Labour Market Flooding? Migrant Destination and Wage Change during America's Age of Mass Migration
Published on: Mar 12, 2007

Susan B. Carter is Professor of Economics at the University of California, Riverside.

Richard Sutch is Distinguished Professor of Economics and History at the University of California, Riverside and a research associate at the National Bureau of Economic Research.

Influential voices in the media and in public policy circles have sustained the impression and perhaps heightened the concern that high levels of immigration harm resident Americans by reducing their wages.  This perception of “labour market flooding” – sometimes billed as “common sense” (Brimelow, 1995) – is bolstered by the logic of introductory-level microeconomic theory.  That analysis begins by assuming a static labor market in which an increase in the supply of labor from immigration will lower the wage employers will offer. Immigration economist, George Borjas, emphasized this logic in the title of a recent paper, “The Labor Demand Curve Is Downward Sloping” (Borjas, 2003), which refers to the graphic representation of this abstract labor market model.

Nonetheless, an impressive number of empirical studies based on recent data find no evidence of a negative impact of immigration on resident wages.  At the conclusion of a survey of the literature published in 1995, Rachel M. Friedberg and Jennifer Hunt report:

Despite the popular belief that immigrants have a large adverse impact on the wages and employment opportunities of the native-born population, the literature on this question does not provide much support for this conclusion.  … [E]mpirical estimates in a variety of settings and using a variety of approaches have shown that the effect of immigration on the labor market outcomes of natives is small.  There is no evidence of economically significant reductions in native employment.  Most empirical analysis of the United States and other countries finds that a 10 percent increase in the fraction of immigrants in the population reduces native wages by at most 1 percent (Friedberg and Hunt 1995: p. 42).1

Yet immigration’s impact on wages and employment is extremely difficult to measure.   This is why the debate continues.  Several well-known economists, with Borjas prominent among them, contend that immigration reduces the economic well-being of residents (Borjas 1995, 1999a, 2003).  The negative effect of immigration is hidden, they suggest, because native-born workers respond to the arrival of immigrants by moving elsewhere, “voting with their feet” (Borjas 1999b: 1740).  

In this view immigrants “crowd out” native workers who flee to areas less impacted by immigration.  Indeed, if every arriving immigrant worker inspired one resident departure, total employment in the local market and therefore the wage would remain unchanged.   The residents’ departure disperses the immigrants’ wage-depressing effect across the entire economy where it is difficult to detect precisely because it is pervasive.  Therefore the question of the wage effects of immigration is intimately related to the locational choices of foreign and native workers.

The empirical evidence on this “crowding out” hypothesis for the modern period is mixed and no consensus has been reached.  Investigating data for the 1970s and 1980s, Randall Filer (1992), Borjas (2001) and several others find a negative relationship between immigration (or net immigration) and out-migration of resident workers.  Research by Michael White and Yoshie Imai (1994), Richard Wright, Mark Ellis, and Michael Reibel (1997), David Card (2001), and Mary Kritz and Douglas Gurak  (2001) found either no relationship between the entry of immigrants and the exit of the native-born or a positive one; that is, both immigrants and the native-born moved to the same cities.  Because the question of harm is, in Borjas’ words, “at the core of the immigration debate” (Borjas 1999a: 62-63), the issues of locational adjustment and wage effects remain hotly contested within the economics profession.2 Kritz and Gurak, in a review of this debate, suggest that the confusing results reported in the literature are a product of different model specifications,  different populations studied,  different regions, and  different time periods chosen for analysis (Kritz and Gurak 2001: 134-135).3

This essay attempts a fresh empirical look at the economic consequences of immigration with particular attention to the argument that native-born workers are pushed out of labour markets flooded by foreign workers.  Our approach shifts attention away from the recent experience to the decades centred on the centennial year 1900.  There are several reasons for thinking that an examination of this historical “Age of Mass Migration” may prove helpful.  During that period immigration flows were considerably heavier than they are today, especially when compared with the size of the resident population.  If a negative impact of immigration is hard to find in modern data, perhaps it will reveal itself during a period of much more intense labour market pressure.  Second, most of the economists who argue that there ought to be significant negative impacts of immigration have taken a short-run, static point of view and thus have assumed away any relationships between immigration, structural changes, and economic growth.  If the objective is to measure the net effect of immigration, not just the partial short-term impact, then one needs to take a longer historical perspective.

Two widely-cited studies, one by Claudia Goldin and the other by Timothy Hatton and Jeffrey Williamson, conclude that the mass immigrant arrivals during the "Age of Mass Migration" exerted strong downward pressure on the earnings of resident workers.  Goldin reports, “wages were depressed in cities having an increase from 1899 to 1909 in the percentage of their populations that was foreign born” and “the results are even more supportive of the view that immigration severely depressed the wages of less-skilled labor” (Goldin 1994: 252).  Hatton and Williamson conclude that “a 1 percent rise in the labor force due to immigration would have reduced the real wage in the long run by 0.4 percent … or 0.5 percent”  (Hatton and Williamson 1998: 172).  Hatton and Williamson also report that crowding out was a significant phenomenon between 1880 and 1910, presumably as natives fled the regions that were attracting the immigrants  because the wages in those labour markets fell in response to labour market flooding.  Given the large magnitude of the immigrant flows, the age and skill mix of the immigrants relative to the existing population, and the less-structured character of the American labour market at that time, these conclusions are certainly plausible.  

But are they correct? A dynamic historical analysis, such as that offered by historians and theorists of economic growth, suggests not. A long-term historical perspective indicates that, even though immigration may somewhat slow the rate of growth in  wages, it also has a stabilizing effect in sustaining growth by raising levels of consumption and investment and by differentially expanding labour supply to the  dynamic sectors of the economy. 

Modeling the Impacts of Immigration

Economic analyses of the consequences of immigration usually take as their starting point a static model of the labour market.  In the simplest version of this model, labour  is assumed to be homogenous in its productivity and other relevant characteristics so that immigrant and native-born labourers are perfect substitutes.

According to this model, demand is assumed to be unaffected by immigration itself.  Thus, for example, the analysis ignores the impact of immigrants in increasing demand for final products.  It assumes an economy that is closed to trade with other regions so that an inflow of immigrants cannot lead to an increase in the production of traded goods or an in- or out-migration of resident labour. The increase in labour relative to capital is not allowed to stimulate  an inflow of capital or the adoption of new production techniques.  We will return to relax these restrictive assumptions later.  Our discussion of this simple version is intended, not as a straw man, but as a starting point for discussing our analytical framework.