Bryan Caplan  

The Immigration/Labor Demand Elasticity Puzzle

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While labor demand elasticity is pretty clearly negative, virtually all estimates have an absolute value less than 2.  Yet estimated effects of immigration on native wages are tiny.  Kerr and Kerr's summary is typical.
The documented wage elasticities are small and clustered near zero. Dustmann et al. (2008) likewise found very little evidence for wage effects in their review of the UK experience. This parallels an earlier conclusion by Friedberg and Hunt (1995) that immigration had little impact on native wages; overall, their survey of the earlier literature found that a 10% increase in the immigrant share of the labor force reduced native wages by about 1%. Recent meta-surveys by Longhi et al. (2005, 2008) and Okkerse (2008) found comparable, small effects across many studies.
See here for details.

How are both these results possible?  The easy answer is that "wage elasticity of labor demand" and "wage elasticity of immigration" are conceptually distinct.  Quite true, but they're also conceptually related.  Indeed, unless labor supply is fairly elastic, a low wage elasticity of labor demand seems to imply a high wage elasticity of immigration.

What gives?  Top potential reconciliations:

1. Labor supply is actually quite elastic.  Tempting, but this implausibly means immigration avoids wage effects by inducing lots of voluntary native unemployment.  Kerr and Kerr also report very little evidence of this.

2. Left-wing bias.  Within economics, labor is known as a liberal field of study.  So labor economists gravitate toward (a) low estimates of labor demand elasticity, and (b) low estimates of the economic harm to natives of immigration - despite the tension between these results.  While I find this somewhat plausible, labor economists also have offsetting publication biases in favor of statistically significant results.

3. Native and foreign labor are distinct goods, so an increase in the supply of immigrant labor barely increases supply in the labor markets where most natives actually work.  In fact, native and foreign labor are generally complementary goods, so when the supply of immigration goes up, so does the demand for most native workers.  Implausible?  Check out the weighty evidence in its favor.

Other stories?

COMMENTS (12 to date)
John Hawkins writes:

Could immigration labor supply bring its own demand? It is a littly "Say's Law"-y, but it jibes with my own instincts and the absolute 0 number that often comes up in the literature.

Thomas B. writes:

Well, here's a possible story, no idea if would match any data:

Labor contracts are sticky so adjustments only happen in recessions.

Existing research misses labor market adjustments by looking for effects in normal time frames, assuming adjustments should happen immediately. Research might even avoid periods of economic shock as outliers.

Maybe employers delay hard choices about staff when basic business conditions are favorable (they can reassign earnings or borrow during good times to defer reckonings). Then when times are bad it catches up to them.

You might measure this by seeing if minimum wage or immigration levels are correlated with time of recovery for the relevant labor class in future recessions.

No idea how it would turn out. Like you, I'm generally supportive of immigration and skeptical of MW, but my hunch is that supply and demand probably work in some normal boring way, cruelly disregarding my preferences.

Eliezer Yudkowsky writes:

Immigrants bring with their own demand and don't change the "per capita supply of labor" or "per capita demand for labor" leaving equilibrium labor prices unchanged. Artificial changes to the equilibrium price a la minimum are a different story and distinct phenomenon.

(This seems like the obvious thought? Surely someone must have addressed this already, if it's not already the standard explanation? Or is it subsumed in 'complementarity'?)

Amelanchier writes:

Endogeneity bias - immigrants move to places with strongly growing labor demand. This implies that the wage-reducing effects of immigration in the literature are underestimated.

Daniel Kuehn writes:

First, I strongly agree that you need to distinguish "immigration elasticities" or "minimum wage elasticities" from demand elasticities, because you're not necessarily just moving along a demand curve in either case.

I haven't done a thorough review of the immigration wage effect literature, but I've done a little and you'll also see a difference between studies of geographic labor markets and studies that look at specific occupational labor markets. In the former at the very least immigrants are a source of demand too, there may be complementarities, etc. In the latter you can find bigger effects and there's more direct competition (see a few papers in the 2015 JOLE). This is all pretty reasonable to me. I'm always amazed to see how hard some people find it to accept that immigration is really good for the economy but direct competition with a big immigrant flow is going to hurt certain workers.

Daniel Kuehn writes:

Amelanchier's point is important too - some of the IVs in this literature are pretty questionable (that's a redundant sentence, I know). There's little in the way of clean natural experiments (although obviously a few prominent examples).

pyroseed13 writes:

The claim that immigrants and natives are generally complementary goods only holds if you fail to adequately distinguish between high school dropouts and those who are still in high school, as Peri has done and has been pointed out by Borjas multiple times now. Honestly I'm not sure why proponents of more immigration continue to cite the fundamentally flawed findings of Peri when there is far more persuasive evidence that immigrants do in fact compete with native workers for some segments of the population.

Nicholas Weininger writes:

You may think the voluntary native unemployment hypothesis in #1 implausible, but alas, a large chunk of the country does not. See every news story about poorly educated white men playing video games all day and supporting Trump because they feel that immigrants have outcompeted them for low-wage jobs.

MikeDC writes:

Is this unexpected in a heavily regulated labor market?
* As noted, immigrants bring their own demand to partially offset the numbers.
* Substantial portions immigrants, especially illegal immigrants, are employed at less than the legal minimum wage/benefit package.

I have the suspicion that most labor law is in effect similar to Jim Crow laws in the sense that it creates vast segregation between those who are employed legally and those who are not. Those who are employed illegally at $7/hr cash off the books would like the $15/hr w/benefits "minimum wage" jobs in San Francisco, but it's an entirely different market.

Zhou writes:

Low-wage labor is a distinct market from high-wage labor (which generally requires a college degree or ownership of capital).

Low wage immigrants compete with low-wage natives for jobs (i.e., restaurant and construction jobs). Increasing the number of low-wage immigrants, drives down the price of labor for the low-wage jobs. Low-wage natives then elect to collect social welfare instead of engaging in the now lower wage,low-wage jobs. As a result, fewer low-wage natives are working and the average wage rate for all natives (combining low-wage and high-wage) is relatively unchanged.

Mr. Econotarian writes:

Language skills are also complementary. There are many jobs in the US where you have to be fairly fluent in English. Also an acquaintance in the home building trades tells me that now speaking Spanish is an advantage in that industry.

Floccina writes:

I am puzzled along with Hawkins and Yudkowski. Wouldn't immigrants increase demand for everything from smart phones to homes to haircuts leaving per capita supply of labor unchanged? what are we missing? In fact an increase would require more long lasting goods like housing.

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