The logic is clear, immigrants reduce wages. You’d think, at least.
In an introductory course to economics you learn about probably one of the most famous graphs in history, the perfectly competitive supply and demand model:
If the supply of something goes up, like if more iPhones are made or more people immigrate to the U.S. to find work, then the price goes down. The supply and demand graph shows the reasoning, and the reasoning is sound.
All arguments start with assumptions. In this case, the assumption is that the immigrant is competing for the same job as the native. Right? If you believe that immigration lowers your wage, and you wouldn’t be alone in your beliefs, then you also believe that those immigrants are candidates for your job. If they weren’t candidates for your job they would have no effect on your wage whatsoever, because no matter how low cost they went they simply are not qualified to do what you do.
What if that assumption were wrong? What if we live in a world where immigrants and natives don’t compete for the same job?
That might be the world that we live in.
In 2012, Gianmarco I. P. Ottaviano and Giovanni Peri, two economists, looked at the evidence and published their findings in a paper titled, “Rethinking the Effect of Immigration on Wages.” They find that immigrants do lower wages, but not for the people who you’d think was the case.
Indeed, they found that, on net, migrants lowered wages for other migrants. What about natives? They found that immigration was responsible for a net increase in native wages. You read that right, a net increase. American wages went up.
How did they reach this unexpected conclusion?
Ottaviano and Peri build on two previous papers, Borjas (2003) and Borjas and Katz (2007), which found that if you focus on wages at the national level, you see that immigration reduces wages for jobs of their skillset.
First, Ottaviano and Peri look to study these effects if you make the focus even more granular and look at what economists call substitutability of labor — the idea that different workers bring different qualities to the table, and so one immigrant is not the same as one native worker.
There is a considerable literature on the elasticity of substitutability, or the degree to which native and immigrant workers are substitutable. Like with most things economics, there’s disagreement here too, but in general there is agreement that there is at least some non-substitutability. For example, can we really compare an immigrant with no high school diploma to an American worker with a high school diploma? Probably not.
Second, they also break down the data between skill groups to see how immigration affects wages in their direct markets, like construction, and how they may affect wages indirectly in other markets, like welding. The logic here is that if natives are more likely to be in certain markets, and immigrants in others, it’s worth studying whether those immigrants can still lower native wages.
How could an immigrant affect the wage of a person in a totally different industry? One way is by displacing native workers in the industry they do join. That native worker might now learn another skill and add to the labor supply in a new market. For example, a displaced construction worker might learn plumbing and therefore reduce wages for other plumbers, since now there’s more competition between them.
All of this theory is nice, but so far it’s just that — theory. We know that, hypothetically, more workers means less money to spread between them. We also know that, hypothetically, immigrants have both direct and indirect effects on wages. What are the actual numbers though?
Ottaviano and Peri took data from the US Decennial Census, between 1960–2000, and from the 2006 American Community Survey. They looked at both hours worked, so that they could study the data by education, experience, and birthplace, and also by wage-level.
This data was interpreted through four statistical models that the authors built:
- Model A: Where native and immigrant labor with the same education and experience is imperfectly substitutable. In other words, a native and immigrant worker are not the same worker, and one is preferred over the other.
- Model B: Imperfect substitutability between workers with different experience and education backgrounds.
- Model C: This one is like a more granular version of Model B, where certain industries are more related than others, and therefore employees within these different industry segments are more substitutable than otherwise. For example, it’s probably easier to jump from construction to plumbing than it is to jump from construction to brain surgery.
- Model D: This was an inverted Model A. This was basically to see what’s more important: experience or education?
Why four models? So that they could test the data against all these different hypothetical stories.
What did our authors find?
They found, for one, that an immigrant and a native are not equally as employable, despite having similar experience and education. For example, immigrants tend to have a weaker command of the English language, so the range of potential things a native could do in the same market are much broader.
An immigrant with low education and low experience may be good for manual labor, but they wouldn’t be as skilled in talking to customers or vendors. An immigrant plumber may not be as good in drumming up business as a native plumber, either.
In higher education groups this difference is less apparent, because an educated immigrant might hold greater command over the English language, or knowing the English language may be less relevant if what you’re looking for is someone who can successfully complete surgery on your back — or whatever the case might be.
The bottom line: it’s hard for an immigrant to displace a native worker.
We came to learn about immigration and wages, so how’s everything we’ve talked about so far relevant to that?
To answer that question, Ottaviano and Peri looked at data for the period between 1990 and 2006, a period during which we saw the highest volumes of immigration to the United States in the country’s history.
All that stuff they figured out before — how substitutable an immigrant and a native worker are — was to come up with the parameters that will dictate how the evidence is interpreted. In other words, by figuring out that low-skill immigrants can’t necessarily easily compete against similarly skilled native labor, we can now interpret the effects of immigration on wages much more accurately (as long as the parameter estimates are accurate).
Let’s get to the juicy part:
The authors found that, once you account for substitutability and education, native workers not only didn’t suffer from lower wages, they saw a wage rise by 0.6–0.7%. Maybe this doesn’t sound impressive to you, but the point is that natives did not lose from an increase in immigration between 1990–2006.
Who does lose, if anyone? Other immigrants lose the most. When new immigrants come in, it turns out that the ones out of a job are the older immigrants they’re displacing. Indeed, according to their data, previous immigrants lose between 6.6–7% of their wages.
Most immigration during this period was of the low-skill variety, but what about high-skilled immigration? How does that affect high-skilled native labor? Here the wage effect is closer to what we suspect, but it was balanced out by the wage gain amongst lower-skill native labor.
This is a remarkable point because our immigration policy tends to favor high-skilled migrant labor, or what economists call STEM immigrants. We favor these types of immigrants because they bring a lot of value to our economy, and we disfavor low-skill immigrants because we see them as competing against Americans who are most in need.
What if the evidence shows that Americans most in need gain from immigration. What does that say about our policies?
As a final note, it is important to keep in mind that all we’re discussing here are averages. It may be that some Americans lose from immigration and other gains, it’s just that on net Americans tend to gain. Nonetheless, as a whole, Ottaviano’s and Peri’s results fly in the face of conventional wisdom.
Let’s Get Controversial:
This is just one paper; just one study. There are other studies that find opposite results. In fact, Ottaviano and Peri were basing their work on models that had found opposite results. They just wanted to dig deeper and consider factors that others, up to now, hadn’t.
Still, the results are important in a world where immigration has, once again, taken center stage. I say ‘once again’ because this isn’t the first time the U.S. has dealt with immigration as a policy issue. Some of our first immigration laws were drafted in the late 19th and early 20th centuries, when our country saw large waves of Chinese and Southern European migrants step onto our shores looking for better opportunities.
Then, all that labor helped to fuel the explosion of our factories. Now employment in manufacturing is slowly dying and Americans are worried. But, as we restrict immigration to protect ourselves against this, we may be shooting ourselves in the foot. If you’re a native worker in a factory, an immigrant may not be a threat to you — if Ottaviano’s and Peri’s research is correct.
It may be that immigrants aren’t competing against you at all, they’re just taking the jobs no one else wants, even when wages rise.