7 October 2022
The following table (which I modified slightly) came from Paul Samuelson’s famous economics textbook1. Whereas Samuelson used land as his fixed input I substituted the capital stock. Production consists of a single stage at the point of consumption. In this highly simplified model capital is homogeneous2, as is labour, and consists of 1,000 units equalling 1,000 capitalists.The table makes it clear that the height of real wages rates is determined by the labour-capital ratio. The higher the ratio of capital to labour the higher the real wage rate, and vice versa. As we can see, beyond a certain point the return to labour falls but starts increasing for capital. In other words, increasing the labour supply against a given capital structure eventually lowers wage rates and by doing so increases the return to capital. Therefore, Professor Caplan, it is capital accumulation relative to the size of the population that raises real wages, not mass immigration.