Economic effects of immigrants on native and foreign-born workers: complementarity, substitutability, and other channels of influence.

• Author: Greenwood, Michael J.

13. Greenwood, Michael J., and John M. McDowell, "The Factor-Market Consequences of U.S. Immigration." Journal of Economic Literature, December 1986, 1738-72.

14. Greenwood, Michael J., Gary L. Hunt, Dan S. Rickman, and George I. Treyz, "Migration, Regional Equilibrium, and the Estimation of Compensating Differentials." American Economic Review, December 1991, 1382-90.

15. Grossman, Jean B., "The Substitutability of Natives and Immigrants in Production." Review of Economics and Statistics, November 1982, 596-603.

    1. Introduction

       Do immigrant workers cause the reduction of domestic wage rates and displace domestic workers from jobs? This question is central to the current debate regarding the economic consequences of U.S. immigration. Moreover, it has been a key issue in the U.S. for over 100 years. As discussed in Greenwood and McDowell [13], the economic consequences of U.S. immigration are highly debatable. On one side of the debate are those who argue that immigrants take jobs that would otherwise be filled by other U.S. workers, depress domestic wages, and worsen working conditions. To the extent that the immigrants are poorly trained and lack education, they have negative impacts on those Americans with whom they compete in the labor market, such as blacks, Hispanics, youths, and others (including prior immigrants) whose incomes tend to be low and whose unemployment rates tend to be high.

       On the other side of the debate are those who argue that immigration has positive impacts on other workers. Such effects supposedly are due primarily to the innovative and entrepreneurial abilities of the immigrants and to the increased rate of capital accumulation they foster. Others argue that less-skilled immigrants fill jobs that domestic workers find undesirable and thus do not directly decrease the employment opportunities and wages of native labor.

       Empirical findings to date reflect this uncertainty regarding the effects of immigrants on native workers. For example, Grossman concludes that both second-generation and foreign workers are substitutes for native workers, but the relevant elasticities are sufficiently small that "large inflows of immigrants . . . do not pose serious economic threats to natives" [15, 602]. These findings are consistent with Borjas's [3] conclusion that during the 1970s male immigrants had a small negative influence on the earnings of native white men. More recent research reaches similar conclusions [7; 20; 21]. Work reported by Altonji and Card [1] is qualitatively comparable, but the estimated impacts on less-skilled natives under their preferred estimation method is somewhat higher than other estimates.

       On the contrary, focusing on the effect of first-generation Hispanics on the earnings of second- and third-generation Hispanic workers, King, Lowell, and Bean [18] find little support for the substitutability hypothesis. Only for the subsample of workers classified as laborers does their evidence suggest a competitive influence of immigrants on native wages, and even then the influence is slight.

       Although the results of the various studies are somewhat sensitive to the country of origin of the immigrants, to the specific groups of native workers studied, to whether the immigrants are legal or illegal, and to other factors, in general they suggest that if immigrants are substitutes for native workers, the degree of substitution is small. However, a major problem with existing studies is that they focus on a single channel of immigrant influence, namely, the production structure channel. That is, they are concerned with whether immigrants and natives are substitutes or complements in production. However, immigrants may also influence native workers through a number of other channels, and these additional influences may offset or reinforce those exerted through the production structure channel. In this paper, we develop a structural model of immigrant/native labor demand and labor supply that allows us to distinguish the effects of immigrants in such a way as to identify the channels through which wages and employment are influenced. We show that although immigrants and natives are substitutes in production, when other channels of influence are taken into account, immigrants can positively affect the employment and wages of native workers. However, they cause somewhat lower wages among other immigrants.

    2. Channels of Influence and the Model

       Channels of Influence

       Several distinct channels are evident through which the location of immigrants can influence the employment and wages of other U.S. residents. The approach that we implement incorporates several main channels. It is useful first to give a qualitative description of the various channels of influence that the approach will treat before we introduce the equations required by our approach.

       Production Structure Channel. An increase in the number of immigrants in an area increases the supply of immigrant labor, which will decrease immigrant wage rates, ceteris paribus. If immigrants and natives are substitutes in production, immigrant employment will increase and native employment will fall, ceteris paribus. The magnitudes will depend on the relevant own-and cross-price elasticities. If immigrants and natives are complements in production, then this implies substitutability with respect to capital (given three input factors). Under conditions of native-immigrant complementarity, a fall in immigrant wage rates will lead to the substitution of immigrant labor for capital and an increase in immigrant employment. An induced increase in native employment will also occur.

       Local Demand Channel. The production structure effect can lead to either a decrease or an increase in aggregate labor income depending on whether immigrants and natives are complements or substitutes and the size of the elasticities. Consequently, this effect can lead to higher or lower levels of local final demand in an area. Moreover, the larger the per capita wealth of the immigrants, the larger their sources of non-labor income, and therefore the greater will be the stimulation of local final demand in the area due to their entry. Many attempts to model the effects of immigrants on native workers assume that if the immigrants own capital, they leave it behind. This seems like an unrealistic assumption, but the relative magnitude of the effect of the assumption is an empirical question. Given the area's propensity to import goods to satisfy local final demand, the enhanced local final demand will result in additional local output and therefore in additional labor demand. The net effect of this channel of influence will depend on whether the change in aggregate labor income and non-labor income is positive or negative.

       Net Export$Demand Channel. An increased supply of immigrants and the resulting fall in immigrant wage rates will lead to reduced unit production costs, ceteris paribus. This reduction should make the area more competitive in national and international markets, which should in turn lead to an increase in the quantity of area net exports demanded and to increases in area labor demand.

       Labor Force Participation Channel. If labor force participation rates are sensitive to real wage rates, and if increased immigration causes wage rates to fall (rise), then part of the adjustment will occur through employment reductions (increases) in contrast to wage changes bearing all of the adjustment.

       Migration Channel. If lower (higher) real wage rates induce net out-migration (in-migration), then this channel also transfers some of the adjustment from wage rates to employment. The net export demand channel is labor demand enhancing. The local demand channel is as well in areas that have aggregate real labor income gains. The labor force participation and migration channels shift part of the adjustment of more immigrants from wage rates to employment. The basic idea that underlies the model developed below is to assess the relative importance of each channel of influence discussed above. Whether immigration represents a net cost or a net benefit to the original U.S. workers is then determined in light of the various channels through which immigrants might affect others.

       The Model

       Depending on the relative strengths of these various channels of influence, the location of immigrants in an area could result in better or worse economic conditions for existing residents of the area. To get at the relative strengths of the various influences, we estimated an empirical model comprised of the following equations:

       Unit cost function:

       c = c([w.sub.1], [w.sub.2], [w.sub.3]) (1)

       Input demand functions:

       [Mathematical Expression Omitted]

       [Mathematical Expression Omitted]

       [Mathematical Expression Omitted]

       Output demand function:

       [q.sup.d] = [q.sup.d](p, Y/Np, N) (5)

       Local price:

       p = [Phi]c (6)

       Input supply functions:

       [Mathematical Expression Omitted]

       [Mathematical Expression Omitted]

       Capital supply function (exogenous):

       [w.sub.3] = [W.sub.3] (rcok) (9)

       Income identity:

       Y [equivalent] [w.sub.1][x.sub.1] + [w.sub.2][x.sub.2] + [YNL.sub.1][N.sub.1] + [YNL.sub.2][N.sub.2] (10)

       Factor market equilibrium:

       [Mathematical Expression Omitted]

       [Mathematical Expression Omitted]

       [Mathematical Expression Omitted]

       Output market equilibrium:

       [q.sup.s] = [q.sup.d] = q. (14)

       Equation (1) is the unit cost function. Unit cost and the input demand functions are derived from a three-input cost function incorporating native labor, foreign-born labor, and capital. Constant returns-to-scale (CRTS) is imposed as a maintained hypothesis. Unit costs depend positively on the three factor prices: [w.sub.1], [w.sub.2], [w.sub.3]. Additional regularity conditions theoretically required for equation (1) to be a true unit cost function are discussed in the Model Estimation section.

       Input demand functions are derived via Shephard's lemma from the cost function. Equations (2)-(4) are the factor demand equations...