Tuesday, March 6, 2007

New Study: Effects of Immigrant Workers on Wages and Employment.

One of the most heated debates over immigration and immigration reform has not been taking place in Congress or on the campaign trail. Over the last few years in the halls of academia a debate has raged between two opposing schools of labor economists trying to understand the ultimate costs and benefits of immigrant workers to the US economy. One camp claims that immigrants provided a net benefit to the economy and US workers, the other claims immigrants take jobs from US workers, particularly those with the least education and opportunities. Armed with statistical data, mathematical formulas, charts, and analytical theories, they have argued back and forth trying to answer a key question to any successful immigration policy: Are immigrant workers good or bad for the US economy and more importantly how do they effect the wages and job prospects for native-born workers?

The debate has focused mostly on the relationship between immigrant and native-born workers at the bottom of the economic ladder where competition between the two groups would seem to be the most intense. Conventional wisdom would dictate that given the basic laws of supply and demand, an increase in low-skilled workers would increase competition and drive down wages for all those in that job category.

A new report by the Public Policy Institute of California should change the nature of that debate.

Released last week, "How Immigrants Affect California Employment and Wages", by Giovanni Peri, Associate Professor of Economics at the University of California, Davis, looks at over 40 years of data to determine what effect increasing immigrant populations have had on the job market for native Californians.

As the home to almost 30 percent of all foreign-born workers in the United States, California was chosen as the subject of the study not only because of its large immigrant population, with 1/3 of its workforce being foreign-born, but because 2/3 of its immigrant workforce are without high school diplomas – a demographic believed to have the greatest negative effect on native workers with similar educational backgrounds. Additionally, the state's experience with immigrant populations can be viewed as a model for the entire country as immigrant populations begin to disperse into more non-traditional areas and regions.

The study found that increased immigrant populations had an overall positive effect for American workers across all age and educational levels.

  • First, there is no evidence that the inflow of immigrants over the period 1960–2004 worsened the employment opportunities of natives with similar education and experience. The study finds no association between the inflow of immigrants and the out-migration of natives within the same education and age group.

  • Second, according to our calculations, during 1990–2004, immigration induced a 4 percent real wage increase for the average native worker. This effect ranged from near zero (+0.2%) for wages of native high school dropouts and between 3 and 7 percent for native workers with at least a high school diploma.

  • Third, the results indicate that recent immigrants did lower the wages of previous immigrants. Wages of immigrants who entered California before 1990 were 17 to 20 percent lower in 2004 than they would have
    been absent any immmigration between 1990 and 2004

The positive effect of immigrantion for the vast majority US workers and on the overall economy is not a new finding, numerous studies have drawn the same conclusions. Most notably were last years, "Rethinking the Effects of Immigration on Wages." by Università di Bologna's Gianmarco Ottaviano and Giovanni Peri from UC Davis, "Growth in the Foreign-Born Workforce and Employment of the Native Born", by the Pew Hispanic Center, and 2005's "Is the New Immigration Really So Bad?" by Andrew Card of UC Berkeley. All came to the same general conclusion to varying degrees.

What is new, is that Peri's study shows a net positive effect for all workers, even those with limited educations and low skills. Perhaps even more important is that he has managed to document the concept of "imperfect substitutes" and "complimentary" workers first explored in earlier studies.

In essence his hypothesis is that simple supply and demand models are not applicable to the current immigration situation since immigrants bring different skills and experiences to the workplace and rather than being "substitutes" for native workers they are most likely to "compliment" US workers, increasing overall productivity and opportunities for the native born.

In nontechnical terms, the wages of native workers could increase because the increased supply of migrants is likely to put native workers in jobs where they perform supervisory, managerial, training, and in general interactive and coordinating tasks, which makes them more productive. Moreover, the presence of new workers also implies higher demand for consumption, so that immigration might simply increase total production and demand without depressing wages.

The concept is not new, economist Rachel M. Friedberg, of Brown University documented it in 1997 in her study of Russian immigrants in Israel, "The Impact of Mass Migration on the Israeli Labor Market". Friedberg found that "… the Russians had, if anything, improved wages of native Israelis. She hypothesized that the immigrants competed more with one another than with natives. The Russians became garage mechanics; Israelis ran the garages."

After analyzing 40 years of census and other data Peri expands on those findings and explains his results with a simple explaination:
Typically, two very important dimensions of workers’ skills are their education and their labor market experience. Workers with different education and experience tend to fill different jobs. Rather than competing with each other in the labor market, they complement each other.

We say that two types of workers are “substitutes” (competitors) if the increased supply of a group decreases the wages of the other (other things equal). They are complements if the increased supply of a group increases the wage of the other.

As an example, think of the construction sector. Workers with a college degree in that sector are likely employed as structural engineers, whereas workers with some college education would be employed in accounting and secretarial jobs, and workers with a high school diploma or less (but with applied skills) might be masons, plumbers, or electricians. The increased supply of masons, plumbers, and electricians would allow more construction companies to start up (or existing ones to expand). In the long run, it would increase the demand for and wages of (complementary) secretaries and engineers.

At the same time, the availability of young, inexperienced masons may increase the need for older, more experienced masons in the role of supervisors, coordinators, and team leaders. Hence, across education and experience groups, the increased supply of one group increases the demand (and productivity) of other groups through these linkages.


Even workers with the same education and experience but in different occupations are usually not purely competing with each other. In our previous example, a mason and a plumber, both with a high school diploma and between ages 27 and 36, complement each other to a significant degree: An increased supply of masons allows construction of more homes, increasing the demand for plumbers.

However, if the supply of plumbers becomes small enough (or the supply of masons large enough), some masons may adapt themselves to do plumbing work, implying some degree of competition (substitutability) between the two groups.

Complementarities between different workers are particularly important in evaluating the labor market effect of foreign-born immigrants. Because of their skills, informational constraints, preferences, and history, recent immigrants are usually employed in jobs, occupations, and sectors where previous immigrants were already predominantly employed. Hence, the jobs they compete for are most closely substitutes for those held by other immigrants, whereas they tend to be more complementary to jobs held by natives. For instance, many past and new immigrants are employed as plaster and stucco masons or as agricultural laborers. In contrast, occupations such as plumbers or farm managers require similar degrees of formal education and experience but employ mainly native workers. Therefore, recent immigrants affect the productivity and wages of previous immigrants and natives differently and are potentially beneficial to natives.

The importance of Peri's new study cannot be overestimated. In addition to looking at the effects of immigrants on wages he also addresses the theory that as immigrants moved into a workforce, native workers, facing added competition, relocate to other states with fewer immigrants. His results showed that "immigrants do not displace native workers with similar education and age. Natives did not systematically move out as new immigrants moved into California. Instead, the net effect was an increase in the overall supply of California labor in
each age-education group."
As of now, one-third of California’s total labor force consists of immigrants, two-thirds of its uneducated workers come from abroad, and a burgeoning foreign-born population has grown by over 40 percent in the last 14 years.

As a result, one might think that native Californians (particularly the unskilled ones) must have suffered, to an extreme, the negative effects of this “immigration crisis” on their employment opportunities and wages.

The present study seems to say otherwise. Immigrants evidently do not increase the tendency of natives with similar skills (education and experience) to migrate out of state or to lose jobs. Moreover, between 1960 and 2004, immigration had a much more negative effect on the wages of previous immigrants than on those of native workers. This suggests that native and foreign-born workers perform complementary rather than competing tasks in production. In fact, an increase in the number of immigrants evidently increases the demand for tasks performed by native workers and raises their wages. Our median estimates indicate that these complementarities of immigrants spurred wage growth of natives by about 4 percent in 14 years.

These results should certainly be taken into account by policymakers as they consider immigration reform. The findings would seem to defuse one of the most inflammatory issues for those who advocate measures aimed at “protecting the livelihood of American citizens.”

Because California leads the nation in immigration trends, this study may provide glimpses into the future and the potential effects of immigration on wages and employment at the national level. PPIC

Related media coverage
Sacramento Bee
Press Telegram
San Jose Mercury News
LA Times
McClatchy Newspapers

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