Question

What factors can explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers?

Short answer

In conclusion, the relatively small effect of low-skilled immigration on the wages of low-skilled workers can be explained by several factors, such as complementarity between immigrant and native jobs, job creation due to increased economic activity, limited competition between immigrants and natives, immigrants' lower reservation wage, and capital adjustment by firms in response to immigration. These factors work together to offset potential negative wage effects and maintain a balance in the labour market.

Step-by-step solution

Define key terms

First, let's define the key terms involved: - Low-skilled immigration: immigration of workers who generally have lower levels of education and skills. - Low-skilled workers: workers with less education and experience, typically working in jobs requiring little training or specialization. - Wages: monetary compensation paid to employees for their work.

Explore supply and demand

Consider the labour market dynamics in terms of supply and demand. The wage rate is determined by the intersection of supply and demand for labour. When there is an influx of low-skilled immigration, there should be an increase in the supply of low-skilled workers, which might be expected to put downward pressure on wages.

Identify possible factors

Now, let's outline the possible factors that can explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers: 1. Complementarity: Low-skilled immigrants may work in jobs that complement the jobs of native low-skilled workers, resulting in increased productivity and minimizing negative wage effects. 2. Job creation: Immigrants can increase economic activity, creating new jobs and helping mitigate any negative wage impacts. 3. Limited competition: Low-skilled immigrants may not directly compete with native low-skilled workers in the labour market due to geographical or sectoral differences. 4. Lower reservation wage: Immigrants might be willing to work for lower wages, which can result in employers offering lower wages for all low-skilled workers, but since the immigrants are already working for lower wages, the effect on the native low-skilled workers will not be significant. 5. Capital adjustment: Firms may adjust their capital investments in response to immigration, which could increase the demand for low-skilled labour and mitigate downward pressure on wages.

Explain the factors

Now let's provide explanations for each of the factors identified: 1. Complementarity: For instance, low-skilled immigrants might work in manual labour jobs such as construction, agriculture, or janitorial services, while native low-skilled workers remain in positions requiring more communication skills or cultural knowledge. This division of labour could enhance economic productivity and alleviate downward pressure on wages. 2. Job creation: As immigrants spend their earnings in the local economy, demand for goods and services increases, stimulating economic growth and potentially creating new job opportunities for both immigrants and natives. This can help offset any decline in wages. 3. Limited competition: Low-skilled immigrants might concentrate in specific geographic areas or industries in the host country, so they only compete directly with a relatively small number of native low-skilled workers. This can help limit the negative wage effects. 4. Lower reservation wage: The immigrants' willingness to accept lower-paying jobs might result from their lack of knowledge about the local labour market or their lower reservation wage due to lower living costs in their home country. While this may mean that employers can offer lower wages overall, this effect may be small for native workers. 5. Capital adjustment: Businesses can respond by investing in new machinery, technologies, or facilities, which could increase the demand for low-skilled labour in certain industries. This can help offset any negative wage effects of low-skilled immigration.

Conclusion

In conclusion, there are several factors that can help to explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers. These factors include complementarity, job creation, limited competition, lower reservation wage, and capital adjustment. It is essential to take these dynamics into account when assessing the impact of low-skilled immigration on the host country's labour market and economy.