Labour Market Flooding? Migrant Destination and Wage Change during America's Age of Mass Migration
Published on: Mar 12, 2007
Figure 5: Dynamic Economy Model

A simple expression of this possibility is depicted in Figure 5, which we label the “Dynamic Economy” model.  We begin with the assumption that wages in all local labour markets are in equilibrium at the intersection of the original demand and original supply curve, the point shown by W0 and R0.  We then let the labour demand curve in a selected city shift outward, perhaps reflecting a resource discovery.  As a result, wages in that city might be expected to rise to Wh and resident employment to expand to Rh.  However, since immigrants are mobile and attentive to economic rewards, they select the city with the dynamic economy over all others.  When they do so, they cause the supply of labour curve to shift out (and become more elastic) at wages above W0.  Employment expands from R0 to R1+M.  Although the resulting wage rate, W1, is below the counterfactual wage Wh, it may nevertheless remain for some time above the initial level W0, and therefore above the wage in cities that did not experience the positive demand shock.  Resident employment also expands from R0 to R1.

Figure 5 provides a framework for interpreting Goldin’s finding of a negative wage impact.  When she reports, “wages were depressed in cities having an increase … [in their] foreign born” (emphasis added), she is referring to the difference between Wh and W1, not to a wage below W0.  This subtlety is overlooked in many summaries of Goldin’s contribution.  Reviews of Goldin reported by Hatton and Williamson (1998: 170), Dolmas and Huffman (2004: 1129), and Graham (2004: 60) suggest that immigrants depressed wages to a level below W0.  This was not the case.  Resident wages were high in cities with large numbers of immigrants.

The dynamic economy model assumes a demand shock unrelated to immigration.  A second mechanism that would explain the failure of immigration to have a depressing impact on wages is an induced demand shift, that is, a shift in demand that responds to the arrival of immigrants.  More foreigners or indeed more population from any source by itself should not mean lower wages or increased unemployment because the additional people not only supply labour but add to the demand for output in a closed economy.  Even if we relax the textbook assumption of a closed economy and allow local labour markets to import goods from another region to meet the expanding demand, this induced demand story will still be valid.  This is because some goods and services must be produced where they are consumed – restaurant meals, construction, and educational and medical services.  In addition, an open economy will respond to an increase in its labour force by expanding production of tradable commodities in which it has a comparative advantage.  Thus an exogenous entry of immigrants that produces an outward shift in the labour supply curve will prompt a positive response from the labour demand side of the market.  It is also conceivable that, with an open economy, the impact of immigration may increase resident wages if the expansion of local industry pursuing a comparative advantage also allows those firms to exploit economies of scale (Romer 1996; Brezis and Krugman 1996) or if strong complementarities between immigrants and residents are at work (Ottaviano and Peri 2005).

Conclusion

The dynamic and open economy models imply that immigration does not harm resident workers in the common-sense way in which the term “harm” is generally understood.  In the cases we examined, the wage either increases or remains the same and the employment of residents is not reduced.  The empirical evidence from 100 years ago suggests that wages of residents increased and the local employment of residents increased in the presence of heavy immigration.  The estimates reported by Goldin and by Hatton and Williamson of a wage setback for resident workers are only valid if we interpret them to suggest that resident wages would have risen even faster without immigration.9  Such a counterfactual estimate is problematic for at least two reasons.  If one is looking either for an explanation of political opposition to immigration in the past, as was Goldin or Williamson in an earlier article (1982), or if one is defending a proposal to restrict immigration in the present, what is likely to matter most is whether real wages fall in the presence of immigration not whether the growth of real wages is  slowed (Williamson 1982: 256).  Second, as articulated by Goldin and by Hatton and Williamson, the counterfactuals that they offer assume that there is no impact of immigration on the forward momentum of the economy.  Yet, there is every reason to suppose that without immigration, wage growth, even in these high-wage cities, might have been slower or even halted.  There is a broad consensus that immigration accelerated the rate of economic growth.  The key mechanisms emphasized in the literature are:
 

  • The high labour force participation rate of immigrants
  • Immigration-induced capital flows from abroad 
  • High immigrant saving rates 
  • Increase in population-sensitive investment 
  • Economies of scale 
  • The roles of immigration in stimulating inventive activity and of population growth in accelerating the adoption of new technology 
  • The importation of significant stocks of human capital without cost to the American economy. 

For a review of the literature see Carter and Sutch (1999: 319-332).  

In a dynamic economy there is also a more direct connection between immigration and growth.  The fact that immigrants opportunistically select local markets with the highest wages suggests that the ebb and flow of immigrants can act as a “governor” for the economy.  By reducing the rate of wage growth, the local business boom can continue without being choked off by explosive wage growth (Carter and Sutch 1999: 338-339).  Thus the fact that the wage does not reach the hypothetical level of Wh can be considered as good for the economy and as good for resident workers.

Endnotes

1 This summary refers in particular to a series of studies reported by the National Bureau of Economic Research (NBER).  See Robert LaLonde and Robert Topel (1991) and Joseph Altonji and David Card (1991).  In summarizing the NBER research effort John Abowd and Richard Freeman reported that the “broad implication is that immigrants have been absorbed into the American labor market with little adverse effect on natives” (Abowd and Freeman, 1991: 22).  A National Research Council Panel convened by the U.S. Commission on Immigration Reform reached the same conclusion (Smith and Edmonston 1997: 219-220).  See Card (2005) and Gianmarco Ottaviano and Giovanni Peri (2005, 2006) for recent contributions that bolster the conclusion that the impact of immigration on the wages of competing native-born workers is small. 

2 See Roger Lowenstein (2006) for an accessible account of the debate. 

3 Another problem is that some of the findings are driven by two significant outliers: Los Angeles and New York City.  Both cities are major ports of entry for new immigrants even today.  

4 The simple model assumes one type of labour.  Data reported here are averages across a variety of labour types.  These averages are affected not only by the wage paid to each category of labour, but also by the relative share of the different occupations in the total.  The impact of shifting relative shares on the average is called the “composition effect.”   Since immigrants earned lower wages than the native-born, the growth of the immigrant share of the labour force would be expected to lower the average wage.  Indeed, as the immigrant share of the labour force grew, it is theoretically possible for the overall wage to fall even when the wages of both the native-born and the immigrants were rising.  That the average rose despite the negative composition effects, means even stronger wage gains for immigrants, natives, or both, than trends in the average wage suggest. 

5 Note:  The rates graphed are the decadal average annual net migrant flows divided by the average native-born population.  The state names are indicated by a two-letter code.  The plot for Wisconsin is the small dot partially hidden by the plotted observation for New Hampshire.

Source:  Eldridge and Thomas 1964: Tables A1.11, A1.12, and A1.14.

6 The data for other decades is qualitatively similar.  The correlation coefficients between native- and foreign-born net migrations are 0.64, 0.70, and 0.77 for the decades of the 1880s, 1890s, and 1900s, respectively.  Only Wisconsin in the 1880s displayed migration patterns consistent with possible crowding-out.  In that decade an 18.7 percent immigration rate was associated with an 8.2 percent outflow of the native born.   

7 Note: All 318 counties with an increase in the foreign-born population (aged 10 and older in 1910) equal to or greater than 1,000 are indicated.  The bubble size is proportionate to the numerical increase in the foreign-born with New York and Kings Counties in New York State the largest with increases of 362 and 195 thousand respectively followed by Cook County, Illinois (the site of Chicago with 193 thousand), and Philadelphia County, Pennsylvania (75 thousand).

Source: Haines 2004 and authors’ calculations.

8 Note: All 318 counties with an increase in the foreign-born population (aged 10 and older in 1910) equal to or greater than 1,000 are indicated.  The bubble size is proportionate to the rate of foreign immigration.  All counties above the straight line experienced both foreign immigration and native in-migration.  Those below experienced native departures.  

Source: Haines 2004 and authors’ calculations.

9 These authors, we think, would accept this interpretation of their findings.  

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