ABSTRACT
While international mobility of goods, capital, ideas, and technology has been increasing steadily over the past three decades, we are still very far from free mobility of workers across countries. The limited international mobility of workers is in large part due to immigration laws which remain very restrictive in most receiving countries, substantially limiting the possibility for foreign citizens to access domestic labor markets. In most OECD countries, except for some special categories of skills, labor markets are often almost exclusively restricted to nationals (or to EU members in Europe). While from a “world” perspective more labor mobility would increase the efficiency of resource allocation, increasing substantially total world production and producing dramatic economic benefits to migrants (see Pritchett 2006; Benhabib and Jovanovich 2007), receiving countries are often worried that such global benefits may come at a cost for their own economies. The idea that immigrants “take jobs” from natives and somehow “diminish” their opportunities is still very common, at least among the media and some policy-makers. In spite of the fact that most academic economists would not subscribe to the simple theory of “job-stealing” by immigrants, their voices are rarely heard. It is therefore important that economists provide some clarifying evidence in order to inform the debate on the economic effects of immigrants on receiving-country economies. This chapter identifies and organizes some simple theories and empirical evidence on the economic effect of immigrants, focusing particularly on insights gained in the past ten years of research. My analysis will not do justice to the long series of articles1 that analyze the impact of immigrants on native wages and employment. Some of those studies, especially those written before 2000, were looking at the variation of immigrants and wages across local economies (such as cities, regions, or states). While some of those studies were very informative, they typically used a reduced form approach, did not worry too much about skill differences among workers or local adjustment mechanisms, and handled endogeneity in a simplistic way. Recently the literature has made some progress on these fronts. To start with, economists have introduced a more sophisticated framework, using the aggregate production function as a tool to analyze wage effects while also paying closer attention to the differentiation of workers by skills. Within such a framework they have also
extended their attention to other potential effects of immigration on issues such as local specialization (Peri and Sparber 2009), technological choice (Lewis 2005), prices of nontradable services (Cortes 2008), and investments and productivity (Peri 2008). Furthermore, the public availability of better individualand country-level data for several countries and over long time periods (e.g., micro samples of censuses such as the Integrated Public Use Microdata Series (IPUMS), Ruggles et al. (2008)) has made it possible to study immigration issues while relying on longer panel data (rather than cross-sections only) and more precise aggregate measures. In the second section of this chapter I will first present an influential framework that has informed recent empirical analysis and was first applied by Borjas (2003), and then by Borjas and Katz (2007) and Ottaviano and Peri (2008), to the analysis of the wage effects of immigrants. This approach, which analyzes national labor markets segmented by skill levels, is a useful and theoretically consistent method to analyze the effects of immigrants on the wages of workers across different skill groups. Its application to the US labor market constitutes a clear improvement relative to simple area analyses. However, this approach, while theoretically sound, relies on some functional form assumptions, takes the speed of capital adjustment as given rather than estimating it, and addresses only partially the issue of endogeneity of immigration. The problem of endogeneity, in plain English, is that while we are trying to isolate the effects of immigrants on the labor-market outcomes of natives, these labor-market outcomes (wages and employment rates) also affect the inflow of immigrants, potentially generating “reverse causality”. The usual method used to address this problem is an instrumental variable strategy. Because immigrants prefer to settle where there are other immigrants, one can construct a differential inflow of immigrants across local economies based only on the potential “network effects” of previous settlements. Such an approach explains the variation of immigrants across US regions (states) as being mainly due to their preferences and network connections, rather than to the endogenous labor demand conditions. In other words, the variation of immigrants across local economies produced by this supply factor (the preferences of immigrants) is not affected by labor demand factors and therefore serves as a good instrument, allowing the researcher to isolate the causal effect of immigration on labor market conditions. However, this instrument is only available when one uses cross-regional variation, and does not work at the national level. Hence, in the third section of this chapter I propose an alternative instrument for yearly immigration flows at the country level. This instrument is based on push factors in the countries of origin – namely, economic and demographic conditions in the country of origin which increase the probability of emigration (such as a decline in income or an increase in the share of young people in the population) and do not depend on the receiving-country labor-market conditions. The portion of yearly immigration flows that depends on economic, political, and demographic factors in the countries of origin can be used to identify the average employment and wage impact of immigration across countries. This cross-country analysis is useful for arriving at the average effects
of immigration on average wages, as well as in estimating the adjustment of capital to immigration. In the final section of this chapter we return to the regional analysis. While the local wage response in the US may not be very informative per se (with the assumption of an integrated national market), the employment response of natives to immigrants by skill level offers an alternative way to approach the issue. How substitutable are immigrants and natives? How do local economies absorb immigrants? How do immigrants affect the demand for native labor? Regional economies still provide important information on these questions, but beyond wages one needs to focus on employment responses and on specific mechanisms of local absorption and adjustment to immigration flows. In this final section we summarize some studies that identify promising mechanisms to understand how local economies absorb immigrants, and we present some new and interesting evidence from California, the US state with the largest inflow of immigrants from the past 40 years.2
