Labor market effects of immigration: evidence

One of the most hotly debated issues in the economics of immigration is how immigration affects the labor market outcomes of natives in the destination country. Indeed, how immigration affects natives’ wages is one of the most studied topics in the economics of immigration. Many people believe that immigration adversely affects native-born workers. Gallup polls show that the share of Americans who said that immigrants drive down wages fluctuated between one-third and two-thirds over the last 30 years, for example.1 Despite the prevalence of such concerns, the evidence is less conclusive.

Theoretical models are critical to understanding the expected impact of immigration policy. As Chapter 7 explained, basic neoclassical theory predicts that immigration will put downward pressure on wages and employment of substitutable, or competing, natives in the short run. However, immigration should boost labor market outcomes among natives who are complements to immigrants. The canonical labor supply and demand approach to immigration indicates that there are winners—immigrants themselves, firms that hire them and native-born workers who complement them— and there are losers—native-born workers who compete with immigrants.

In more complex theoretical frameworks, the impact of immigration on wages is a function of a number of factors, such as differences in workers’ skills, the speed of capital adjustment, the response of firms in terms of their production technology, labor laws, enforcement policies, the health of the economy, output mix and the time period under study. These models can give ambiguous predictions regarding winners and losers. Theoretical models often predict different outcomes under different assumptions. To resolve this ambiguity, economists turn to data to test the underlying assumptions and predictions of theoretical models and to assess the responses to immigration by employers, native-born workers, other immigrants, investors and the public sector.

Surveys of empirical research conclude that the evidence indicates, on balance, that immigration has had a small negative effect or no effect at all on average wages among natives in the United States and Europe (Friedberg and Hunt, 1995; Longhi, Nijkamp and Poot, 2005, 2008; Dustmann, Glitz and Frattini, 2008; Kerr and Kerr, гоп; Peri, 2014; National Academies of Sciences, Engineering and Medicine (NAS), 2017). However, there is a wide range of estimated effects, from sizable negative effects to small positive ones. One reason for the wide range is that different studies use different methods, each of which has limitations. Studies also examine different countries and different time periods, making it difficult to compare their results. Nonetheless, the balance of studies suggests that immigration has had a minimal impact on natives’ wages.

Some economists interpret the lack of strong evidence of a negative wage effect as indicating that native-born workers are insulated from immigration. Immigrants may be absorbed into the workforce through responses by firms, native-born workers themselves or other adjustment channels. Other economists focus on the results of recent simulations that are heavily based on economic theory. As discussed later in this chapter, some of these studies find more negative impacts, including a significant decrease in wages among workers who compete most directly with immigrants.

This chapter explains the four main methodologies that economists use to estimate the labor market effects of immigration: spatial correlations, natural experiments, skill cells and structural models. The focus here is on how immigration affects natives’ wages and employment. The chapter then discusses evidence on other effects, such as the possibility of skills and occupational upgrading; changes in production technology and the output mix; and productivity gains from immigration.

Brief review of theory

The predicted effect of immigration on native-born workers hinges on how substitutable immigrants are for natives. In the extreme, immigrants and native-born workers are perfect substitutes. Immigration increases labor supply. Absent an offsetting increase in labor demand, the equilibrium wage falls. Some natives may not be willing to work at the new, lower wage. If so, employment of natives falls even though total employment increases (as shown in Figure 7.4). Native-born workers are worse off: they earn less, and fewer of them are employed as well.

For native-born workers who are complements to immigrants, immigration leads to an increase in labor demand. As a result, their wages and employment increase (as shown in Figure 7.7). Overall, basic neoclassical theory predicts that immigration lowers the wages of substitutable native-born workers, improves labor market outcomes for complementary native-born workers, increases the income of owners of capital, and increases national income (GDP). These are short-run effects when capital is fixed. In the long run, simple theory predicts that the labor demand curve becomes more elastic as capital changes (as shown in Figure 7.10). The labor market effects become smaller or even non-existent over time. However, in reality there may be other adjustments, including job upgrading, labor demand shifts and changes in workers' skill levels. The predicted effects of immigration on labor market outcomes then become more complex and ambiguous. Given the controversy surrounding immigration, it is essential to use the best techniques to answer questions regarding labor market effects, substitutability across types of labor and distributional concerns.

 
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