The Economic and Fiscal Consequences of Immigration (2017) / Chapter Skim
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5 Employment and Wage Impacts of Immigration: Empirical Evidence
5 Employment and Wage Impacts of Immigration: Empirical Evidence
Pages 197-278
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From page 197... ...
The wages and employment prospects of many will be unaffected. The direction, magnitude, and distribution of wage and employment effects are determined by the size and speed of the inflow, the comparative skills of foreign-born versus native-born workers and of new arrivals versus earlier immigrant cohorts, and the way other factors of production such as capital adjust to changes in labor supply.
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From page 198... ...
Given the potential for multiple, differentiated, and sometimes simultaneous effects, economic theory alone is not capable of producing decisive answers about the net impacts of immigration on labor markets over specific periods or episodes. The role and limitations of theory were assessed by Dustmann et al.
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From page 199... ...
Spatial studies define subnational labor markets -- frequently, these are metropolitan areas -- and then compare changes in wage or employment levels for those with high and those with low levels of immigrant penetration, controlling for a range of additional factors that make some destination locations more attractive than others. As immigrants are likely to settle in those metropolitan areas that have experienced positive economic shocks, econometric methods are used to identify spatial variation in immigrant penetration that can be considered "exogenous" -- that is, not determined
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From page 200... ...
To the extent that existing spatial studies have not been able to address all possible mechanisms through which local labor markets adjust, it is possible that they underestimate any impact of immigration on labor market outcomes at the national level. At the same time, economic theory also implies that domestic impacts of immigrant inflows are reduced to the extent that the United States trades with the rest of the world and that capital flows into and out of the United States (see Chapter 4)
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From page 201... ...
, estimating the parameters that characterize the production technology (most notably the elasticities of substitution between factors of production) , and then simulating the impact of changes in labor supply on relative wages of, say, native-born workers based on the estimated arameters and the assumed functional form of the production function.3 p While, as noted earlier, all empirical approaches require identifying assumptions, structural models require particularly strong assumptions, and some of those assumptions build in specific numerical answers for the wage impact.
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From page 202... ...
Both spatial analyses and aggregate skill cell and production function studies may divide workers into skill groups, and a spatial study by Peri et al.
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From page 203... ...
Moreover, it might be argued that the notion of complete adjustment in the face of ongoing immigration is not clearly defined, in that there is no theory and little empirical evidence on the effect of anticipated immigration on firm behavior. Among the various approaches reviewed in this chapter, the structural approach deals most explicitly with the distinction between the short and long run.
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From page 204... ...
One somewhat confusing aspect of this terminology is that one might be tempted to assume that perfect substitutes 4 For simplicity and also due to policy concerns, the panel frequently refers to immigrant versus native-born workers. In reality, immigrant inflows may affect the wages not only of natives but of earlier immigrants as well.
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From page 205... ...
argued that evidence supports the conclusion that high school dropouts are essentially perfect substitutes for high school graduates. In a production function context, Ottaviano and Peri (2012)
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From page 206... ...
The second issue of importance is whether immigrants and natives within skill groups are perfect substitutes. This issue is potentially quite important in that, for cases in which natives and immigrants are imperfect substitutes, any negative wage effects resulting from immigrant inflows will be more concentrated on previous immigrants, who are usually the closest substitutes for new immigrants, lessening the adverse impact on natives.6 Various research findings lend support to the notion that immigrants are imperfect substitutes for natives with similar measured characteristics.7 Chiswick (1978)
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From page 207... ...
. Using a structural production function approach, they estimated substitution elasticities, whose values indicate that immigrants and natives were imperfect substitutes within the typical categories used, especially among the less skilled.
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From page 208... ...
The idea here is that, if immigrants and natives are imperfect substitutes, the impact of immigrant inflows on prior immigrants should be larger than on the native-born, since immigrants are likely to be closer substitutes for each other than for natives. Many studies focus only on the native-born component of the pre-existing workforce, but when both groups are examined, larger negative wage and employment effects for previous immigrants than for the native-born are generally found (e.g., Card, 2001; Ottaviano and Peri, 2012)
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From page 209... ...
The short-dashed line in the graph (labeled "actual") indicates that recent immigrant workers are more concentrated in the lower quintiles and less concentrated in the 2.5 2 1.5 1 .5 0 20 40 60 80 100 Percentile of Nonimmigrant Wage Distribution Predicted Actual Nonimmigrant FIGURE 5-1 Predicted and actual position of recent immigrants (less than 2 years in the United States)
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From page 210... ...
The panel considers this issue further, along with the appropriateness of aggregating high school dropouts and high school graduates, in the context of the s tudies reviewed below.
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223) As documented below, however, continued study of this issue over the past two decades has led to greater variation and detail in estimates of the wage impacts of immigration obtained from the local labor market approach.
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From page 212... ...
(2) Local labor markets are not closed, which means that natives (or earlier immigrants)
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From page 213... ...
Monras (2015) found that, during the Great Recession, "fewer people migrated into the locations that suffered more from the crisis." This relative shrinking of the labor supply in the most hard-hit metropolitan areas would have alleviated some of the negative wage effects associated with the crisis by spreading the local recession shocks across regions or nationally.
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From page 214... ...
that the wage effects of local employment shocks die out within 10 years provides some support for the interval, employed in most of these studies in the construction of the instrument, of 10 or more years between the previous immigrant concentrations used to derive the allocation and the current inflows.15 Due to concerns about whether local labor market conditions during the analysis period are, or are not, directly related to conditions for the period from which the instrument is constructed, researchers have begun exploring alternative instruments. For example, an IV constructed to deal with endogeneity of location choices may be based on a characteristic such as the distance between origin and destination countries.
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From page 215... ...
. natives may respond to the wage impact of immigration on a local labor market by moving their labor or capital to other cities.
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From page 216... ...
Any such adjustments imply that spatial correlations between wages and immigration may underestimate the national wage impact of immigration. The adjustments described thus far in this section explain why spatial studies may underestimate any national wage impact of immigration.
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From page 217... ...
. Illustrative Results from Spatial Studies Table 5-3 in Section 5.8 summarizes the results from spatial studies of the labor market effects of immigration, most of which employed IV methods to address the endogeneity of immigrants' locational choices.
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From page 218... ...
, the 1970 share of immigrants in the population was used to construct the IV for immigrant inflows over the 1970-1980 period. As discussed above with regard to the possible imperfect substitutability of immigrants and the native-born with similar measured characteristics, focusing on the total immigrant share implicitly allows cross-effects to be examined.
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From page 219... ...
. While they did not instrument for immigrant inflows, potentially underestimating the negative effect of immigrants, their findings are consistent with evidence discussed above of imperfect substitution between immigrants and native-born workers.
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From page 220... ...
Card (2005, 2009) raised the possibility that high school dropouts and high school graduates are perfect substitutes as an explanation for these small wage effects.
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From page 221... ...
Smith concluded that it is possible "an immigrationinduced reduction in youth employment, on net, hinders youths' human capital accumulation." Other recent studies also suggest larger negative effects of immigrant inflows on earlier immigrants than on natives, consistent with LaLonde and Topel's (1991) earlier findings and the notion of imperfect substitution between the two groups.
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From page 222... ...
. One explanation Card provides is the flexibility of the Miami labor market in absorbing low-skilled workers by expansion of industries that produce goods that use low-skilled workers more intensively.
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From page 223... ...
Consideration of these studies also underlines that what occurred to the wage structure in Miami was a very unusual event -- one that can be characterized as a true shortrun shock occurring in a compressed time period, as opposed to moreanticipated immigrant flows that typically occur over longer time periods. The decade-long absorption of the supply shock in the Miami labor market was a unique episode and may not be fully informative about the dynamics of how labor markets in general adjust to immigration.
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From page 224... ...
Labor supply changes, in the form of new immigration, permeate various skill groups unevenly; for example, recent immigrants have been represented disproportionately at very low and very high education levels. The methodological approach is to compare the changes in natives' outcomes in skill cells that experienced larger increases in immigrant density with the changes in natives' outcomes in skill cells that had smaller increases; the comparison allows the impact of immigration to be inferred.
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From page 225... ...
A quite distinct set of studies employs the methodological approach referred to as the structural approach. Structural studies of immigration typically divide workers into skill cells at the national level, but the hallmark of the approach is the imposition of theory-based relationships (structure)
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As summarized later in this chapter, the national skill cell studies find larger negative wage effects on native-born workers from immigration inflows than do other approaches (i.e., spatial and structural studies)
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From page 227... ...
Card and Peri (2016) argued that their immigration measure (immigrant induced labor supply changes)
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From page 228... ...
are very close substitutes. Immigrants' education and labor market experience are often not comparable to that of natives, and immigrants therefore earn less than observationally similar natives, particularly when they first arrive in the host country.
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From page 229... ...
production function,25 to derive these relationships -- specifically, the elasticities of substitution between different skill groups -- and describe them with a small number of parameters. These estimated parameters may then be used to simulate the impact of changes in labor supply due to immigration on the relative wages of native-born workers.
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From page 230... ...
In terms of the structural models, what is really meant by "the short run" is that capital is perfectly inelastic in supply while "in the long run" capital is perfectly elastic in supply.27 Another important point is that while structural models can estimate changes in relative wages across groups in the short or long run, the assumptions necessary to estimate the model require that the average wage cannot be affected by immigration in the long run. The production function specification dictates that a 10 percent immigration-induced increase in supply have a 0.0 percent impact on average wages in the long run and must lower the average wage by 3.0 percent in the short run (Borjas, 2014a, p.
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From page 231... ...
It is important to keep these mathematical restrictions in mind when interpreting any wage impact estimated from the structural approach. As with any theoretical approach, the simplifying assumptions entailed in the aggregate production function approach come at a cost (Blau and Kahn, 2015, p.
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From page 232... ...
found substantial negative wage effects of immigration with capital held fixed, particularly on the low skilled. He estimated that the immigrant inflow from 1980 to 2000, equal to an increase in the labor supply of working men of about 11 percent, lowered the wages of male native high school dropouts by 8.9 percent and those of male college graduates by 4.8 percent.
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From page 233... ...
Further, they split the sample in order to allow the substitutability between immigrants and natives for the less educated (high school dropouts and high school graduates) to differ from that for the more highly educated (those with some college and college graduates)
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From page 234... ...
Since most immigrants to the United States are low skilled, the wage impact of an increase in immigrant supply will be lower if high school dropouts and high school graduates are combined, since the immigrant supply shock will constitute a smaller percentage of the same skill-group labor force in the larger aggregate. In contrast to Borjas et al.
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From page 235... ...
, and high school dropouts and high school graduates are different groups -- similar to GB. • Scenario 2: Immigrants and natives in a skill group are imperfect substitutes (σMN = 20.0, as in OP)
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From page 236... ...
TABLE 5-1 Simulated Percentage for Wage Impacts of 1990-2010 Immigrant Supply Shock 236 High School High School Some College Post- All Education Dropouts Graduates College Graduates College Groups Percentage Supply Shift 25.9 8.4 6.1 10.9 15.0 10.6 A Short Run Scenario 1*
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From page 237... ...
framework, set σE = 5.0, and assume that the aggregate production function is Cobb-Douglas, implying σKL = 1.0.
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From page 238... ...
The scenario that does lead to a much lower negative or even positive impact of immigration on the lowest skilled workers is the one that also incorporates the possibility that high school dropouts and high school graduates are perfect substitutes. When comparing simulated effects across education groups within a scenario, it is useful to remember that all structural simulated effects reflect a combination of the estimated parameters relating relative wages and relative labor supply across skill groups and the simulated amount of immigration-induced labor supply by skill group.
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From page 239... ...
are more negative in the short run than in the long run, when they are sometimes even positive. And, for both the short-run and long-run scenarios, the largest negative effects on native less-skilled workers are for the scenarios in which immigrants and natives are perfect substitutes and high school dropouts and graduates are imperfect substitutes (Scenario 1)
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From page 240... ...
For the structural studies, the simulations reported in Table 5-1 above may be thought of as the result of a simple increase in the share of immigrants in the labor force from 1990 to 2010, rather than the result of more complex changes in different types of labor over the period. The wage effects reported in the simulations may then be divided by this increase in immigrant share to get the effect of a percentage point increase in immigrant share, a figure that may then be converted to the effect of a 1 percent increase in the labor supply, as was done for the spatial and skill cell studies.
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From page 241... ...
, and the relatively large negative effects found by Monras (2015) are for dropouts, including non-Hispanic immigrants.35 Although theory predicts larger negative effects on native wages of immigrant inflows in the short run than in the long run, this pattern 35 The Borjas (2016b)
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From page 242... ...
and on native dropouts are reported. "Dropouts" refers to high school dropouts; HS to high school or less.
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From page 243... ...
Bolded figures are coefficients reported directly from the cited study; underlined figures are the result of the panel's calculation using the paper's coefficient and an immigrant density of p = 0.126, the national value for the 2000 labor force. See Section 5.9 for technical notes on these calculations and those for the structural cases and a number of other papers that do not involve p = 0.126 and are implicitly evaluated at a different p (though a very similar one in the case of the structural papers)
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From page 244... ...
On balance, the skill cell studies find the most negative wage impacts and the structural studies the least negative, with the spatial studies in the middle; differences between approaches are of about the same order of magnitude as the variation among studies using the same approach. Below, the panel revisits some of the methodological differences discussed in Section 5.3 to see if this ranking is expected, with particular attention to the medium- to long-run time frame probably captured by most nonstructural studies.
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From page 245... ...
. The reasons for the variation within the structural approach are transparent: Short-run effects are larger, and effects with natives and immigrants assumed to be perfect substitutes are larger than those where they are not.37 Further, as discussed above with respect to Table 5-1, assumptions about substitutability across education groups, particularly whether or not high school graduates and high school dropouts are perfect substitutes, also influence the results, with the assumption of perfect substitutability resulting in smaller estimated negative effects.
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From page 246... ...
changed the immigrant variable from the (change in the) immigrant share of the labor force to the change in the number of immigrants divided by the initial labor force, the elasticity becomes close to zero (−0.1)
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From page 247... ...
However, the intensive research on this topic over the past two decades, summarized in Table 5-2, displays a much wider variation in the estimates of the wage impact on natives who are most likely to compete with immigrants, with some studies suggesting sizable negative wage effects on native high school dropouts. In addition, the
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From page 248... ...
Thus, the evidence suggests that groups comparable to the immigrants in terms of their skill may experience a wage reduction as a result of immigration-induced increases in labor supply, although there are still a number of studies that suggest small to zero effects. 5.6 HIGH-SKILLED LABOR MARKETS AND INNOVATION Much of the research on the impact of immigrants focuses on the inflow of immigrants with low education and skills.
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From page 249... ...
In this section, after providing background on the visa pathways available to skilled immigrants, the panel examines the effect of high-skilled immigration on native wages and employment. We then review the effect of immigration on innovation followed by the effect of immigration on entrepreneurship.
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From page 250... ...
Because those entering as permanent residents typically stay longer in the United States than do those entering on temporary visas, the initial visa composition of new entrants is different from that of the stock of workers at a given point in time. The National Survey of College Graduates shows that, in 2013, 38 percent of foreign-born, college-educated workers had entered with lawful permanent residence, 16 percent on a temporary work visa, 25 percent on a student or trainee visa, 11 percent as the dependent of a temporary visa holder, and 9 percent on other temporary visas.
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From page 251... ...
These results are consistent with a positive effect of inflows of foreignborn STEM workers on the wages of both college-educated and, to a lesser extent, noncollege-educated natives. However, the very large estimates of 47 Controlling for factors such as native response may be especially important in this context, given that high-skilled labor markets are likely to be national and even international in spatial scope.
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From page 252... ...
He estimated wage elasticities of −0.24 to −0.31, where these elasticities indicate the percentage change in earnings associated with a 1 percent change in labor supply due to immigration. The larger estimate (absolute value)
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From page 253... ...
states with the highest flows of foreign-born nurses experienced decreased numbers of natives entering the profession and sitting for licensing exams; the researchers detected an offsetting increase of similar size in the numbers of natives entering teaching professions in these states. They used an instrument based on historical immigrant flows for foreign nurses.
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From page 254... ...
This is consistent with the possibility that immigration increased software innovation, although this is of course hard to measure. Another reason that an increase in the numbers of high-skilled immigrants in the labor market may not lead to lower overall employment or wages of highly educated natives is positive productivity effects, or spillover effects whereby technological progress is spurred through the creation and diffusion of knowledge and innovation.
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From page 255... ...
If immigrant innovators have negative effects on native innovator productivity and wages in their region, native innovators will avoid immigrant locations. This native relocation will lead a spatial identification approach to underestimate the benefit of immigration.
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From page 256... ...
She also found that, conditional on having at least one patent, immigrants and natives had similar numbers of patents. Hunt's dataset is one of the few with visa information, and she found that the particularly innovative immigrants were those who entered on a temporary worker visa or a temporary student visa (especially as a graduate student or postdoctoral fellow)
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From page 257... ...
A 1 percentage point increase in the immigrant college graduates' population share increased patents per capita by 9-18 percent, with the larger effects resulting from the instrumental variables analysis. This means that the net result of the immigrants' own innovation, any native movements in or out of innovative jobs, and any effect of immigrants on the productivity of native innovators was positive.
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From page 258... ...
Mode 4 concerns the supply of a service by a service supplier of one member, through the presence of natural persons of a member. The United States committed to permitting temporary work permission for intracompany transferees from abroad (an unlimited number of L-1 visas)
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From page 259... ...
Measuring TFP involves modeling output by selecting a production function for the economy -- a difficult exercise -- and measuring the values of inputs, which involves judgments on matters such as the rate of depreciation of capital. TFP is measured as the residual in the modeling exercise and is sensitive to modeling and measurement choices, so this type of evidence cannot provide conclusive proof of an immigration impact on productivity.
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From page 260... ...
by recognizing that an expanded capacity for entrepreneurial ability is a form of human capital. Schultz (1980, p.
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From page 261... ...
One possibility is that the more recent immigration cohorts were more entrepreneurial than either natives or earlier immigrants, which should eventually lead to a larger difference in the stock of self-employed. Figure 5-3, which shows that the immigrant self-employment rate has risen relative to the native rate since 2000, is consistent with this possibility.
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From page 262... ...
based on Current Population Survey data, July 29, 2014. not show clearly the contribution of immigrant entrepreneurs to successful (in terms of size or growth)
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From page 263... ...
She found that, conditional on characteristics, immigrants are 30 percent more likely to found such firms than are similar natives. In an unconditional comparison between all immigrants and all natives, the result is the same in sign and magnitude, but statistically insignificant: The rarity of the outcome (0.6% of native respondents founded a firm that met the condition)
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From page 264... ...
The empirical evidence reviewed in this chapter reveals one sobering reality: Wage and employment impacts created by flows of foreign-born workers into labor markets are complex and difficult to measure. The effects of immigration have to be isolated from many other influences occurring simultaneously that shape local and national economies and the relative wages of different groups of workers.
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From page 265... ...
This counterbalancing impact potentially plays a role in explaining why much of the empirical research finds small wage impacts associated with immigration. As noted above, the changes in wages and employment attributable to immigration can be difficult to identify because other factors tend to swamp the relatively small role that immigration typically plays in the overall labor market.
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From page 266... ...
This assumption limits such analyses to estimating relative wage impacts across different groups, such as across high school dropouts, those with a high school degree, those with some college, and those with a college degree. The technical assumptions are therefore not innocuous; the most significant ones concern the degree to which capital is adjusted by firms in response to new worker inflows, the degree to which immigrants and natives within the same skill group are substitutable, and the degree to which high school graduates and high school dropouts are substitutable.
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From page 267... ...
Another regularity consistent with theory is that there are larger negative effects on native wages from immigrant inflows in the short run (i.e., in studies of the immediate impacts of abrupt immigrant inflows or in which inflows are observed over shorter periods of time, or in the case of the structural studies, when capital is assumed fixed)
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From page 268... ...
Moreover, as with wage impacts, there is evidence that the employment rate of prior immigrants is reduced by new immigration -- again suggesting a higher degree of substitutability between new and prior immigrants than between new immigrants and natives. The impact of high-skilled immigration on native wages and employment has been the focus of less attention than the impact of low-skilled immigration.
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From page 269... ...
EMPLOYMENT AND WAGE IMPACTS: EMPIRICAL EVIDENCE 269 5.8 ANNEX: SUMMARY COMPARISON OF SELECTED WAGE AND EMPLOYMENT IMPACT STUDIES FOR THE UNITED STATES As an aid for readers, Table 5-3 provides a summary comparison of the spatial (cross-area) studies and structural studies discussed in Sections 5.2 through 5.7.
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From page 270... ...
LaLonde and U.S. men, 1970-1980, MSA Spatial correlation, first differences Negative wage effects for new immigrants, effects Topel (1991)
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From page 271... ...
Card (1990) Miami men and women, Spatial correlation; measured impact of No effect on wages or unemployment of unskilled 1980-1985 increase in low-skilled labor supply shock workers.
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From page 272... ...
U.S. youth and adults Spatial correlation, IV 10% increase in immigrants with high school degree or less reduced average number of hours worked by 3-3.5% for native teens; less than 1% for less educated adults.
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From page 273... ...
women of low-skilled for high-skilled workers to wages of high school dropouts relative to high immigrant share school grads by 4.8%. Borjas (2003)
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From page 274... ...
All papers use the log wage, logwj, as the dependent variable. In sev Lj M j + N j eral papers, the independent variable is logkj, where kj ≡ = , the L M+N share of employment or the labor force or population that is of education or occupation type j, a share which may be rewritten as a reminder that L is composed of immigrants N and natives M
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From page 275... ...
• Independent variable is p. • θ = −1.2 for all native-born high school dropouts.
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From page 276... ...
27) indicate that the boatlift increased the labor supply of high school dropouts by 21 percent, assuming column 1 is indeed all dropout workers.
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From page 277... ...
. • If the number of immigrants rises sufficiently to increase labor sup ply by 1 percent, native high school dropout wages fall by θ (this is the LATE interpretation of instrumenting the log share of a group in the labor force with immigration to the group)
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From page 278... ...
. o or native dropouts in the short run, wage impacts in Table 5-1 F range from –6.3 percent (Scenario 1)
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