Labor Market

Effects of
Immigration:
Theory

1
Important but controversial

Concern that immigration has a negative effect on native-born workers often dominates
discussion about immigration policy, making this one of the most important topics in the
economics of immigration (Bansak et al., 2020)

Results hinge on whether immigrants and natives are substitutes or complements

• Substitutes: There is nothing special or unique about natives. Immigrants replace natives. (e.g. Polish
strawberry pickers replace Belgian strawberry pickers)
• Complements: There is something fundamentally different about natives and immigrants. Having
more immigrants helps natives in some way (e.g. Indian computer programmers help American IT
managers)
I. Neoclassical immigration model
Labor market with inelastic labor supply and
immigration
The labor market in the destination and origin countries before and after migration

Wage LS LS’ Wage LS’ LS

A
WD F
B D
WD+M WO-M I
G
C E WO
D
L LD
H J

LD LD+M Labor LO-M LO Labor

(a) Destination country (b) Origin country

Basic immigration model: assumptions

Labor markets for two countries O and D:

• Labor demand: downward sloping
indicates how many workers employers are willing to hire at a given wage with diminishing
marginal productivity of labor (MPL)
• Labor supply: perfectly inelastic
reflects the number of people willing to work at a given wage (not depending on age, hence vertical)

• Substitutability: workers are perfect substitutes across O and D

• 1 country of interest: destination
 Welfare effects for the destination

Winners and losers from migration

Group Before After Gain (or Loss)

Destination country:      

Immigrants   E E

  Competing workers B+C C −B

  Other factors of production A A+B+D B+D

  Total income A+ B+ C A+B+C+D+E D+E

Immigration is Pareto superior

The destination country as a whole is better off because of immigration

Immigration is Pareto superior: Within the destination country, the gains to
employers and society as a whole would be big enough to compensate the
native-born workers if there were a costless way to redistribute some of
those gains from the winners to the losers
In reality, however, redistribution is not costless and rarely occurs enough to
fully compensate losers. This is one reason why countries impose barriers to
immigration
“Immigration surplus”

The income gain that accrues to natives in the destination country is

called the “immigration surplus” = area D, which is bigger
• the larger the number of immigrants
• the more the wage falls as the number of workers increases
Basic model = strong assumptions

This basic model assumes that

• labor supply is perfectly inelastic  wages change as a result of immigration, but
natives’ employment does not
• markets are perfectly competitive  workers are paid the value of their marginal product
• immigrants are perfect substitutes for natives  the labor supply curve in the receiving
country shifts to the right by an amount equal to the number of immigrant workers
• workers are homogeneous, or that there is only one type of worker
• the amount of capital in each country is fixed, but immigrants may bring or attract capital
• there is full employment but each economy always has some unemployment
 Welfare effects of immigration

Wage in Wage in
Before immigration: destination
DD
origin

• L1 workers earning WD in destination A DO

WD
• L–L1 workers earning WO in origin B D F

Immigration occurs until W* W*

E
W*

G
• L* in destination C I G
WO
• L–L* workers in the origin C J H H

Immigrants earn E + I + J
L1 L*
Native-born workers in the destination lose B
Native-born workers in the origin gain G Labor in
destination
L Labor in
origin
 Winners and losers from immigration

Group Without immigration With immigration Gain (or loss)

Immigrants J J+E+I E+I

Destination country:
Competing workers B+C C –B
Other factors of production A A+B+D B+D

Origin country:
Competing workers H H+G G
Other factors of production F+G+I F –(G + I)

Net gain due to immigration D+E

Immigration surplus

The immigration surplus is area D:

Divide both sides by Y and multiply right-hand side by yields:

Or, equivalently:
(%
Immigration model with costs

The basic model can be extended to include migration cost

Explicit costs like travel costs and visa fees
Implicit costs like psychic costs or cultural adjustments (e.g. learning a new
language)

• Assume migration costs are constant and denoted by the parameter C>0
• When migration costs are added to the model, the net gain to migration is smaller
Adding migration costs to the basic immigration
model
Wage in Wage in
destination origin

• Each immigrant incurs a fixed cost DD

equal to C WD DO

WD**
• In equilibrium, workers migrate
W* C W*
until WD**-C=WO**, which occurs WO**

at L** WO

• The shaded area is the loss in social

welfare due to migration costs L1 L** L*

compared with costless migration

Labor in L Labor in
destination origin
The effect of increased enforcement on wages

• An increase in border
enforcement decreases the
supply of unauthorized
workers
• Wages increase
II. Upward-sloping labor supply when immigrants and
natives are perfect substitutes
Allowing for elastic labor supply

• Assume that labor supply has some elasticity: some workers are no
longer willing to work if wages fall
• Labor supply curve slopes up instead of being vertical
• More realistic
Upward-sloping labor supply when substitutes

• Immigration causes the supply of labor to

shift to the right
• The wage falls from WD to WD’
• The number of natives employed falls
from LD to LN
• The number of immigrants employed is
LD'- LN
• Immigrants replace natives
Welfare effects of immigration in the destination

• SI and SI' are perfectly inelastic labor

supply before and after immigration
• SE and SE' have some elasticity
• Immigration surplus falls from
C+F+G (inelastic) to C (elastic)
• Some natives exit labor force at
lower wage
Change in earnings or surplus

Group With immigration and With immigration and

inelastic labor supply elastic labor supply

Competing native-born ‒ (B + D + E) ‒ (B + E + I + L)
workers’ earnings

Surplus accruing to other B+C+D+E+F+G B+C

factors of production

Immigrants’ earnings J+K+M E+F+I+J+L+M

III. Labor demand
Labor demand

In addition to increasing labor supply, immigrants buy goods and services in

the destination country  increases aggregate demand
 Firms increase production to meet the increase in AD
 Output prices increase
 This makes it profitable for firms to hire more workers
 Labor demand increases (“derived demand”)
As a result, immigration increases total output, or GDP
Effects of increased labor demand

• The increase in labor demand is assumed

to be smaller than the increase in labor
supply
• The wage falls from WD to WD’
• The number of employed natives falls
from LD to LN
 The increase in demand mitigates the
adverse effects of the increase in labor
supply on natives’ wages and employment
Other scenarios

Increase in LD > increase in LS Increase in LD = increase in LS

• When immigants to not work • Similar effect on LD as on LS
(retirees, investors) • Impact on wages?
• Impact on wages?
IV. Upward-sloping labor supply when immigrants and
natives are complements
Upward-sloping labor supply when immigrants
and natives are complements

In reality, immigrant and native workers are not perfectly interchangeable

• Instead of being substitutes, immigrants and natives may be
complements in production
• In this case, if more of one group is hired, labor demand for the other
group increases
• Example: as the number of computer programmers (immigrants)
increases, the firm needs more managers (natives)
Effects of immigration when immigrants and
natives are complements

• Immigration increases demand for

workers who are complements to
immigrants in production
• The increase in labor demand causes the
wage to rise from WD to WD’
• The number of employed natives rises
from LD to LD’
• In LR labor supply might rise as well if
natives start to retrain
V. Unskilled and skilled labor
Unskilled and skilled labor

• Workers differ in their skill levels

• More-skilled workers are more productive than less-skilled workers
• In equilibrium, wage = marginal productivity of labor

 An increase in the supply of less-skilled workers will reduce less-

skilled workers’ wages and raise the relative wages of more-skilled
workers
Effects of immigration with skilled and unskilled
workers
Effect of immigration on relative supply and
demand for communication vs manual skills

• Natives concentrated in jobs

requiring communication skills
• Immigrants concentrated in
jobs requiring manual skills
• Immigration decrease C/M
• Then WC/WM increases
VI. Elasticity of substitution between different types of
workers
Elasticity of substitution between different types
of workers

• The effect of immigration on natives’ wages depends in part on the elasticity of substitution
between natives and immigrants
• Three levels in the production process:
• 1st level: experience
• young inexperienced workers combine with older experienced workers to produce output
• 2nd level: education
• combines workers in different education groups
• 3rd level: combines labor and capital
• All combined in a Nested Production Function with a constant elasticity of substitution (CES),
need info on all 3 elasticities of substitution to measure impact of immigration on natives’ wages
VII. Physical capital
Physical capital

• = infrastructure and equipment (no financial capital)

• Typically capital is assumed fixed in the short run
• Over time, firms can add capital which will affect worker’s productivity
• Need more workers to operate capital if capital and labor are
complementary
• If labor and capital are complements in production, immigration will
encourage firms to increase their capital stock
Immigration leads to more physical capital

• The firm will adjust labor and capital until:

(=marginal rate of technical substitution)
reflecting the relative productivity of labor to capital
• If immigration reduces wages, the ratio of capital to labor adjusts to
keep this relationship in balance
• If labor and capital are complements, both labor and capital will rise as
firms scale up their operations
Skill-biased technological change

Economists assume:
• capital and skilled workers are complements in the production process
• capital and unskilled workers are substitutes

This skill-biased technological change (increased demand for high skilled and reduced demand for
unskilled workers) has implications for immigration:
• If immigrants are primarily unskilled and substitutes for unskilled natives, capital-skill complementarity
will further deteriorate unskilled natives’ wages
• If immigrants are relatively skilled, immigration can help meet the increased demand for skilled workers
in the economy
Labor demand is more elastic as physical capital
adjusts in the long run

• In the short run, physical capital

is fixed
• Over time, physical capital
adjusts
• Labor demand is more elastic
• Wages fall less in the long run
(WLR > WSR)
VIII. Open versus closed economy
Open versus closed economy

• The model assumed two countries: origin and destination

• Once immigration occurs, wages equalize to W* and equilibrium
occurs when WD = WO = W*
• Factor price equalization
• The extent to which a country is closed or open in terms of trade in
goods and services and capital mobility will influence how
immigration affects the labor market outcomes of natives
Open versus closed economy

Open economy:
• Labor, capital and goods and services can move across borders
• Each country has an initial amount of labor and capital
• Countries produce goods with comparative advantage
• If immigration causes an increase in labor supply in a country already endowed
with a lot of labor, the country can export more of the labor-intensive good
 Natives’ wages may remain unchanged in equilibrium even though labor
supply has increased because the country can export the extra output it produces
Open versus closed economy

Closed economy:
• Goods and services cannot freely move across countries
• Countries cannot export goods and services freely to other countries (due to
tariffs or quotas, for example)
• An increase in labor supply due to immigration could result in lower wages
for natives
Final thoughts on theoretical labor market effects

How immigration affects natives in the labor market depends critically on

how different types of labor are related to one another
• Under production functions where inputs are substitutes (complements),
immigration adversely (positively) affects natives’ wages
• Economists must assume the nature of the production function—they
cannot see it: heated debate with real-world consequences (policy setting)
• Turn to data to estimate these effects
Labor Market
Effects of
Immigration:
Empirics

44
I. A brief review of the theory
 Basic neoclassical theory predicts that, in the short run,
immigration
• Reduces wages and employment of substitutable natives
• Boosts LM outcomes among natives who are
complements
• Increases the income of owners of capital

Brief review of • Increases national income (GDP)

theory I In the long run, the labor demand curve becomes more elastic as
capital changes  the LM effects become smaller or even non-
existent over time

In reality also other adustments s.a. job upgrading, labor demand

shifts and changes in workers’ skills levels  predicted LM
effects even more complex/ambiguous
 In more complex theoretical frameworks, the impact is
a function of a number of factors s.a.
• Differences in workers’ skills
• The speed of capital adjustment
• The response of firms in terms of their
production technology
Brief review of • Labor laws and enforcement policies
theory II • The health of the economy
• The output mix and openness
• The time period under study

 Ambiguous predictions regarding winners and losers,

depending on assumptions
Findings of empirical research surveys

Review articles point out that, in general, there is a small negative effect on native-
born wages, or no effect
(Friedberg and Hunt, 1995; Longhi, Nijkamp and Poot, 2005, 2008; Dustmann, Glitz and Frattini, 2008; Kerr and Kerr, 2011; Peri,
2014; National Academies of Sciences, Engineering and Medicine (NAS), 2017; Edo et al., 2018)

However, there is a wide range of estimated effects, from sizable negative effects to
small positive ones. Reasons?
Findings of empirical research surveys

Review articles point out that, in general, there is a small negative effect on native-born
wages, or no effect
(Friedberg and Hunt, 1995; Longhi, Nijkamp and Poot, 2005, 2008; Dustmann, Glitz and Frattini, 2008; Kerr and Kerr, 2011; Peri, 2014;
National Academies of Sciences, Engineering and Medicine (NAS), 2017; Edo et al., 2018)

However, there is a wide range of estimated effects, from sizable negative effects to
small positive ones. Reasons?
• Different methods
• Different countries
• Different time periods
Neutral or negative wage effects?

Nonetheless, the balance of studies suggests that immigration has had a

minimal impact on natives’ wages
Interpreted by some economists that native-born workers are not affected by
immigration: immigrants may be absorbed into the workforce through responses
by firms, native-born workers themselves or other adjustment channels
Yet, others focussing on the results of recent simulations are more pessimistic:
immigration significantly decreases wages among workers who compete most
directly with immigrants
Empirical issues

Challenges to all approaches (endogeneity)

• Reverse causality
• Does immigration cause wage effects, or the other way around?
• That is, do immigrants move to high wage areas, or do they create high wages?
• Omitted Variables Bias
• There may be offsetting migration by natives
• Accounting for complements/substitutes
• Other forms of firm adjustment (location choice, product mix, use of capital and scale of
operations)
 How does immigration affect natives’ wages and
employment?
i. Spatial correlations
ii. Natural experiments
iii. Skill cells
Four empirical iv. Structural models

approaches Other effects:

• Skills and occupational upgrading
• Changes in production technology and output mix
• Productivity gains
II. Empirical approach 1: spatial correlations
Spatial correlations approach: What?

Examines the relationship between the number of immigrants in an area and the labor
market outcomes of natives in that area
• Aka “cross-area approach”
• Most common approach in empirical studies estimating the wage effects of immigration
• Basic hypothesis tested: Do areas with more immigrants as a fraction of the
population/work force have lower wages than areas with fewer immigrants?
• Evidence is mixed, but most studies find evidence of only a small negative relationship
or even no relationship at all (Friedberg and Hunt, 1995; Smith and Edmonston, 1997; NAS, 2017)
 The relationship between the immigrant share and less-skilled
natives’ wages for U.S. cities, 2018

• Cross-section
• High school degree or
less
• Positive relationship
• Yet no causal
evidence

Source: The Economics of Immigration, 2nd ed., by Bansak, Simpson & Zavodny ©2020
Fixed effects vs cross section

Better to use multiple years of data (fixed effects approach): relationship between the change in the immigrant share
and the change in wages within areas (wage growth)

• Altonji and Card (1991) examine the effect of immigration on less-skilled natives using data for 120 U.S.
metropolitan areas (MSA) in 1970 and 1980: a 1% point increase in the fraction of immigrants in an MSA reduced
the number of natives who worked in the previous year by 0.25% points and their wages by at most 1.2%
• Using data for six immigrant gateway MSAs in 1970 and 1980,  LaLonde and Topel (1991) find that new
immigrants have a negative impact on the wages of other new immigrants but no significant effect on the
earnings of natives
• Others find little evidence of adverse effects in Australia (Addison and Worswick, 2002) and a number of
European countries (Brücker et al., 2002)
Spatial correlations: Strenghts

• Straightforward approach:
• Data quite easy to find
• Simple regression analysis
• One parameter of interest, i.e. elasticity of wages or employment
• No assumptions needed about substitutability
• No production function necessary
Spatial correlations: Limitation A

A/ Assumes that changes in the immigrant share are exogenous, or that immigration is a supply “shock”
• Assumes that immigration location is not endogenous
• Important to control for strength in local labor markets
• Common technique: use instrumental variables (correlated with immigration but not with the strength
of the LM)
• Historical immigration, aka “shift—share approach” (Card et al., 2001)
• Politics (e.g. communist coups in Nepal - Bansak and Chezum, 2009)
• Weather (e.g. rainfall in origin areas in Indonesia - Kleemans and Magruder, 2018)
• Travel costs (e.g. access to paved roads and highways in Mexico - Basu and Pearlman, 2017)
• Modest impact on wages of less-skilled confirmed
Spatial correlations: Limitation B

B/ Assumes that natives do not respond to immigration by moving out of an area, i.e. native
mobility (aka “vote with their feet”)
• Scenario:
• Immigrants move to Brussels
• Raises Brussels’ foreign-born share
• Reduces Brussels’ wages
• People residing in Brussels move to Ghent
• Does nothing to Ghent’s foreign-born population
• Reduces Ghent’s wages
• Result
• Only some municipalities have high foreign-born share
• All municipalities have lower wages
• Cross-area regressions wrongly find no evidence that immigration causes wage losses
Effect of emigration in response to immigration

• Immigration causes the labor

supply curve to shift from S to S′
• Emigration by natives causes the
labor supply curve to shift from S′
to S″
• The fall in the equilibrium wage is
smaller as a result of emigration
by natives
 Economists disagree on how much natives “vote with their
feet”
• In the U.S., George Borjas (2006) estimates that the
response by native-born workers can offset wage effects by
40 to 60 percent, whereas several other studies do not find
Empirical evidence of a large response there (Card and DiNardo,
2000; Card, 2001; Peri and Sparber, 2011a)
findings • Studies of European countries do not find evidence of out-
migration by natives in response to in-migration by
immigrants (Hunt, 1992; Pischke and Velling, 1997)

Regardless of the extent of emigration, not controlling for it

can be considered a form of omitted variable bias
Spatial correlations: Limitation C

C/ Assume that industries/occupations remain fixed

• But new firms may enter those areas or existing firms may change their product
mix or production technology in response to immigration
• Production also can be affected by changes in capital or changes in trade flows
between locations
• Eventually, factor price equalization may occur

Under these circumstances, negative wage effects will be small

Spatial correlations: Limitation D

D/ Small sample sizes are more likely to lead to coefficients near zero
• Census has city-level data
• But small samples (e.g. not possible to capture any less-skilled immigrants
in an area)
• Leads to a lot of measurement error (leading to ”attenuation bias”)
Spatial correlations: Summary

• Despite the possible weaknesses of the spatial correlation approach, it is

still widely used
• Studies use varying time periods, data series, immigrant flows, skill groups
and techniques to addresses endogeneity
• Most studies using it point toward little to no effect of immigration on
natives’ wages
• While many studies focus on U.S. labor markets, spatial studies also show little
evidence of wage loss in Australia and Europe
III. Empirical approach 2: natural experiments
Natural experiments

• Sometimes a variant of spatial analysis: compare wages between area

that experienced an exogenous immigration shock and one that didn’t
• Analysis exploits data variation caused by an exogenous shock
• Weather events
• Policy changes
• Other unusual circumstances
• Does the unusual shock to immigration cause changes to native wages?
Classic example: Card (1990) and the Mariel Boatlift
the Mariel • Mass migration from Cuba’s Mariel Harbor to the U.S.
between April and October 1980
Boatlift • 125,000 Cuban immigrants arrived in Florida over a six-
month period
• ‘Marielitos’ rose the labor force of Miami by 7%
• Card (1990): How did this unexpected shock affect the
native-born workers in Miami relative to other cities?
Diff-in-Diff approach

Difference in Difference (DiD) approach

• Treatment group: People in Miami

• Control group: People in other Southern U.S. Cities (Houston, Atlanta, etc.)

• Treatment Period: Observations in 1981 (after the migration)

• Pre-Treatment Period: Observations in 1979 (before the migration)
Unemployment rates before and after the Mariel Boatlift

Before (1979) After (1981) Difference

Miami:
Whites 5.1 3.9 -1.2
Blacks 8.3 9.6 1.3

Control group cities:

Whites 4.4 4.3 -0.1
Blacks 10.3 12.6 2.3

Difference:
Whites 0.7 -0.4 -1.1
Blacks -2.0 -3.0 -1.0

Source: Card (1990)

Effect on unemployment rates

Effect on unemployment rates of White Americans:

Before (1979) After (1981) Difference
Miami 5.1 3.9 -1.2
Control Cities 4.4 4.3 -0.1
Difference 0.7 -0.4 -1.1

Effect on unemployment rates of Black Americans:

Before (1979) After (1981) Difference
Miami 8.3 9.6 1.3
Control Cities 10.3 12.6 2.3
Difference -2.0 -3.0 -1.0
Why was there so little impact?

Why did unemployment in Miami actually decline relative to

comparison cities?
• Displaced natives who planned to move to Miami?
• Firms responded quickly by using production favoring low skilled labor?
• Miami was particularly adept at absorbing immigrant shocks?
• Effects dissipated throughout the economy?
Other natural experiments

• Hunt (1992): 1962 Algerian independence from France

• Shock: 900K move to France; no adverse labor market effects
• Friedberg (2001): Jews fled from USSR to Israel from 1990-1994
• Shock: 12% population growth. No adverse effects
• Kugler and Yuksel (2008): Central American immigration to Southern U.S. cities
after 1998 Hurricane Mitch
• Adverse employment effects only for established Latin American migrants
• Monras (2019): Mexican migration to the US after the Mexican peso crisis in 1995
• Adverse wage effect for less-skilled non-Hispanic workers; but effect dissipates within ten
years
Natural experiment: Strengths

• computationally straightforward: difference-in-differences estimates

can be computed easily
• natural experiments aim to avoid endogeneity by exploiting
exogenous sources of variation
• tells a story which allows to make a convincing argument why the
labor supply shift is truly exogenous
Natural experiment: Limitations

A/ Is the shock truly exogenous?

• Problem if policy changes occur in response to immigration concerns
B/ Do you have a valid control group?
• Maybe Mariel Boatlift affected other cities too
• Maybe Miami was experiencing changes in demographics
C/ What about movements by natives or change in production
techniques or output mix of firms? Small sample size?
IV. Empirical approach 3: skill cells
Skill cells and • Motivated by concerns about
• Counter-intuitive outcome of most studies that an

structural increase in labor supply does not decrease wages,

as a downward-sloping demand curve would
suggest
model • Endogenous location choice of immigrants

approaches
• Native mobility in response to immigration
• Biases of spatial approaches (including related
natural experiments)
• Can be applied at the national level
• Focus on workers who are closely substitutable so that
subs/compl don’t cancel each out other
Skill cells approach

• Key to approach: divide native born workers into groups

• Look at labor market effects on workers who are in direct competition (or
are highly substitutable) with immigrants
• Source of variation: distribution of skills/age of immigrants is different
than distribution of immigrants
• Assess the impact of relatively large immigrant inflows on wages of native-born
workers in a certain cell compared to cells with relatively small immigrant
inflows
“The Labor Demand Curve Is Downward Sloping” (Borjas,
2003)

• Method: Divide people into

• 4 Education Groups: HS Dropouts, HS Grads, Some College, BA or More
• 8 Experience Groups: 1-5 Years, 6-10 Years,… 36-40 Years
• 4*8 = 32 “Skill Cells”
• 5 Decades (1960, 1970, 1980, 1990, 2000)
• ⇒ 160 Observations
• Note: Borjas (2014) expands to 5 education groups (Graduate Degree) and 6
Decades (2010) for 240 observations
The relationship between the immigrant share and wages in
the skills cells approach, 1960–2010

Source: The Economics of Immigration, 2nd ed., by Bansak, Simpson & Zavodny ©2020
Findings Borjas (2003)

• Estimates effects of foreign-born share on native born wages for each ‘cell’
• Finds: Large negative effects
• Within-Cell estimates:
• A 10% increase in labor supply due to immigration leads to a 3-4% decline in male US Natives’ Average weekly
earnings
• Larger effects for US born without high school degree (9%)
• Overall effect: a 1% point increase in the foreign-born share of the labor force decreases wages paid to native-
born men by 0.57%
• Effect is a similar 0.53% in Borjas (2014)
• No effect on college educated
• No effect on natives’ employment (fraction of weeks worked by average working-age adult)
Studies on other countries or regions

Similar national-level skill cells studies reveal negative effects with a 10% increase in the immigrant
share reducing wages
• in Canada by 3.5% (Aydemir and Borjas, 2007)
• in Germany by about 1% (Bonin, 2005; Steinhardt, 2011)
• in Norway by 2.7% (Bratsberg et al., 2014)

Studies have also applied the skill cells approach to regional data
• Borjas (2003) examines the education and experience groups at the state level, with up to 2,000 cells per
year; results point to “spatial arbitrage”, i.e. offsetting movements by natives and firms in response to
immigration, cutting the national estimate of the impact of immigration by one-half to two-thirds
The debate continues...

Two recent studies address endogeneity concerns that arise in Borjas (2003,
2014):
• Llull (2018) corrects for the non-random allocation of immigrants across skill
cells and finds much larger negative wage elasticities due to immigration in
the U.S. and Canada, nearly three times bigger than Borjas’s estimates
• Yet, Card and Peri (2016) find wage effects that are smaller when changing
the measure of immigration to the change in the number of immigrants over
the initial size of the labor force (rather than the immigrant share)
Skill cell approach: Strengths

• Less prone to
• Reverse-causality problems
• Native mobility issues
• Natives and Immigrants are likely to be more substitutable within
skill cells than within states or cities
• Thus, estimates effects of direct competition with immigrants
• Can be implemented at national or regional level
Skill cell approach: Limitations

• Does not identify general equilibrium effects

• Focuses only on within-cell substitution
• Without further analysis, it completely ignores cross-cell complementarities
• Assume native born do not change their skill levels in response to immigration
• Immigrants may work in skill cells that do not match their education and
experience (”brain waste”)
• Immigrant inflows may be in response to demand for certain skills
V. Empirical approach 4: structural models
Approach #4: structural models

• Complicated (estimate or simulate a series of equations)

• Grounded in Theory
• Specifies the structure of the LM, or how different groups of workers
interact with each other in the production process, (=‘cross-effects’)
• Need to make assumptions about production function
• Elasticity of substitution between different types of workers (first
determine how many) and physical capital is key
Structural models intuition

• Suppose that we believe GDP is determined by a CES Production Function

• The production function describes how Technology (A), High-Skilled Labor (H), and
Low-Skilled Labor (L) combine to make output (Y)
• Let:
• Where:
• β is the share of income paid to high-skilled labor
• σ is the elasticity of substitution between high and low skilled labor
• σ = ∞ ⇒ Perfect substitutes
• σ = 1 ⇒ Cobb-Douglas
• σ = 0 ⇒ Perfect complements
Structural models: step-by-step

1 2 3 4

Use the skill cell approach to
estimate the effects of
immigration within-cells
For example, how does low-
skilled immigration affect low-
skilled native wages?
Ask the same question for high-
skilled
Use regression analysis to
estimate the elasticity of
substitution between skill groups
Or use estimates from other
studies
Using the production function
and the estimates for the
elasticities of substitution, derive
wage equations for all types of
workers
Determine estimates for the wage
effects of immigration on specific
types of workers
The overall effect of
immigration on output can also
be calculated
Structural models - results

• Borjas (2003, Table IX):

• The immigration influx between 1980 and 2000 reduced wages in the US by 3.2%, with the largest effects felt by high school dropouts
(8.9%) and college graduates (4.9%), but σ assumed high
• Borjas (2014, Table 5.2):
• The influx of immigrants between 1990 and 2010 reduced wages in the US by 3.2%, with the largest effects felt by high school
dropouts (6.2%) and workers holding advanced college degrees (4.1%); LR effects smaller
• Ottaviano and Peri (2012, Table 5):
• Find evidence for complementarities between immigrants and natives within education&experience cells (bc of differences in language
abilities and experiences in the source country)  imperfect substitution (σ=20)
• The immigration influx between 1990 and 2006 raised wages in the US by 0.0-0.6%
• Manacorda, Manning and Wadsworth (2012)
• Analyze UK population data from the mid-1970s to the mid-2000s and find that native-born workers and immigrants are imperfect
substitutes (elast of subst much lower than in U.S., σ=7.8)
• Overall, they find very little to no effect of increased immigration on the wages of UK-born workers
Structural models: Limitations

• Results are incredibly sensitive to elasticity assumptions

• Effects of one bad estimate can affect the entire model
• Do not account for changes in consumption, investment, etc.

• Borjas probably overestimates within-cell substitutability

• Borjas definitely does not properly account for complementarities across
groups (Ottaviano and Peri, 2012; Manacorda, Manning and Wadsworth, 2012)
Concluding remarks regarding wage effects

Many wage effects are clustered around zero, but some are negative and a handful are positive

Despite the different methodologies, some patterns emerge:

• Less-skilled native workers tend to be more negatively impacted by immigrants than their higher-skilled counterparts
• Certain minority groups are especially disadvantaged; there is some evidence that the negative effect is more severe
for low-educated black workers and Hispanic workers who have dropped out of high school and have limited English
proficiency
• Earlier cohorts of low-skilled immigrants, those without a high school degree, also see larger negative impacts
compared to other low-skilled groups
• Results in the long run are mixed

So which methodology is correct for assessing wage effects? The answer is “it depends” on the context, data and
specific group under study
VI. Other channels of labor market adjustment
Other channels of LM adjustment

• Natives change jobs: more likely when immigrants are similar to natives
• Firms change their production technology or output mix: more likely
when immigrants bring different skills or experiences with them

These margins of adjustment can attenuate the adverse effect of

immigration on natives’ wages and employment and are typically assumed
to occur only in the long run
A. Job upgrading by natives

One potential reason for the limited evidence of a negative effect of immigration on
natives’ wages is that immigrants may not be perfect or even close substitutes with
natives (e.g. differences in language ability)
• Peri and Chad Sparber (2009): An increase in immigration to the U.S. leads natives
with a high school diploma or less education to shift from manual-intensive
occupations into better-paid communication-intensive occupations (rewarding
language skills in which they have a CA)
• Gu and Sparber (2017): Natives with a college degree or less are in occupations that
require more quantitative skills than comparable immigrants
Differences in average skills used by native-born and
foreign-born workers by education level, 2010

Source: Figure 1 from Gu and Sparber (2017).

Job upgrading by natives - theory

• Suppose a less-educated worker is paid for performing two types of

tasks: Manual and Communication
• Native born workers have a comparative advantage in
communication-related tasks (due to language, culture)

How does immigration affect the wage paid for these skills?
Job upgrading by natives - theory

• Immigrants have a comparative advantage in manual skills, and

specialize accordingly
• Immigration causes wages paid to manual work to plummet

What should a native manual skill worker do?

• Specialize in his/her comparative advantage: Communication skills
• Switch occupations
Job upgrading by natives - important facts

• Communication jobs pay more than manual labor jobs

• Immigration
• Even if there are more workers in the economy, immigration raises the
relative wages paid to communication jobs
• Provides an additional incentive for natives in manual labor jobs to move
toward communication jobs
B. Changes in input mix

Immigration may also affect how and what a firm produces: firms
may shift to more labor-intensive production methods
• Ethan Lewis (2011) finds that U.S. manufacturing firms added automation
technology more slowly in areas where immigration caused the relative
supply of high school dropouts to grow more quickly
 This capital-labor adjustment attenuated the adverse effect of immigrant
inflows on wages
C. Changes in output mix

Firms may also change their output mix toward more labor-intensive goods and services in
response to immigrant inflows
• Immigration of less-skilled workers may have slowed the movement of labor-intensive jobs
overseas, a movement often called “offshoring” (Ottaviano, Peri and Wright, 2013)
• Changes in output mix may even create jobs for natives who are complementary to
immigrant inflows

However, economic research to date finds little evidence of sizable changes in output mix in
response to immigration (Lewis, 2013)
D. Productivity gains through technological
adjustments

When there is an influx of immigrants, firms may adjust their technologies:

• Unskilled immigration: firms may adopt more manual-intensive technology (substitute low-skilled
labor for capital)
• High skilled immigration: firms may adopt more capital if highn skilled labor and capital are
complements
Because the capital may make workers more productive, workers may see their wages increase
In addition, high-skilled immigrants may bring capital with them, further increasing the stock of capital
in the destination and boosting wages among complementary native-born workers
Studies typically find that the adverse impact of immigration is smaller among high-skilled natives
than among low-skilled natives and even zero or positive, perhaps because of such complementarities
D. Productivity gains through innovation

Immigration, particularly of high-skilled workers, may lead to increases

in productivity if immigrants invent new technologies or bring new ideas
from their home countries
• Studies suggest that immigration of high-skilled workers, particularly
those in technical fields, leads to increases in productivity (e.g., Hunt and Gauthier-
Loiselle, 2010; Kerr and Lincoln, 2010; Peri, 2012; Peri, Shih and Sparber, 2015)

• In the long run, higher productivity is the only way that wages can
increase
VII. Effects on previous immigrants
Effects on previous immigrants

The most adverse labor market impact of immigration appears to fall on earlier immigrants, not on
natives
• Ottaviano and Peri (2012) conclude that during 1990 to 2006 immigrant inflows to the U.S.
reduced the wages of earlier immigrants by about 6.7%
• Borjas (2014) concludes that immigrant inflows during 1990 to 2010 reduced the wages of earlier
immigrants by about 4.4%

Makes sense: new immigrants are typically more substitutable for earlier immigrants than for
natives. They are more likely to have similar education levels, work in the same occupations, speak
the same language, live in the same regions within the destination country, etc.
 It does not appear that there is a single right answer
regarding the labor market effects of immigration
on natives in the destination

Workers who are most similar to immigrants may

lose, while those who are most different may gain
Concluding
thoughts Empirical evidence on the wage effect for the
average native-born worker appears to be
inconclusive at best

As a result, this is an ongoing area for research,

with new findings appearing regularly
 To summarize, although many studies find that immigration does not appear to have
had negative labor market effects on natives in the destination, some studies do find
evidence that certain groups, such as high school dropouts and previous immigrants,
have seen their wages fall because of immigration

Studies that use the spatial correlations and natural experiments approaches tend to
find smaller, if any, negative effects on wages and employment of native-born
workers

In sum...
Studies that use the skill cells approach or structural approach tend to find more
evidence of detrimental effects, although there are exceptions

The labor market effects of immigration thus remain open to debate