How Wages Are Set: Why Immigration Isn’t the Deciding Factor

Why employer power, industry structure, and business choices explain pay trends better than worker inflows.

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Immigration is frequently blamed for wage stagnation among U.S.-born workers. The logic sounds straightforward: more workers competing for jobs should push pay down. The problem is that modern labor markets don’t behave like textbook models. Decades of economic research show that wages are shaped far more by employer behavior, market concentration, and bargaining power than by immigration levels. This explainer lays out how wages are actually set, where immigration fits into that system, and why the data keeps pointing to the same conclusion—even when the conclusion is unpopular.

• What the System Is

  Wages are not set by headcount alone. They emerge from a layered system that includes employer market power, industry structure, labor standards, and workers’ ability to negotiate. Immigration affects who is available to work, but it does not determine how much employers choose to pay. In most sectors, firms have substantial discretion over wages—and that discretion matters more than labor supply changes.

  In practice, wages reflect who has leverage. Employers usually have more of it.

  In short: immigration changes the size and composition of the labor pool. Employers decide what happens next.

• How the Process Works

  The familiar “more workers equals lower wages” story assumes competitive labor markets where firms must raise pay to attract workers. That assumption rarely holds in practice.

  Workers don’t compete one-for-one.
  Immigrant and U.S.-born workers tend to cluster in different roles, even within the same industries. They often bring different skills, experience, or job preferences, which makes them complements rather than direct substitutes. When workers are not interchangeable, the pressure on wages is limited.

  Immigration expands industries.
  Sectors such as construction, agriculture, food processing, logistics, hospitality, and care work grow when labor is available. Growth increases demand for supervisors, skilled trades, managers, and support roles—many of which are disproportionately filled by U.S.-born workers. Expansion changes the shape of the labor market, not just its size.

  Labor markets adjust over time.
  Workers relocate, firms invest in equipment and training, and new businesses enter the market. Short-term local effects fade as regions adapt. What looks like a permanent wage shock is often a temporary adjustment period.

  Employer choices dominate outcomes.
  When labor becomes harder to find, employers can raise wages, improve conditions, invest in productivity, or hold pay flat and accept higher turnover. Research shows that wage stagnation tracks these business choices far more closely than immigration levels. The same labor supply can produce very different wage outcomes depending on how firms respond.

• Who Makes the Decisions

  When economists isolate immigration’s effects, the forces that consistently explain wage outcomes are structural and employer-driven.

  Industry concentration.
  When a small number of firms dominate a sector or region, they can suppress wages below competitive levels. Fewer employers means fewer alternatives for workers—and less pressure to raise pay.

  Monopsony power.
  In areas with limited job options, workers cannot easily move to higher-paying employers. Firms take advantage of this by keeping wages low even when labor is scarce. The problem is not too many workers, but too few choices.

  Weakened bargaining power.
  Declines in unionization and collective bargaining have reduced workers’ ability to negotiate pay and conditions. The timing of wage stagnation closely follows the erosion of bargaining rights, not immigration spikes.

  Contracting and misclassification.
  Outsourcing, temporary staffing, and classifying workers as independent contractors allow firms to lower pay and benefits without changing the number of workers in the economy. These practices shift risk downward while keeping wages flat.

  Wage-setting practices.
  Non-compete clauses, no-poach agreements, and weak enforcement of labor standards limit workers’ mobility and bargaining leverage. These tools quietly depress wages across entire labor markets, regardless of who is doing the work.

  Wages are shaped by employers and firm structures, not by immigrant workers.

• Why It Shows Up in Daily Life

  People experience flat pay alongside visible demographic change and connect the two. The underlying mechanics are harder to see.

  • Wage pressure comes primarily from employer power, not worker numbers.

  • Regions with higher immigration often show faster economic growth and higher long-term wages.

  • Rising housing, healthcare, childcare, and transportation costs shrink paychecks even when nominal wages increase.

  • Business practices that suppress wages operate quietly, while immigration is visible and easy to blame.

  What people notice is change. What shapes wages is structure. The two are rarely aligned.

  The gap between perception and evidence is wide. The data, however, is consistent.

• Sources

  These sources explain how wages are set, how immigration affects labor markets, and what research shows about employer power.

  • National Academies of Sciences, Engineering, and Medicine. The Economic and Fiscal Consequences of Immigration (2017).
    https://nap.nationalacademies.org/catalog/23550

  • Congressional Budget Office. The Economic Effects of Immigration and Labor Supply (2024).
    https://www.cbo.gov/publication/60007

  • U.S. Bureau of Labor Statistics. Union Membership Data.
    https://www.bls.gov/news.release/union2.toc.htm

  • Card, D. (2001). Immigrant Inflows, Native Outflows, and the Local Labor Market Impacts of Higher Immigration. Journal of Labor Economics.
    https://www.journals.uchicago.edu/doi/10.1086/321967

  • Borjas, G. J. (2017). The Labor Supply of Undocumented Immigrants. Journal of Labor Economics.
    https://www.journals.uchicago.edu/doi/10.1086/694450

  • Economic Policy Institute. Wage Stagnation and Employer Power in the U.S. Labor Market (2023).
    https://www.epi.org/publication/wage-stagnation/

  • Brookings Institution. Immigration and Long-Term Economic Growth (2022).
    https://www.brookings.edu/articles/immigration-and-economic-growth/