Immigration, production, and the Rybczynski theorem

Two of the assumptions of some of the pro-immigration arguments, when combined together, strike me as a bit odd.  It is commonly claimed for instance that migration to the United States does not lower American wages much if any (I agree by the way, as do most economists).  It also is claimed that migration will help us boost our production of capital-intensive goods, such as tech products.  Therein lies the tension.

Enter the Rybczynski theorem.  The sequence here is as follows.  An influx of labor does not lower wages, but it does cause both labor and capital to flow out of the capital-intensive sector and into the labor-intensive sector.  Labor-intensive production will rise but capital-intensive production will fall.  (If you are wondering about the intuition, consider that prices and wages are remaining fixed.  All of the adjustment must take place in terms of quantities, and equalizing marginal product and wage, following the influx of new labor, requires more capital in the labor-intensive sector, thus draining some production from the capital-intensive sector.)

In other words, the core model for constant or near-constant wages, following immigration, also implies that capital-intensive production should fall, following an exogenous influx of labor.

You will note that immigration remains welfare-improving in this model.  Still, it is not exactly the deal which has been promised.  You also can imagine someone taking a more dynamic perspective and fearing the long-term growth consequences of losing output in the capital-intensive sector.  You also now have liberty to wonder if a negative wage effect might mean a stronger rather than weaker case for immigration, given that the capital-intensive sector in the U.S. arguably produces global public goods.

Here is one empirical study of the matter, by Slaughter and Hanson.  It supports the predictions of the Rybczynski theorem.  Ethan Lewis (pdf) considers the famous Cuban boat lift example, when the influx of immigrants did not lower wages, but he also finds it may have hurt capital goods production in the Miami area.  Those results are hardly dispositive, but they don’t exactly throw out the Rybczynski framework either.

To be sure, the Rybczynski theorem is far from self-evidently correct.  Prices and wages need not be fixed, especially for a country as large on the global stage as the United States.  2 x 2 x 2 models do not adequately capture the heterogeneity of labor.  Even defining “labor-intensive” and “capital-intensive” is fraught with ambiguity when countries do not share all of the same technologies, as illustrated by the debates over the Heckscher-Ohlin theorem (to measure labor-intensity, are we adding up the number of bodies or instead measuring their “effectiveness”?, in which case labor and capital blur together because capital makes labor more effective).

Still, models are useful in organizing our thoughts, and this is a model which I do not see getting much attention.  I typically have applied comparative advantage to this question (if more immigrants come, high-skilled citizens are freed up to produce more capital goods), but perhaps the Rybczynski model is also relevant.

I also note that I do not view the primary purpose of this blog as hammering home specific policy conclusions, I would rather put doubts and thought processes on the table.  Anyway, maybe this model provides some structure for a better understanding of the trade-offs involved with immigration policy.

I look forward to reading your comments on this issue.


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