This baseline analysis focuses first and foremost on immigration's direct effect on the economy through the addition of workers to the labor force. At the most basic level, immigration increases the supply of labor in the economy. More labor means more goods and services being produced, so that national output (GDP) rises.
Immigration also affects the prices of the inputs that are used to produce these goods and services. Those inputs for which immigrant labor substitutes will suffer as the prices of their services fall. Simply put, "substitutes" means two things that are very similar to one another. As a homely example, red apples and green apples are almost perfect substitutes, so that an increase in the number of red apples would not only reduce the price of red apples, but also simultaneously lower the price of green apples by about the same amount. In the context of immigration, whereas we shall see many immigrants are unskilled laborers, the strong presumption is that immigrants are substitutes for domestic unskilled labor.3 Therefore, an increase in the number of immigrants will generally decrease the wages of domestic unskilled workers.
Immigrants are not substitutes for all domestic workers. A disproportionate number of immigrants are low-skilled relative to native workers, and so tend to be poor substitutes for workers other than the low-skilled—that is, they do not do the same things at all. In the jargon of economics, two factors that are not substitutes are called "complements." For a simple example, think of supervisors and production workers. Suppose that, for every 50 production workers, we need one supervisor. If we increase the number of production workers, we will need more supervisors and their wages will rise. An increase in the number of immigrants, then, will raise the wages of those domestic workers who are their complements. The common presumption is that skilled domestic workers are complements for immigrants, so that an increase in the number of immigrants will raise the wages of domestic skilled labor. Capital may also be a complement to immigrant labor, although the evidence on the complementarity of unskilled labor and capital is more ambiguous than that of skilled and unskilled labor. In summary, an increase in immigration flows will lead to higher incomes for productive factors that are complementary with immigrants, but lower incomes for factors that compete with immigrants.
