Immigration and the labor supply

The chain in words

1. Step 1

   Before the arrivals

   Construction laborers earn 22 dollars an hour and 50 thousand are employed. The horizontal axis is the number of laborers employed. The vertical axis is the hourly wage. The market is at E₀.

2. Step 2

   Labor supply shifts right

   New arrivals look for construction work. At every wage, more people offer their labor, so labor supply shifts right. At the old wage of 22 dollars, more people want jobs than builders will hire.

3. Step 3

   The wage falls, employment rises

   Builders can fill posts at a lower wage. As the wage falls, they hire more, a movement along the labor demand curve. The market settles at E₁: a lower wage and more laborers employed.

4. Step 4

   Who gains and who loses

   Total employment rose, but the wage of existing laborers fell. Builders and their customers gain from cheaper construction. Whether the economy as a whole gains depends on what the new workers spend and build, which this one market cannot show.

Takeaway. A rise in labor supply lowers the wage and raises employment.

Draw it yourself

More on the labor market graph