Do immigrants reduce wages?

The surge in US immigration in recent decades has seen debate about the economic effects of immigrants on US natives, particularly on their wages, gain momentum. Tomorrow sees a noteworthy paper on the topic delivered at the NBER's International Trade and Investment Workshop. - part of week 4 of the NBER Summer Institute.

Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis have a topical new paper entitled Rethinking the Effects of Immigration on Wages (PDF). Unlike some of the other recent studies, they find a positive effect on wages of US-born workers. Here is the abstract:

This paper revisits the following important question: what is the effect of immigration on average and individual wages of U.S.-born workers? In particular we analyze the impact of surging immigration, on average real wages and on the increased wage dispersion during the period 1990-2004. Building on Borjas (2003) we emphasize the need for a general equilibrium approach to analyze this problem.

The impact of immigrants on wages of US born workers can be evaluated only by accounting carefully for labor market and capital market interactions in production. This requires to assume a production function, a mechanisms of physical capital accumulation and to derive labor demands for different types of workers (by education and experience). The usual ”reduced form” approach estimates the effect of immigrants on wages of US-born workers within the same skill group. Such method only provides estimates of a partial effect, usually negative and uninformative of the total effect of immigration on wages.

Using our general equilibrium approach we estimate that physical capital adjust promptly and fully to immigration (already within one year) and that immigrants are imperfect substitutes for US-born workers within the same education and experience group (because they choose different occupations and have different skills).

These two facts, overlooked by the previous literature, imply a positive and significant efect of immigration on the average wage of U.S.-born workers, already in the short run. They also imply a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers. Hence only a very small fraction of the increase in College/High School Dropout wage gap during the 1990-2004 period can be attributed to immigration.

Comments

[Blissex]

«we emphasize the need for a general equilibrium approach to analyze this problem»
«This requires to assume a production function»

Well, stop there -- with such premises need not pay any more attention. The purpose of that stuff is prove the central verity of Economics, that factor prices are determined and solely by marginal productivity, and it succeeds amazingly at that. There is no need to worry about about immigration or anything else as the central verity guarantees that everybody get their just rewards

Or else it is a load of inconsistent bullshit, and why pay attention to that either...

[A. PERLA]

Blissex: "that factor prices are determined and solely by marginal productivity"

An immigrant replacing a native worker does not enhance marginal productivity, unless it is a job creation that is fulfilled.

It supposedly frees a native person with inherent skills to find a better job (more pay). The point, I think, is this. Native people who are in entry-level unskilled work do not and will not ever be able to be "freed" to a better job. This job escalator does not work.

Immigration, to my mind, can only help where service jobs are created and cannot be fulfilled by unskilled native workers (particularly the unexperienced just coming onto the job market) either due to a lack of them or a lack of willingness to assume this work. This typically means, in a developed country, that existing welfare systems simply provide payments that allow the unemployed to refuse unskilled labor even though they probably do not merit any other kind of work.

Conclusion? Well, that should be evident. Reduce unemployment benefits, which America did under Clinton, and watch the unemployment roles diminish by half over the intervening decade. People accepted employment when they had no other alternative.

I cannot possibly see how this sort of phenomenon will be detected by economic analysis. But, I remain to be convinced.

[Arthur Eckart]

The implication is immigration has a small effect on domestic wages. However, that may be true only if the assumption holds: "Immigrants are imperfect substitutes for US-born workers." In reality, illegal immigration into the U.S. has been massive for over 20 years, and many of those immigrants are low-skilled workers. So, those immigrants would be perfect substitutes for all U.S. workers (because both high and low skilled U.S. workers can perform low-skilled jobs). It seems, low-skilled illegal immigrants displaced U.S. workers by accepting jobs below U.S. reservation wages, and then permanently depressed wages. Consequently, even if domestic workers lowered their reservation wages, they may not be low enough to displace immigrants. So, low-skilled immigration may have a large negative effect on low-skilled domestic wages and displacing low-skilled domestic workers.

[Arthur Eckart]

A Perla, when income inequality increases, or low-skilled incomes fall, the opportunity cost of high-skilled jobs increases. So, low-skilled workers are induced to acquire high-skills. The fastest growing industries in the U.S. require high-skills, e.g. computer engineers, programmers, software designers, biochemists, microbiologists, etc. There are labor shortages in new industries, because they're growing so fast (older industries are laying off workers, because of productivity gains). One problem is it takes many years to obtain high skills. Another problem is many low-skilled workers are unwilling spend years learning new skills. So, although many Americans "upgraded" their skills (e.g. after becoming unemployed), the U.S. had to "import" high-skilled labor (e.g. from India) to fill shortages.

[Pancho Villa]

"that factor prices are determined and solely by marginal productivity"

...and marginal productivity is mostly determined by simplicity, thus simplicity automatically means flexibility...am I wrong?

[Loki on the run]

Athur Eckart says:

One problem is it takes many years to obtain high skills. Another problem is many low-skilled workers are unwilling spend years learning new skills. So, although many Americans "upgraded" their skills (e.g. after becoming unemployed), the U.S. had to "import" high-skilled labor (e.g. from India) to fill shortages.

However, the problem here is that the jobs you refer to can only be filled by, lets say, people with IQs two SDs above the mean.

There is a limited supply of such people in the US and those coming in from south of the border are not contributing a huge number of them.

However, India and China, with a combined 6 or 7 times the population of the US, has an enormous supply.

[Arthur Eckart]

Loki, I agree, the skills are so high few can learn them, and China and India have more people who are capable. When I was in grad econ, only a small proportion of the students graduated (there's a book "The Making of an Economist" that showed only 600 Econ Ph.Ds and 2,000 Econ MAs are awarded in the U.S. each year, e.g. compared to 100,000 MBAs). So, although average skills rise, along with economic progress, the top 5% remains fixed. Better use of that small percentage can help accelerate economic progress.

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