This article was written in response to Michael Lind’s article, “A labour shortage can be a blessing, not a curse,” that appeared in The Financial Times on June 9, 2006. This article was subsequently submitted to the editor of The Financial Times, who chose not to publish our article.
Michael Lind’s recent article “A labour shortage can be a blessing, not a curse” (June 9, 2006) makes several assertions that are detached from economic reality.
A great deal of the low wage labour in the United States is attributed to immigrant labourers, many of which have entered the country illegally. Employers typically pay these labourers cash in order to avoid legal issues. As these labourers are not in the system, neither they nor the employers are paying the appropriate payroll and Social Security withholding taxes. As this factor alone lowers the cost of business, employers have a predisposition to utilize illegal immigrant worker resources in order to gain a competitive advantage. This tends to artificially depress real wages for other labourers, with legal status, who could otherwise be performing the same jobs. Illegal immigrant labourers, therefore, contribute to lower incomes for all labourers.
Mr. Lind claims that investment in technologies that improve productivity is driven by tight labour markets. Whilst this may be partially correct, companies are generally driven to invest in these technologies in order to reduce costs of higher priced labour and, thus, increase corporate profits. In many instances, immigrant labourers are more productive than those with legal status. As the supply of cheap illegal labourers is plentiful in the United States, businesses are disinclined, then, to make sizeable investments in technology that increases productivity only marginally.
Mr. Lind makes his clearest error in asserting that productivity growth can solve much or all of the pension funding problem. In the long-run, productivity growth reduces the number of labourers contributing to the Social Security and Medicare entitlement programmes through the appropriate withholding taxes. The financial problems of the entitlement programmes stems from too few labourers paying into the system. Resolving the underfunding of the entitlement programmes would require more labourers paying taxes into the system, a reduction in benefits, higher withholding taxes, or an increase in the retirement age. Productivity growth that removes labourers would only compound the financial problems of the entitlement programmes.
Labour shortages that increase real wages would benefit labourers in the form of higher incomes and improved standards of living. To achieve this, we would be better served removing illegal immigrant labourers from the system. This would drive up real wages and may reduce corporate profits, which could then prompt investment in productivity-improving technologies. Higher real wages would then increase the tax funding for the entitlement programmes. A bigger benefit, however, would be to put the now illegal labourers into the system, forcing them to pay their fair share of withholding taxes but restricting their ability to obtain entitlement benefits (a guest worker programme for example). Withholding taxes on their wages would help to reduce the underfunding of the entitlement programmes.
Hopefully Mr. Lind will recognize by now that more legal labourers, not less, are in our best interests. More labourers provide the only way to save the entitlement programmes.
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