Does immigration affect labor demand? Model and test

Abstract

Numerous studies have concluded that immigration has very small effects on wages or unemployment, even when the immigration flow is very large. Three reasons suggested for this are that immigration: (1) is not supply-push, but may instead be driven by demand-pull factors; (2) is likely to cause some out-migration; and (3) may induce flows of other factors across the economy. Surprisingly, few studies consider another obvious explanation: immigrant workers also consume locally, which means immigration stimulates the local demand for labor. Previous researchers have generally ignored the measurement of immigration's effects on labor demand, perhaps because when immigration, out-migration, and immigrant consumption occur simultaneously in the same labor market, it is very difficult to isolate immigration's effect on labor demand. This paper measures the labor demand-augmenting effects of immigration using a two-sector model of a very special case in which the receiving economy consists of: (a) an export industry employing both immigrants and natives; and (b) a retail industry employing native labor that is driven by local demand. The model can incorporate both supply-push and demand-pull immigration as well as out-migration. The model's important implication is that since immigration is exogenous to the retail sector, an unbiased estimate of the demand effect of immigration can be obtained without having to use instrumental variables estimation or other statistical procedures that may introduce new sources of bias. Fortunately, the economy in our model matches a very convenient test case: Dawson County, Nebraska. Dawson County recently experienced a surge in demand-pull immigration due to the location of a large export-driven meatpacking plant. This exogenous capital shock pulled in many Hispanic immigrant workers, who did not immediately seek work in the retail sector because of social and language barriers. This immigration led to higher retail wages and housing prices, confirming that immigration is capable of exerting significant effects on local labor demand.