Home » The Effects of Immigration on Wages and Employment

The Effects of Immigration on Wages and Employment

1. Review the summaries below of the Card, Borjas/Katz and Peri studies and the material presented in the textbook and in the lectures. Then describe briefly in your own words the differences in the methods and the findings in these three studies.

(You do not need to read the studies themselves to answer this part.)

2. Peri argues that immigrants and U.S.-born workers are imperfect substitutes for each other. What are the theoretical implications for the effects of immigration on wages, and why? What does the evidence show?

(The posted lecture notes Imperfect substitutability and the effects of immigration on wages are an important resource for answering this part.)

Summaries of three recent studies of immigration

David Card (2005) Is the New Immigration Really So Bad?: Looking across major cities, differential immigrant inflows are strongly correlated with the relative supply of high school dropouts. Nevertheless, data from the 2000 Census shows that relative wages of native dropouts are uncorrelated with the relative supply of less-educated workers, as they were in earlier years. At the aggregate level, the wage gap between dropouts and high school graduates has remained nearly constant since 1980, despite supply pressure from immigration and the rise of other education-related wage gaps. Overall, evidence that immigrants have harmed the opportunities of less educated natives is scant.

George Borjas and Lawrence Katz (2005) The Evolution of the Mexican Workforce in the United States: [T]wo questions about the validity of interpreting near zero cross-city correlations as evidence that immigration has no labor market impact. First… if immigrants… cluster in cities with thriving economies (and high wages), there would be a built-in positive correlation between immigration and wages… [which] would certainly attenuate… negative impact immigration might have had on wages. Second, natives may respond to the wage impact of immigration by moving…. The flow of jobs to the immigrant-hit areas cushions the adverse effect of immigration on the wage of competing workers in those localities…. [F]lows of capital and labor tend to equalize economic conditions across cities. As a result, inter-city comparisons of native wage rates will not be very revealing…. In the end, all laborers, regardless of where they live, are worse off because there are now many more of them…

Giovanni Peri (2010) The Effects of Immigrants on U.S. Employment and Productivity: The effects of immigration on the total output and income of the U.S. economy can be studied by comparing output per worker and employment in states that have had large immigrant inflows with data from states that have few new foreign-born workers. Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

Textbook: http://wps.aw.com/aw_ehrensmith_mlaborecon_9/37/9554/2445957.cw/index.html

Lectures:
Imperfect substitutability and the effects of immigration on wages
Adapted from Heidi Shierholz, Immigration and Wages, Economic Policy Institute, February 2010
A key result (shown in Table 2 below)is that the estimated effect of immigration from 1994 to 2007 was to raise the wages of U.S.-born workers, relative to foreign-born workers, by 0.4% (or $3.68 per week), and to lower the wages of foreign-born workers, relative to U.S.-born workers, by 4.6% (or $33.11 per week). In other words, any negative effects of new immigration over this period were felt largely by the workers who are the most substitutable for new immigrants”that is, earlier immigrants.

Table 3 below shows the effects of immigration on wages using the assumptions made by Borjas: namely that the elasticity of substitution among workers of different education levels is constant across all education categories and that immigrant and native workers with the same education and experience are perfect substitutes for one another.

Explanation of the new approach
Immigrant/native substitutability
Immigrant and native workers with the same levels of education and experience are not perfectly substitutable. This may arise, for example, among workers with low levels of education if native workers are more likely to be concentrated in jobs that require strong English skills and immigrant workers are more likely to be more concentrated in jobs that do not (for example, waitstaff versus line cooks).
Previous national estimates of the effect of immigration on wages have assumed that immigrants and natives of similar education and experience levels are perfectly substitutable. If natives and immigrants are perfectly substitutable, an increase in immigration in a particular education/experience class will tend to reduce the wages in the entire education/experience class, including the U.S.-born workers in that class.
But if, as has been shown to be the case, immigrants and natives within the same education/experience class are imperfect substitutes, then an increase in immigration in a particular class will have a strong adverse effect on the wages of earlier immigrants in that class”since they are direct substitutes, or competitors”but have a smaller effect on the native workers in that class.
Substitutability by educational attainment.
The elasticity of substitution is not constant across education categories. Consider a broad grouping of workers by education level: workers with a high school education or less and workers with more than a high school education. These two groups are not good substitutes for each other”workers with a high school degree or less tend to do different jobs than workers with more than a high school degree.
Now consider a subgrouping of the high school or less category into two additional groups”workers with no high school degree and workers with exactly a high school degree. There is a much greater degree of substitutability between these two types of workers. Workers with less than a high school degree are likely to do similar jobs as those with exactly a high school degree.
Ignoring this fact distorts the estimated effects of immigration on workers without a high school degree. It implies that an increase in immigration among workers without a high school degree affects only workers without a high school degree, who constitute a very small portion of the labor force (9.9% in 2007). As a result, the entire impact of less-than-high-school immigration is assumed to be felt by the relatively small number of less-than-high-school workers.
If, on the other hand, workers without a high school degree are relatively substitutable for workers with a high school degree, then the impact of less-than-high-school immigration is more diffused across the much larger share of the workforce that has a high school degree or less (38.7% in 2007), greatly reducing the impact on the least-educated American workers.
These new innovations in the national approach literature essentially solve the earlier divide between the national approach and the area approach. When the key elasticities of substitution are correctly accounted for in the national approach methodology, the results using that approach come in line with the results from the area approach, namely that the effects of immigration on native workers is modest, including the effect on native workers with low levels of education.
We compute the effect of immigration on wages using two main education groups, high school or less and more than high school. There are two education subgroups within each main education group, less than high school, exactly high school, some college, and college or more. There are eight experience groups, 1-5 years, 6-10 years, 11-15 years, 16-20 years, 21-25 years, 26-30 years, 31-35 years, and 36-40 years.
In Table B1 below, the elasticity of substitution between the two main education groups is given by sigmaHL, the elasticity of substitution between two education subgroups is given by sigmaHH and sigmaLL, the elasticity of substitution between workers within the same education subgroup with different experience levels is given by sigmaEXP, and the elasticity of substitution between immigrants and natives within the same education/experience group is given by sigmaimmi. [Sigma refers to the Greek letter used in Table B1to denote elasticities of substitution.]
The different sets of elasticities in Table B1 are taken from the literature (Ottaviano and Peri 2008 and Card 2009). These elasticities of substitution are estimated by regressing the relative wage between two groups on their relative labor supply, exploiting variation over time and (where applicable) between education and/or experience categories.

Card, David. 2009. Immigration and inequality. American Economic Review 99, 2: 1-21.
Ottaviano, Gianmarco I.P. and Giovani Peri. 2008. Immigration and National Wages: Clarifying the Theory and the Empirics. Working Paper No. 14188. Cambridge, Mass.: NBER.

Worker and Job Mobility

A. Introduction

We have been emphasizing frictions in the labor market that impede costless mobility as well as institutions in secondary labor markets that may generate too much mobility (excess churning). Our focus this week is on mobility”the costs and benefits.

We look at geographic mobility of workers. We will look both at internal migration within the U.S. and international migration to the U.S.

B. Migration modeled

1. Quantities

Stock (not flow) of immigrant workers is about 12 percent of stock of U.S. labor force, and perhaps one-third to one-half of the net inflow to the labor force. Flow (Table 10.3) not as high as a century ago.

2. Human capital model: geographic migration as an economic investment. Usual net present value formula applies. Assumes migration is

a. voluntary, so excludes political refugees and forced migration (slavery).

b. rational with mainly economic motivation and individually-based, as opposed to keeping family together (tied movers) or family re-unification.

Note that return migration is large in most historical periods”one-fourth to one-third, although much smaller recently from Mexico, as we shall see later.

3. Two aspects: pull and push. Most migrants do cite economic motives.

a. Pull consists of wage differentials as well as employment probability differentials. Wage differentials are said to be more important in domestic migration, but I don™t see that in the literature.

Push examples: the collapse of Mexican agriculture post Nafta (1994), so immigrants with low education; Irish potato famine of the 1840s.

Pull examples: Asian immigrants with human capital, brain drain of Russian scientists to U.S.

b. Pull is usually but not always more important than push. Pull theory implies that migration need not be from the poorest areas or the poorest individuals. Because costs of moving can be larger for the poor and because having more education can potentially generate greater returns to migration than having less education.

C. Domestic migration

1. Who migrates?

See Table 10.2 for domestic migration.

a. Peaks for ages 20-24: 15 percent across state lines.
At age 32” 10 percent; at age 47 only 5 percent.

b. Among those under 40, college grads much more likely to move regions, but difference diminishes to zero by 40s.

c. So labor market is national for college grads, regional for those with < high school degree. d. Note that figures in table 10.2 include return and repeat movers and that the calculation of returns to migration should include such movers, but often data don™t allow. 2. Returns to domestic migration --Increase in pay for moves across regions within U.S. is about 10 percent on average, but it is negative ten percent for tied movers”those moving for family reasons. --It can still be rational for a family to move together; if husband™s pay increase exceeds wife™s loss. His gain exceeds her loss in absolute dollars. 3. How much inter-regional domestic migration? -A lot, especially compared to European countries, and also in absolute number of movers”about 2 million employed Americans change region every year. This has contributed to convergence of inter-regional wage differentials over the past fifty years. --Only a little, if we note that only one half of the regional differential disappears over a 30 year period. Even today, the convergence is only partial and of course some of it is due to other factors (e.g., the diffusion of air conditioning made the South a more productive region). 4. Examples of Puerto Rico and EU, showing non-economic barriers to migration a. Puerto Rico Average annual 2001 compensation per worker is $46K in U.S. and $21 K in Puerto Rico. They are all eligible to migrate to mainland. In past 50 years, 25 percent have, which might seem like a lot, except that it implies that 75 percent did not move. Implication: large immobilities”costs to migration”even when borders are open. These costs are perhaps loss of social and cultural amenities or perhaps just inertia. b. Relative immobility also is the case in the UK and in the European Union, which has been opening geographic mobility and is moving toward a single labor market. --In 1993 EU internal migrants (Borjas p. 322) numbered 5 million, or about only 1.3 percent of population. --New EU countries (as of May 1 2004) estimated to contribute only 3 percent of their population (or 3 million) to the west over next fifteen years! --So population of current EU countries would be increased by only 1 percent by these migrants. D. International migration to the U.S. --This is where numbers seem bigger and policy issues are highly debated. But keep in mind that in fact domestic inter-regional migration is larger than international migration. --In recent years, inflow of legal immigrants was about 1.1 million people, per year, and estimated net flow of illegal immigrants was about 350K. Stock of illegal immigrants is about 6-9 million. Recall that gross inter-regional domestic flow was about 2 million workers. --Flows have been larger since 1965 reform, which opened immigration from Asia and Latin America. Return flows have fallen since 1986 IRCA, especially at Mexican border. --IRCA established employer sanctions (fines), added to threat of deportation. In 1990s stricter border controls have made it more dangerous to cross Mexican border. See chart from Massey et al. --From 2007 to 2009 the inflow from Mexico is estimated to have dropped by half. 1. Earnings of immigrants See Table 10.3 and compare to Borjas fig. 9.7. Compares immigrants not to non-migrants but to native-born in U.S. and does not hold education, skills constant. a. New immigrants earn less than natives. Compare to Card™s findings, however. b. Some catch-up occurs with time in U.S., as skills such as English proficiency are acquired, but catch-up is partial. c. Compare the recent immigrant cohorts with earlier ones”see also Borjas fig. 9.7. Decline in quality? d. Chart excludes return migration, so it can overstate gains, especially of older cohorts. Darren Lubotsky™s longitudinal data shows slower rate of earnings growth for immigrants than do the cross-sectional cohorts. 2. Economic effects of immigration: David Card™s findings We first abstract from taxes paid versus services (health care and transfer payments) spent. a. Introduction --Quasi-natural experiments, such as the Mariel Boatlift in 1980. --Compare cities with large versus small numbers of immigrants, while taking into account for each city outmigration and reduced immigration. --This work show immigration has had a very small effect on skilled or unskilled wages. b. Mariel boatlift analysis. --In 1980 about 60K Cubans suddenly were permitted to resettle in the U.S. Almost all went to Miami and resulted in an unexpected increase of 7 percent of Miami™s labor force in a very short time period. --Using before and after data on Miami and on comparable control group cities, Card found: No change in wage levels, relative wage levels of the unskilled or unemployment. By 1986, Miami™s population was at the level projected from before Mariel. c. Cross-city analysis. Card finds no difference in relative wages even though there are large differences in the proportions of immigrants. 1. Naïve views of winners and losers a. Every employed immigrant is taking a job away from a U.S. citizen. b. Immigrants are not taking any jobs from U.S. citizens because none want to do this-- rough or dirty or menial-- type of work. c. Economists like to criticize both views on theoretical grounds”as in textbook Figure 10.2. 2. Sophisticated economists nonetheless disagree on the wage and employment effects of immigration: e.g., Borjas versus Card. a. The debate is partly on what are the best theoretical views of the labor market-- the appropriate assumptions to make: --Binding effects of the minimum wage (Textbook Figure 10.3). --Frictions, such as displacement and retraining costs for native workers and negative externalities when jobs and workers leave communities. -- Market-clearing is clearly an inappropriate assumption. -- Monopsony issues when illegal workers cannot exert their rights to enforcement of wage and hour laws. --Skill disaggregation”effects among different groups of workers who might be imperfect substitutes. -- Extent to which immigrants are likely to locate in areas of the U.S. that can absorb them (spatial disaggregation). -- Is immigration a response to growing demand for labor (pull model). --Extent to which immigrants add to local and national aggregate demand and to stock of entrepreneurs starting new businesses. --Effects on business versus effects on workers. -- Fiscal effects”whether immigrants on net contribute to or drain the public sector budget”taxes, services and transfer payments. --Effects on culture and national identity may be greater than the economic effects. --Need to address a different question: What policies might improve the integration of immigrants into the economy? U.S. - Canada comparisons are instructive. b. The debate proceeds also on the level of competing empirical studies --Example: Card™s analysis of Mariel boatlift of 1980 and his cross-city comparisons. --Borjas and Katz: Workers move away from cities with large numbers of immigrants, or do not move there in the first place. So proportion of immigrants in a city is endogenous, not exogenous”not a causal identification. --Borjas and Kats conclude: need to look at national data over time to incorporate these adjustments. --Card™s response: Use statistical instruments such as propensity of specific immigrant groups (e.g., Filipinos versus Mexicans) to cluster where their own group is already located. --This provides a way to measure the causal effect of immigration. He gets same results as before. c. Newer approach: introduces effects of specialization (complementarities) --Shierholz shows (summarizing work of Peri and of Card) how effects are different when immigrants and natives are imperfect substitutes and using elasticities of substitution between college graduates and those without any college. --Peri (2010) introduces a task-analytic approach to studying different occupational groupings of immigrants and natives. Natives have better English language skills: a comparative advantage in jobs that have more communication-oriented tasks. Immigrants specialize in jobs that have more manual work tasks. --Larger number of immigrants then increases productivity of natives, increasing their wages and employment rather than decreasing them. 3. Overall effects of immigration on the host country a. Immigrants (relative to natives) are much more likely to be workers than non-workers (elderly or children). As workers they create at least as much as they are paid, most of which stays in the U.S. (despite remittances). b. Impacts on federal, state and local finances. Most studies find that even recent immigrants pay more taxes than they consume in services or transfer payments. Immigrants receive more in services and transfers than they pay in taxes at the state and local level, but this is far outweighed by the fiscal surplus they create at the federal level. c. Immigrants and innovation. Studies of Silicon Valley firms show extremely high number of immigrant entrepreneurs as well as workers and of capital inflows from e.g., India to finance these companies. d. Children of immigrants integrate rapidly. e. Conclusion: immigration has more positive than negative economic effects. However, the illegal segment of the immigrant workforce is likely to be highly exploited. 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