The Labor Supply Curve is Upward Sloping: The Effects of Immigrant-Induced Demand Shocks

The Labor Supply Curve is Upward Sloping: The Effects of Immigrant-Induced Demand Shocks

A major methodological and empirical breakthrough in labor economics by Sigurd Galaasen, Andreas Kostøl, Joan Monras, and Jonathan Vogel (2025, revised March 2026) shifts the focus of the immigration wage debate from a pure "supply-side" framework to one that incorporates "demand-side" exposure. Traditional literature—such as the debates over the Mariel Boatlift (documented in The Mariel Boatlift Debate: Card's No-Effect Finding vs. Borjas's Reanalysis and Methodological Reconciliation of Mariel: Compositional Bias and the Role of Race)—treats immigrants primarily as producers of output, modeling how their labor supply affects native wages (supply exposure). However, immigrants also consume goods, which creates demand-side shocks. If immigrants have different consumption patterns than natives, their arrival shifts product demand toward specific sectors, boosting the relative demand and wages of native workers in those sectors¹² if the native labor supply curve across sectors is upward sloping ($\kappa < \infty$).

Methodology and Data

The authors combine individual administrative records of employment and tax histories for the entire population of Norway from 2000 to 2015 with a newly collected electronic payments dataset from Nets Branch Norway. This dataset covers all debit card payments via BankAxept and all online bank wire payments cleared through the Norwegian Interbank Clearing System (NICS). This allows the authors to measure region-sector specific immigrant intensities of consumption ($\mu_{rs}^i$) and production ($\theta_{rs}^i$) following the massive immigration surge into Norway after the 2004 and 2007 EU expansions (which increased the immigrant share in Norway's workforce from under 8% to over 14%).

Key Empirical Findings

• Positive Demand Effects: Native workers initially employed in region-sector pairs with higher demand exposure to immigration experience large, positive, and highly persistent increases in real earnings. A one standard deviation increase in demand exposure in 2004 leads to native real annual earnings being approximately 8,000 Norwegian krone ($NOK$) higher in 2015 (about 1.6% of the average sample baseline earnings).
• Negative Supply Effects: Workers in more supply-exposed region-sectors experience relative wage declines (a coefficient of -2.14 thousand krone for supply exposure versus +6.91 thousand krone for demand exposure in the baseline difference-in-difference specification).
• Tradability Mitigation: The positive wage effect of demand exposure is concentrated in less-tradable sectors (+9.87 thousand krone) and is non-existent or negative in more-tradable sectors (-6.27 thousand krone). This aligns with trade theory: in highly tradable sectors, the elasticity of product substitution is endogenously higher, which dilutes the localized wage impact of a demand shock.
• Orthogonality of Shocks: Crucially, the residualized variation in demand exposure is orthogonal to supply exposure, meaning that omitting demand exposure does not mechanically bias the supply exposure estimates, but it does omit a major positive channel of real wage adjustment.

Quantitative General Equilibrium Results

By embedding these mechanisms into a multi-region, multi-sector general equilibrium model and calibrating it using indirect inference ($\kappa = 0.05$ labor supply elasticity, $\rho = 1.55$ substitution elasticity between native and immigrant labor, and $\eta = 1.43$ consumption elasticity across sectors), the authors find that the 130% national increase in immigrant employment between 2003 and 2015 increased the median real wage of natives by 2.8% (ranging from 1.6% at the 10th percentile to 4.3% at the 90th percentile). Within-region supply exposure differences explain 56% to 69% of the wage variance, while demand exposure differences explain 31% to 44%, proving that both exposures are vital for capturing the full welfare effects of immigration.