Labour Market Effects of Immigration
The Labour Market Effects
of Immigration
Notes for Econ C015
Labour Market Effects of Immigration
Immigration Impact in Theory
Immigration expands domestic labour force, possibly
differentially in different skill groups
Effect depends upon assumptions made about dimensions in which the economy can respond
• How far can the mix of inputs be adjusted?
• How far can the mix of outputs be adjusted?
• Is output traded or nontraded?
• Is capital elastically or inelastically supplied?
Labour Market Effects of Immigration
A Very Simple Case
Suppose
• one traded good, sold at world prices
• perfectly elastic supply of capital at world price
• homogeneous labour
Labour supply is expanded by immigrant inflow
Equilibrium wage ensures zero profit given world output price and world capital price
Immigration leaves wage unaffected and output and
capital stock expand in line with labour force
Employment of natives also unaffected
Labour Market Effects of Immigration
Another Simple Case
Suppose
• one traded good, sold at world prices
• inelastic supply of capital
• homogeneous labour
Labour supply is expanded by immigrant inflow
Wage falls and capital price rises to secure adjustment
in capital labour ratio
Output expands but native labour earnings fall
Economy as a whole benefits from ”immigration surplus”
Labour Market Effects of Immigration
Heterogeneous Output
Suppose
• two traded goods, sold at world prices
• inelastic supply of capital
• homogeneous labour
Equilibrium wage is set by zero profit condition for
two output types =⇒ factor price insensitivity result
(Leamer and Levinsohn 1995)
Adjustment in capital labour ratio possible through
relative output expansion in labour intensive sector (Rybczinski theorem)
Long run effects of immigration are felt in the output
mix not in wages.
Labour Market Effects of Immigration
Heterogeneous Labour
Suppose
• one or two traded goods, sold at world prices
• perfectly elastic supply of capital at world price
• two labour types
Immigrant inflow expands size of one skill group, say
the unskilled
If only one output type then equilibrium unskilled
wage falls relative to skilled wage to clear labour markets (labour economics model )
If two types of output then wages are unaffected but
change in industrial composition towards unskilled-intensive
production (trade theory model )
Labour Market Effects of Immigration
Issues in estimation I
Fixed effects
Dominant approach: identify effects of immigration
from spatial correlation between immigrant concentration and labour market outcomes.
Immigrant shares and labour market outcomes spatially correlated because of common fixed influences.
Suggests use of difference estimation.
Labour Market Effects of Immigration
Issues in estimation II
Simultaneity of immigrant inflows
Immigration may be attracted by locally booming
conditions
US work heavily influenced by finding of Bartel that
immigrants tend to settle in areas of already high immigrant concentration
Intelligible response to accessibility of immigrant networks
May also be driven by family reunion
Suggests lagged immigrant stocks as instrument
Labour Market Effects of Immigration
Issues in estimation III
Measurement error
High frequency movements in immigrant population
shares based on sample surveys
Subject to nontrivial sampling error - demonstrably
large relative to flows
Sampling error estimable as basis for correction
IV results not affected if instruments not measured
with correlated error
Labour Market Effects of Immigration
Issues in estimation IV
Native outflows
Usual practice is to regress changes in labour market
outcomes on changes in immigrant concentration
Implicitly ignores changes in skill group sizes due to
flows of natives
If immigrant inflows depress wages then natives may
leave to seek higher wages elsewhere - correlation likely
Native flows are observable and can be incorporated
as additional explanatory variables - also endogenous,
for similar reasons
Labour Market Effects of Immigration
Existing empirical evidence largely for US (eg Altonji
and Card 1991, Lalonde and Topel 1991, Card 2001)
Some EU studies (eg Pischke and Velling)
Based on spatial correlations between immigration
flows and changes in labour market outcomes
Model usually has one output and several labour types
Immigrant labour differs from native labour either in
unobserved skill composition or as a different labour
type in itself
Labour Market Effects of Immigration
Previous evidence:
• Lalonde and Topel 1991:“... increased immigration
reduces the wages and earnings of immigrants and
their close substitutes, though in our view the effects are not large ... Labor market effects on nonimmigrants appear to be quantitatively unimportant.”
• Altonji and Card 1991: “Our empirical findings indicate a modest degree of competition between immigrants and less skilled natives ... We find little
evidence that inflows of immigrants are associated
with large or systematic effects on the employment
or unemployment rates of less skilled natives.”
Labour Market Effects of Immigration
• Card 2001: “The conclusion that immigrant inflows
affect native employment rates is new. However,
the implied effects for natives as a whole are very
small. Even for workers in the bottom of the skill
distribution, I find relatively modest employment
effects of recent immigrant inflows in all but a few
high - immigrant cities.”
Labour Market Effects of Immigration
Conclusions of studies for Europe are very similar:
• De New and Zimmermann 1994: “Immigration ...
appears to have an overall negative effect on German
wages. ... However ... the estimated effects are
far from being dramatic and are well in line with
economic theory.”
• Pischke and Velling 1997: “there is little evidence
for displacement effects due to immigration.”
• Winter-Ebmer and Zweimüller 1999: “The results
indicate only a modest impact of immigration on
the unemployment risk for native employees.”
Labour Market Effects of Immigration
Sources of UK data
Data needed on:
• labour market outcomes (wages, employment)
• immigrant population shares
• skill group population shares
Possible sources:
• Census
• NES, LFS
• Other sources
Labour Market Effects of Immigration
Estimation Strategy
Native unemploymentit = β0+β1Immigrant native ratioit
+ β2 ln Native skill group sizesit
+ β3Demographic controlsit
+ Time effects + Region effects + uit
Homogeneity imposed on native skill group effects
Estimation by instrumental variables
c
°Ian
Preston 2004
Differences
OLS
IV
Coeff
t value
Coeff
t value
0.106
1.580
0.178
1.341
-0.027
-2.451
-0.228
-1.721
-0.004
-0.375
0.027
0.505
-0.082
-0.396
0.739
1.219
0.063
1.392
0.083
1.054
-4.685 p = 0.000
-2.049 p = 0.040
0.515 p = 0.606
0.379 p = 0.705
χ25 = 14.312 p = 0.014
χ25 = 9.853 p = 0.080
χ217 =715.994 p = 0.000 χ215 =220.905 p = 0.000
χ23 = 1.833 p = 0.608
289
255
Variable
Immigrant-native ratio
ln skilled/unskilled
ln semiskilled/unskilled
Mean native age / 100
Mean immigrant age / 100
M1
M2
W1
W2
S
Sample size
306
306
Notes:
M1 is a test for first-order serial correlation, asymptotically distributed as a standard
normal. M2 is a test for second-order serial correlation, asymptotically distributed as a
standard normal. W1 is a Wald test for joint significance of the reported regressors. W2
is a Wald test for joint significance of the unreported time dummies. S is a χ2 test of
the overidentifying restrictions implied by choice of instruments underlying IV estimates
Levels
OLS
Within groups
Coeff
t value
Coeff
t value
-0.050
-1.940
0.245
5.551
-0.046
-6.059
-0.023
-1.928
-0.044
-5.047
0.006
0.534
-1.578
-5.178
-0.156
-0.673
-0.033
-0.510
0.177
3.670
12.858 p = 0.000
-4.489 p = 0.000
11.496 p = 0.000
0.272 p = 0.785
χ25 =313.642 p = 0.000
χ25 =351.445 p = 0.000
χ217 = 234.676 p = 0.000 χ217 = 356.959 p =0.000
LFS 1983-2000
Table 1: Effect of immigration on unemployment
Labour Market Effects of Immigration
Sample size
Notes:
As for Table 1
255
255
255
-4.240 p = 0.000
-0.632 p = 0.527
2
χ6 =5.536 p = 0.477
χ215 =60.992 p = 0.000
χ23 = 0.353 p = 0.950
-2.141 p = 0.032
0.944 p = 0.345
2
χ6 =14.450 p = 0.025
χ215 = 246.459 p =0.000
χ23 = 0.714 p = 0.870
0.238
-4.968 p = 0.000
0.186 p = 0.852
2
χ6 =6.739 p = 0.346
2
χ15 = 200.615 p = 0.000
χ23 = 1.187 p = 0.756
0.642
M1
M2
W1
W2
S
0.486
0.116
Unskilled
Coeff
t value
0.026
0.112
-0.233
-0.997
0.003
0.036
-0.099
-0.086
-0.093
-0.669
Coeff
0.104
-0.084
-0.023
0.437
-0.052
0.089
IV, Differences
Semiskilled
Coeff
t value
0.390
2.219
-0.247
-1.343
0.090
1.269
0.706
1.032
0.312
2.953
Variable
Immigrant-native ratio
ln skilled/unskilled
ln semiskilled/unskilled
Mean native age
Mean immigrant age
Mean skilled native age
Mean semiskilled native age
Mean unskilled native age
Skilled
t value
0.915
-0.768
-0.529
0.869
-0.475
0.850
LFS 1983-2000
Table 2: Effect of immigration on unemployment by skill group
Labour Market Effects of Immigration
c
°Ian
Preston 2004