Tuesday, August 1, 2006

New Economic study: Most US workers gain from immigration

With a debate raging in political circles over US immigration policy, economist who have been studying the effects of the growing number of immigrants on native workers wages and job prospects have presented varying views on the topic. A new study released today by the National Bureau of Economic Research entitled, Rethinking the Effects of Immigration on Wages, weights in on the continuing debate on the effects of immigration on the US labor marketand finds that there is "a positive and significant efect of immigration on the average wage of U.S.-born workers" and that there is only "a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers."

While agreeing that immigration has a general positive effect on the economy on a whole, some economists have expressed concern over its effects on those native workers with the least skills and education. This study, by Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis, looks at the negative effects on that group and finds them to be nearly negligible for a number of reasons.

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The authors see two reasons for the continued debate amongst economist about the effects of immigration on low-skilled, uneducated, native workers.

From the academic perspective two facts have contributed to feed the debate First, the recent empirical literature about the effects of immigrants on the wages of natives has provided a mixed set of results. Second, the group of uneducated workers (without a high school degree) has become increasingly large among recent immigrants, while at the same time the real wage of uneducated U.S.-born workers has performed very poorly: it even declined in real terms during the recent decades (see, for example, Autor, Katz and Kearny, 2005). It is certainly tempting to attribute the poor wage performance of uneducated U.S. workers to the competition of immigrants, as such connection would provide an easy solution to the problem of wage decline: halt immigration.

Ten years ago an influential survey by Friedberg and Hunt (1995) summarized the literature concluding that, “the effect of immigration on the labor market outcomes of natives is small.” Since then, a number of studies have re-examined the issue refining the estimates by accounting for important problems related to the endogeneity of immigrant inflow and the internal migration of US workers. Even with more accurate and sophisticated estimates at hand, a consensus has yet to be reached: some economists identified only small effects of immigration on wages (Card, 2001) while others found large negative effects (Borjas, Friedman and Katz, 1997).Recently, however, the latter view of a large negative impact of immigration on wages, particularly of uneducated workers, seems to have gained momentum.

Our paper builds on section VII of the article by George Borjas (2003) but takes a fresh look at some critical issues that results in substantial revisions of several results


Building on the work of economist George Borjas, Ottaviano and Peri, use the same "general equilibrium" approach to analyze his previous findings. Their conclusions vary greatly from those of immigration restriction advocate Bojas.

  • First, the average wage of US-born workers experiences a significant increase (rather than a decrease) as a consequence of immigration. This results is the consequence of the imperfect substitutability between U.S. and Foreign born workers so that immigration increases wages of U.S.-born at the expenses of a decrease in wages of other foreign-born workers (previous immigrants).

  • Second, the group of least educated U.S.-born workers suffers a significantly smaller wage loss than previously calculated. The fact that uneducated foreign-born do not fully and directly substitute for (compete with) uneducated natives, but partly complement their skills, is the reason for this attenuation.

  • Thirdly, all the other groups of US-born workers (with at least an high school degree) who accounted for 90% of the U.S.-born labor force in 2004, gain from immigration.

  • Finally, even considering only the ”relative” effect of immigration on real wages of natives, namely its contribution to the widening of the College-High School Dropouts gap and of the College-High School gap, we find only a small contribution of immigration to the first and an even negative contribution (i.e. reduction of the gap) on the second for the 1990-2004 period. The group whose wage is most negatively affected by immigration is, in our analysis, the group of previous immigrants who, however, probably have the largest non-economic benefits from the immigration of spouses, relatives or friends making them willing to sustain those losses
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    On of the key reasons Ottaviano and Peri find that immigrant workers don't present as great a threat to unskilled native workers as previously thought is because foreign-born workers are not "perfect substitutes" for US workers in the same education and skill class. Foreign labor often brings different and complimentary skills and/or talents to the workforce. Even in the lowest-skilled jobs native workers have certain skills, ie; language and cultural knowledge that immigrants do not. Expanding on the work of David Card and Rachel Friedberg, the authors explain the concept quite simply: "After all, a Chinese cook, an Italian tailor, a French hair-dresser, a Belgian baker or a Brazilian guitarist produce services that are differentiated from those of their U.S.-native counterparts … just as the talent of Indian-born engineers or German-born physicists may be complementary to (and hard to replace by) those of natives."

    We find strong and robust evidence that U.S. and foreign-born workers are not perfect substitute within an education experience group, probably due to their choice of jobs and occupations. We also find that investments respond fast and fully to immigration, already within one year. This implies an average benefit to wages of natives from immigration, already in the short run, distributed as a small loss to the group of high school dropouts and significant wage gains for all the other groups of U.S. natives. The group suffering the biggest loss in wage, rather than natives, is the one of previous immigrants, who compete for much more similar jobs and occupations with the new immigrants. Finally, our model implies that it is very hard to claim that immigration has been a significant determinant in the deterioration of wage distribution during the 1990’s and 2000’s. Only one eight of the sub-average wage performance of high-school dropouts in the 1990-2004 period can be attributed to immigration, while immigration helped wages of high school graduates (the second worst performers of the period). As 30% of U.S. workers are in the group of high school graduates (vis-a-vis only 10% in the High school dropout group) it may be reasonable to consider the college-high school wage premium as the most meaningful measure of wage dispersion. In this case immigration actually worked to reduce that wage gap in the 1990-2004 period.

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