Immigration and Wages – a useful diagram

I found this graph in New Zealand Association of Economists publication entitled “Asymmetric Information”. It shows the effects of immigration policy and considers the broader effects of immigration – not just the simple fact that immigration increases the size of the labour force and therefore puts downward pressure on wages. It suggests that immigration shifts the aggregate demand curve to the right and this can increase inflationary pressure which ultimately raises wages. There is also the chance that this could lead to an outward migration of domestic workers as their jobs are taken by those coming into the country. Below is an extract from the article:

The model shows the flow of immigrants in the centre of the diagram, and the well-recognised downward impact on domestic wages through increased supply. The extent to which increased supply of immigrants can impact domestic wages depends on the occupational attainment of immigrants, and the extent to which immigrants are substitutes for domestic labour.

The left-hand side of the diagram shows the added effect of immigration, with an upward effect on domestic wages through increased demand for goods and services and new job creation. This effect can explain why wage decreases may not result after an influx of immigrants. In addition, a feedback loop is shown on the right-hand side, which shows that if downward pressure on wages is created, outward migration of immigrant or domestic workforce would have an increasing feedback effect on wages. The out-migration part of the diagram is pertinent to New Zealand due to its geographic and institutional proximity to Australia.

Immigration Wages


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