1. Theory and Method
In simple demand and supply terms, a persistent and substantial increase in
the flow of less-skilled workers from very low income regions to high income
regions can be described as an outward shift in the supply curve and a movement
down the employer’s demand curve for this type of labor, resulting in lower
wages for less-skilled workers in receiving labor markets. This may raise
the demand for higher skilled workers (if output increases and more highly
skilled workers are complementary) or reduce the demand for them (if employers
take advantage of cheaper labor by shifting away from production technologies
that are complementary with skilled labor). In either case, an increase in
supply of less-skilled workers in a labor market not marked by labor shortage
can be expected to lower the wages of workers to the extent that they are
closely substitutable in the workplace. Again, it is conceivable that
low-skill immigration to an area could trigger economic development, ultimately
leading to an increase in demand for less-skilled workers and higher wages. But
this would require that additional flows of low-skill immigrants would not
offset any such induced demand.
So for most economists there is a strong theoretical “prior” that a large and persistent supply of less-skilled workers (especially those with low reservation wages and whose bargaining power is undermined by their illegal status) into labor markets not characterized by labor shortages will reduce local wage levels of substitute workers. The empirical question is whether, in a large and dynamic economy such as the U.S., even the recent immigration surge can be shown with the available data to have unambiguous and robust wage and employment effects.
Until recently, the consensus among researchers was that there has been little if any observable impact of immigration on wages using standard data and methods. Indeed, even George Borjas, among the most prominent researchers who have presumed substantial negative labor market effects at the bottom of the labor market, has termed these results an “unresolved puzzle’ (Borjas 1994a, 1994b). In their survey of this literature, Friedberg and Hunt (1999) confirm their earlier (1995) conclusion: “Given the widespread nature of the popular view that immigration has large adverse effects on the economic outcomes of the native-born population of the United States, there is surprisingly little evidence to support this… Most research finds that a 10 percent increase in the fraction of immigrants in the population reduces the wages of even the least skilled native-born workers by at most 1 percent… Evidence of immigrants reducing employment or labor-force participation rates or increasing the unemployment rate is even harder to find” (1999, p. 358).
Many researchers who find this a “puzzle” attribute it to data availability and methodological difficulties. Most new immigrants locate in one of a small number of large cities. In the U.S., these would include Los Angeles, San Francisco, New York, Chicago, and Miami. A natural approach to testing labor market effects with aggregate statistics is through “spatial correlations”: associating the share of new immigrants in an area with levels of native-born wages across cities or regions; or better yet, correlating the change in immigrant share against the change in wages. But the problem here is that workers feeling the competition from new immigrants may relocate, producing their own “supply shocks” on their destination communities. In this case the wage effects may be transferred from the local to the larger regional or national level, a process known as “factor price equalization” – in this case, between native- and foreign-born workers at a particular skill level. There is also the problem of controlling for local labor demand and for longer run effects of demand, trade patterns, and capital mobility, which may to some degree be responses to the initial immigrant supply shock (lower wages produce an increase in investment and output growth, increasing the demand for both low and high skill native workers). With all of this challenging the researcher, this is an area of research particularly susceptible to the heavy hand of theoretical (and ideological) priors: a somewhat jaundiced reviewer might suspect that researchers tend to find what they want to find.