Ultimately, the long-term labor supply depends on two factors: the number of births and the number of immigrants from other countries. As of 2017, the fertility rate—the number of births

Ultimately, the long-term labor supply depends on two factors: the number of births and the number of immigrants from other countries. As of 2017, the fertility rate—the number of births per women ages 15-44—is at a record low and falling. In recent years, foreign-born workers have been an important contributor to labor force growth ( ). Between 2007 and 2018, the foreign-born labor force rose by 4.2 million, just slightly behind the 4.7 million increase in the native-born labor force. Figure 16.10 Foreign-Born Workers Contribute to Labor Force Growth: Foreign-born workers accounted for almost half of the labor force growth between 2007 and 2018. Source: Bureau of Labor Statistics. With fewer births, is expected to be the main driver of the long-term labor supply going forward. In recent years, immigration into the United States has been quite high. Pulled by economic opportunity in the United States and a lack of good jobs in their own countries, the foreign-born labor force increased by 4.2 million workers between 2005 and 2015. By comparison, the native-born labor force increased by 3.6 million over the same period. In other words, without immigration, the growth rate of the labor force in the United States would have been much slower. Immigration is a highly controversial topic, not just in the United States but around the world. In 2015 Europe grappled with an influx of well over 1 million refugees and migrants from Syria and other countries. This surge generated heated political debate about the economic and cultural impacts of immigration. From the economic perspective, immigration clearly shifts the labor supply curve to the right—in a big way. All other things being equal, this decreases wages while increasing the level of employment in the host country. Economic research has not nailed down the size of this wage effect from immigration, though it’s certainly real. This concern about immigration driving down wages fuels much of the political debate over immigration policy. People are worried that the influx of foreign-born workers makes it harder for native-born workers to get paid well. Low-skilled workers worry about competition from low-skilled immigrants, while native-born workers with a college education are concerned about competition from immigrants who received college degrees in their own countries. But that’s not where the story stops. Immigration also shifts the national demand curve for labor to the right, which s push up wages. Why? Immigrants are consumers as well as workers. They buy homes: 52 percent of foreign-born residents in the United States lived in owner-occupied housing as of 2017. They buy food and furniture, use telephones and banks, and shop for cars and toys. As a result, immigrants not only increase the supply of labor, they increase the demand for goods and services and, therefore, the demand for labor. This may be especially true in cities such as New York and Los Angeles, which have vibrant immigrant communities. These two opposing effects of immigration explain why there is much disagreement among economists about the actual impact of immigration on wages. Reputable estimates range from a big negative impact to almost no impact at all. Economists are still not sure what has caused the increase in income inequality since the 1970s. However, they have suggested several different reasons, each of which may explain part of the increase (see ). Rapid technological change Changes in government policy First, the introduction of computers into the workplace in the 1980s and the 1990s seems to have favored skilled and educated workers. Remember that before the early 1980s, virtually no one had a personal computer at work. By the end of the decade, personal computers were everywhere. The new technology eliminated or reduced the need for certain low-skilled jobs, and it put a premium on the ability to understand and use sophisticated equipment. The result was an increase in the in the 1980s, as we saw in the previous chapter . As the pay gap between the college-educated and those with less education widened, it led to more income inequality. Another cause for widening inequality, especially in recent years, is foreign trade. This explanation used to be controversial among economists, but it has become much more widely accepted. Prior to the 1980s, workers with a high school education could find well-paying jobs in manufacturing. Many of those jobs have now vanished because low-cost imports from China and elsewhere have reduced the size of the U.S. manufacturing sector. In other words, the of globalization has caused wages for low-skilled workers to fall (as described in ). At the same time, highly skilled workers have benefited from the of globalization, at least until now. Another cause of widening income inequality is what we might call the . In many fields—sports, entertainment, consulting, academics, law—there is a widening gap in compensation between the top people and the merely competent ones. As the economy evolves from local to national and even global markets, companies are reaching out to the best talent they can find. The reason is simple: If you are accused of a crime, you want the best criminal defense attorney if you can afford him or her, rather than the 10th best or a competent but average one. If you are a big company looking for with a tough problem, you’d rather go to one of the top consulting firms rather than get a second stringer. This means that the top people in any field end up doing very well. Finally, government action—or inaction—has probably played a role in increasing income inequality, though it’s hard to say just how big this role is. For example, some economists believe that the minimum wage s reduce income inequality by boosting the pay of low-income workers. However, as discussed in the previous chapter, the minimum wage has not kept up with inflation over the past 40 years. Another way to assess the distribution of income is to look at the , which is the percentage of people living in households that earn incomes below the poverty line. The is an income level that is supposed to indicate the lowest acceptable living standard in the economy. It is adjusted for inflation each year and depends on the number of people in the household. In 2017, the poverty line for a family of two adults and two children was roughly $25,000. shows that over the past 40 years the poverty rate has been as low as 11.3 percent in 2000, but has risen back over 15 percent after the Great Recession. This reflects a combination of the disruption caused by the financial crisis and lack of real wage growth for many Americans. Figure 17.5 The Poverty Rate, 1975-2017 The percentage of the U.S. population living below the poverty line rose after the Great Recession, but has been declining in recent years. Source: Census Bureau, www.census.gov. However, the official poverty rate does not tell the full story of how the people at the bottom of the income distribution are doing. One reason is that the government’s calculations of the poverty rate exclude noncash benefits such as food stamps and health care programs such as Medicaid (a is any income support that the government provides other than a direct check to the recipient). It’s also important to remember that a household classified as poor in the United States may have a higher standard of living than the typical person in another country. Over time, some countries have closed the income gap with the United States, but it’s a slow process. (See ” .”) HOW IT WORKS: GLOBAL CATCH-UP Are emerging countries catching up to the industrialized countries? shows GDP per capita for four important emerging economies compared to the United States. If the line on the chart is rising, that means the country is catching up with the United States. If it’s falling, it’s losing ground. In this figure, incomes in China and India have gained significant ground on the United States, but incomes in Brazil and Mexico have not. Figure 17.6 GDP per Capita: Four Important Emerging Economies This figure shows the GDP per capita of four emerging countries as compared to the United States from 1990-2018, adjusting for price levels. Source: International Monetary Fund, www.imf.org.

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