chapter  5
Immigration, diversity and the labour market outcomes of native workers: some recent developments
ByGIANMARCO I . P . OTTAVIANO
Pages 13

Introduction “It is not best that we should all think alike; it is a difference of opinion that makes horse races.”

(Mark Twain)

The debate on immigration is often heated as it triggers instinctual reactions by natives to the perceived “invasion” of their physical, social and cultural territories by alien newcomers. This brief essay is about the “invasion” of the economic territory. In particular, it focuses on the labour market, providing a selective discussion of how in recent years economists in the neoclassical tradition have addressed the questions whether and how immigration affects natives’ wages and employment levels.1 The answers to these questions much depend on the role “diversity” is understood to play in a market economy. On this point neoclassical economics has straightforward implications based on the main tenet of general equilibrium analysis: in a perfectly competitive environment without distortions there are gains from trade (in goods/endowments/factors) if and only if agents are “different” (in terms of preferences/endowments/technology). Indeed, if they were all identical, sharing and valuing everything in the same way, there would be no incentive for them to exchange anything and each of them would be an autarkic island. This is wittily captured by Mark Twain’s famous quote cited above. While defining what the “diversity” of immigrants actually means continues to be a matter of endless discussions, applied studies in economics have taken a pragmatic approach building on what can be actually measured in the available datasets. In this respect, “diversity” has been captured through aggregate indices based on objectively observable markers (such as ethnicity, language spoken at home or country of birth), which may affect individual economic outcomes beyond standard labour market attributes (such as educational attainment or working experience). A variety of alternative indices has been proposed with the aim of capturing both the “richness” and the “evenness” of the immigrant population. The former concept broadly refers to the number of identifiable

immigrant groups while the latter concerns the relative number of their members.2 The basic idea is to relate the chosen diversity index to the economic performance of natives in places exposed to immigration. A general issue is that unfortunately, even from the narrow economics viewpoint of the labour market, immigration remains a complex multi-faceted phenomenon. In particular, immigration is the outcome of an endogenous location choice by mobile workers, driven by economic and noneconomic reasons, that causes economic and non-economic responses by firms and other workers both in the place of origin and in the place of destination. This chapter focuses on a specific methodological approach that cuts through such complexity by studying the labour market responses in the places of destination when immigration can be considered an “exogenous shock” driven by noneconomic reasons, to which firms and native workers react by entering and exiting the local labour market. The basic analytical framework is laid out in the first section after this introduction. It is extended in the second section to highlight some potential “identification” problems that are relevant for empirical investigation and their possible solutions. The corresponding empirical findings are surveyed in the third section where the importance of different dimensions of “diversity” between natives and immigrants is also discussed. The fourth section debates the issue of how to distinguish a causal impact of immigration on native labour market outcomes from a correlation between them. The last section concludes.