Figure 1: The Textbook Economy
Figure 1 presents the familiar graphical analysis which we have labeled the
“Textbook Economy” model. Before immigration, the labour supply curve is
S0. Together with the demand curve, it
establishes an equilibrium wage of W0 and a
quantity of resident labour hired of R0. If a
flow of immigrant workers equal to M arrives, the supply curve
for labour is pushed to the right as shown by
S1. Here it is assumed that the supply of
immigrant labour is perfectly inelastic, that is, wages do not influence the
amount of immigrant labour supplied. The outward shift of the labour
supply curve lowers the equilibrium wage to W1,
reduces the employment of residents from R0 to
R1, and increases total employment to
R1+M. The model assumes
“full employment,” so the decline in resident employment is due to the
voluntary withdrawal of labour services by residents unwilling to put forth the
same effort at the reduced wage.
As students of the subject know, however, the presence of immigrants is often associated with high, not low wages. For example, when Friedberg and Hunt plot the average wage and salary income of the 30 largest cities in the United States in 1990 against the fraction of those cities’ population that is foreign-born they find that “cities with higher immigrant densities also have higher mean incomes." In a study of the American economy a century earlier, Goldin also found a strong positive relationship between the fraction of a city’s population that was foreign-born and the city’s average wage (Goldin 1994: 247).
There is another prediction of the simple model that fails the empirical test. Real wages in sectors that employed a large and growing number of immigrants during America’s Age of Mass Migration did not fall over time; they rose. Real wages at the end of the period were higher than at the beginning despite the influx of immigrants.4
So what explains the failure of the straightforward predictions of the textbook model to accord with the facts? As we have noted, one explanation may be native flight or “crowding out.” This view takes as a starting assumption the notion that before the arrival of new immigrants the regional labour markets are in a country-wide equilibrium with an identical wage (after adjustments for particular regional conditions) prevailing in all markets. Thus the arrival of immigrants would push the local wage below the national level, inducing some residents of the impacted market to move to another area. In doing so, they restore a national equilibrium. This explanation is favoured by Hatton and Williamson (1998, Figure 8.4: 166). They relax the textbook assumption that native workers are confined to the local market and postulate as a consequence a highly elastic supply of resident labour.
Locational Choices of Immigrants and Natives: State-Level Analysis
… an additional 100 foreign-born in-migrants to these northeastern states increased native-born out-migration by 40. While this is not quite the one-for-one Filer found for late-twentieth century America …, it is substantial crowding-out nonetheless” (Hatton and Williamson, 1998: 168-169 citing Randall Filer 1992).
Hatton and Williamson’s conclusions are based on an analysis of data assembled by Hope Eldridge and Dorothy Swaine Thomas (1964) from the decennial censuses. Hatton and Williamson focus on the three decades beginning in 1880. To identify possible crowding out, they begin by comparing regional differences in net native- and foreign-born in-migration rates calculated as a share of the native population. They call attention to three different regional patterns: (1) in the Northeast, low (but non-negligible) rates of native out-migration coupled with high rates of foreign in-migration; (2) in the South, high rates of native out-migration coupled with very low rates of foreign in-migration; and (3) in the West, large inflows of both the native- and the foreign-born. Hatton and Williamson concede that there was no crowding-out in the South or the West. Few immigrants were going to the South, so they could not be the reason for native departures. Both natives and immigrants were going West in large numbers, so immigrants do not appear to have thwarted the natives’ westward march. If crowding out occurred, it would have to be in the populous 14 states of the Northeast that were attracting large numbers of immigrants while at the same time losing many of their native-born. It is to states in this region that the Hatton-Williamson crowding-out results reported above apply. Here we review their evidence.
Figure 2: Hatton and Williamson’s Test of Crowding Out5