead to benefits through a dynamic impact on growth, technology and innovation, for example, by introducing additional knowledge and innovation, resulting in increased average wages and employment in the long term. However, the ready availability of migrant labour may in some cases also reduce incentives to develop the productivity of existing workers, and the dynamic benefits while often discussed in the literature are difficult to measure accurately.
It is also argued that immigration may increase labour market efficiency. Borjas
(2001) argues that immigration “greases the wheels of the labor [sic] market” as immigrants may be more responsive and mobile than the native population and therefore more likely to move to areas with the best economic opportunities. This means that they may self-select into areas where they are most likely to find employment. Greater flexibility through a relative lack of ties or social investment may also provide immigrant labour with a competitive advantage, although conversely the attraction of migrants to existing diaspora may also inhibit their flexibility and responsiveness.
Most analyses of the short-term impacts of migration are not well placed to assess effects across markets and over…