Month-long riots in France have some immigration opponents fresh attention to, and support for, restrictive policies. Pollsters find attitudes against migration (including legal immigration) have soared to new heights. For example, some 63 percent of French voters favor suspending legal immigration for three years. 

Encouraged by the growing popularity of their stance, restrictionists offer a litany of reasons for restrictions. High on the list, at home and abroad, is the supposed wage-depressing effect of immigration. 

The logic is simple. “Econ 101,” they say: more immigrants, more labor supply; more supply, lower wages.

Economists get especially discouraged to hear “Economics 101” waved in triumphant support of restrictions, as it reminds us that students don’t always make it to the end of a full lesson. New people entering a market shift supply, true, but immigrants also generate new demand. What immigrants consume must be produced, and to produce it, employers demand more workers. As long as the added demand for labor is sufficiently large, immigrants could actually increase wages. But this is not (solely) a theoretical question. It is largely an empirical one. 

What Happens to Wages When Immigrants Arrive?

A recent meta-analysis in Labour Economics reviewed 88 peer-reviewed articles on the effect of immigration on wages published between 1985 and 2023. Among all that data, researchers find: the “distribution of wage effects is centred near zero (…)” suggesting that some demand-side growth is often offsetting the increase in labor supply.

The same study reveals wide heterogeneity in the results, with each study’s methodological design often “shaping the findings.” The quote on near-zero findings continues by stating that while “centered near zero,” the distribution of results “(…) exhibits substantial dispersion”. In other words, many studies find positive wage effects and around equally many find negative wage effects. Why such differences? 

The answer is subtle, but requires explaining what determines the magnitude of the demand shift. In earlier (and ongoing) work with Casey Pender of Mount Allison University in Canada, we explain that the demand shifts can easily be made far greater than the supply shifts. The effect of those shifts, though, requires allowing markets to work as freely as possible.

Introductory Economics students likely remember, for example, that demand for labor depends on the productivity of labor. When labor is more productive, employers are willing to pay more (raise wages). But what boosts productivity? Most notably, task specialization! And specialization depends to a great degree on how big the market is. The more economic participants there are, the more we can support specialization and upskilling, raising the productivity of each hour of labor, whether immigrant or native-born. By increasing the market’s size, immigration can increase specialization in ways that make the demand for labor shift more. But that requires open markets and low barriers to entrepreneurship, so people can rapidly move to invest in their own productivity and comparative advantages. 

Why Capital Follows Workers

Another factor is the complementarity with capital inputs (the fancy term economists use to say “machines”). If immigration adds workers, there are more workers per machine initially. At first, this puts downward pressure on wages. But those slightly suppressed wages provide their own remedy: employers now see greater value from acquiring new capital — more machines for workers to operate. In other words, the initial effect is an increase in the marginal product of capital, encouraging capital accumulation. New investments gradually redistribute the additional workers over additional machines, making each worker more productive. For that added productivity, employers are again willing to pay the previous, higher wages, or even more. 

In the international market for capital, businesses have new reasons to invest in countries where immigrants are expanding the workforce. Capital seeks higher returns, so where workers go, capital is likely to follow, helping to finance factories, equipment, and new businesses. Fresh investments help offset the downward pressure on wages from adding workers, while leaving the productivity and specialization effects intact. If capital can move freely across borders, new investments tend to follow workers where they go.

Notice the subtle complication: immigration’s effect on labor and wages depends disproportionately on policies that have absolutely nothing to do with immigration. 

A country that places high barriers on starting businesses will stomp on the possible gains from specialization.

A country that imposes barriers to foreign investments will reduce the availability of capital to offset the wage effects of adding workers.

A country that discourages workers from acquiring and developing new skills, perhaps by progressively taxing them, reduces the added productivity (and revenue) from their upskilling.

A country that taxes investment and makes foreign capital reluctant to move in adds downward pressure on wages by blocking capital from investing in the expanding workforce.

The more any country restricts markets, the more difficult it becomes for the demand shift (immigrants consuming) to overpower the supply shift (immigrants working). These seemingly unrelated constraints help explain why studies of immigration and wages find such different effects in different environments.

A Digression on Housing

The same evidently “Econ 101” arguments applied to labor are invoked to claim more immigrants create more housing demand, such that letting more workers enter the country leads to higher rents and housing prices.  

But the same outside factors intervene. Yes, immigration increases demand for housing, which does increase rents. But if immigration increases wages more than it impacts rents, then housing can actually be made more affordable for everyone. 

To capture that affordability, builders must be able to increase the housing supply quickly and easily. That means no rent controls, limited land-use regulation, open bidding processes for construction, and a predictable, flexible market so builders can meet new demand. The more you intervene in the housing market, the more you turn immigration into congestion. When housing can’t respond to new demand, rents will indeed rise. This is exactly what we observe in the United States: cities with more housing restrictions have experienced faster rent increases in response to similar numbers of immigrants. 

Complicating matters further, US homebuilding relies disproportionately on immigrant labor, meaning builders that can find much-needed workers can produce more homes (reducing prices). If immigrants are blocked from providing “complementarities in production,” that gap widens, because productive wage gains aren’t allowed to keep up with the demand-driven increases in rent.

To Let Immigrants In, Let Economies Adjust

Pile it all up and the most depressing lesson emerges: many complaints about immigration are really byproducts of state interventions elsewhere in the economy, preventing markets from responding to the influx of labor.

Perhaps it is unsurprising that France — a paradise of bureaucracy, high taxes, burdensome regulations, cost-heavy state-owned corporations — is the hottest hotbed of anti-immigration feelings. In environments hogtied by ill-advised state interventions, few of the benefits of immigration materialize, while the visible costs remain. 

Ohhhh, ma douce France…ma douce souffrance… bittersweet suffering.