The Labor Market Impact of Immigration. George J. Borjas Harvard University October 2006

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1 The Labor Market Impact of Immigration George J. Borjas Harvard University October 2006

2 Resurgence of large-scale immigration Almost 3% of world s population and 9.5% of population in more developed countries lives in a country where they were not born. Denmark: 7.2% Sweden: 12.4% UK: 9.1% Portugal 7.3% Greece: 8.8% France: 10.7% Germany: 12.3% Austria: 15.1% Canada: 18.9% Australia: 20.3% US: 12.9%

3 Number of legal immigrants admitted to US, by decade 10 Number (in millions) s 1830s 1850s 1870s 1890s 1910s 1930s 1950s 1970s 1990s Decade

4 Illegal immigration in US Jan. 2005: 10.5 million illegal immigrants. In Jan. 2000, estimated number was 8.5 million. Annual net flow is around 400,000. Assuming this rate of growth: Jan estimate of 11 million 2.8 million live in CA (26.7%); 1.4 million in TX (10.3%) 6.0 million (57.1%) of the illegal aliens come from Mexico. Other leading source countries: El Salvador (470,000). Guatemala (370,000) and India (280,000).

5 Immigrants in US workforce 0.15 Immigrant share Year

6 Immigrant share, by region 40 Percen California Other immigrant states Rest of country Year The other immigrant states are New York, Florida, Texas, Illinois, and New Jersey.

7 Percent wage differential between immigrant and native men 10 Percent Year

8 The question Do immigrants alter the employment opportunities of native workers? After World War I, laws were passed severely limiting immigration. Only a trickle of immigrants has been admitted since then...by keeping labor supply down, immigration policy tends to keep wages high. Paul Samuelson, Economics, 1964.

9 The puzzle Summary of evidence: Friedberg and Hunt (1995, p. 42): The effect of immigration on the labor market outcomes of natives is small. National Academy of Sciences (1997, p. 220): The weight of the empirical evidence suggests that the impact of immigration on the wages of competing native workers is small. Puzzle: The immigrant supply shock has been very large, and Hamermesh (1993) concludes that the labor demand curve is not perfectly elastic. Why can t we observe an impact?

10 Spatial correlation approach Suppose there are a number of closed labor markets that immigrants penetrate randomly. We can then relate the change in the wage in a particular market to the number of immigrants in that market. The estimated correlation measures the impact of immigration. Immigrants cluster in a small number of geographic areas. Most studies exploit this geographic clustering to test the implications of the textbook model. Grossman (1982), Borjas (1987), Altonji and Card (1991), LaLonde and Topel (1991), Schoeni (1997), Card (2001). Most influential study: Card s (1990) analysis of the Mariel flow.

11 Problems with spatial correlations Immigrants may not be randomly distributed across labor markets. If immigrants cluster in cities with thriving economies, there would be a spurious positive correlation between immigration and local employment conditions (Borjas, 2001). Local labor markets are not closed. Natives may respond to the immigrant supply shock by moving their labor or capital to other cities, thereby reequilibrating the national economy. There is an unresolved debate over whether these equilibrating flows exist. See Borjas, Freeman, Katz (1997), Card (2001), Borjas (2006). Measurement error (Aydemir and Borjas, 2006)

12 Alternative approach (Borjas, QJE, 2003) We need to pay closer attention to the definition of a skill group. The human capital literature implies that both schooling and work experience determine a person s stock of acquired skills. Immigration is not balanced evenly across all experience cells in a particular schooling group. The immigrant influx will tend to affect some native workers more than others. And the nature of the supply imbalance changes over time. The local labor market may not be the right unit of observation. So examine evolution of national wage structure (in the spirit of Murphy-Welch, 1992; Katz-Murphy, 1992). This approach reconfirms that the labor demand curve is indeed downward sloping: An influx of immigrants into a particular skill group lowers the wage of that skill group.

13 Wages and immigration for schoolingexperience groups in USA, Decadal change in log weekly wage Decadal change in immigrant share

14 Predicted impact of immigrant influx in US Education group: All workers High school dropouts High school graduates Some college College graduates Short run -3.3% Long run 0.0% Source: Borjas and Katz, Short run: Capital stock is fixed Long run: Rental price of capital is fixed

15 Who gains? Who loses? Immigration changes how the economic pie is split. It redistributes wealth from labor to users of immigrant labor. Assuming factor price elasticity is around -0.35: Native workers in USA lose approximately 2.8 percent of GDP, or $280 billion. Native employers in USA gain approximately 3.0 percent of GDP, or $300 billion. Net gain in USA is about $20 billion annually, about $80 per native-born person. Distributive conflict is at the core of immigration.

16 What does it all imply about immigration policy? Nothing at all! Crucial questions need to be answered before we can choose an optimal immigration policy: What do we want to accomplish from immigration policy? Whose well being do we want to maximize?