Firm Heterogeneity and the Impact of Immigration: Evidence from German Establishments

Abstract

We revisit the old question of how immigration affects the welfare of native workers. As opposed to most of the previous literature, we look at this question through the lens of firms, as they play a crucial role in immigration and are massively heterogeneous even within sectors. We use a novel establishment-level dataset from Germany to document a new dimension of firm heterogeneity: Large firms spend a higher share of their wage bill on immigrants than small firms. We show analytically and quantitatively that ignoring this heterogeneity in immigrant share leads to biased welfare gains from immigration. To do so, we set up and estimate a quantitative model where heterogeneous firms choose their immigrant share and validate the model using an instrumental variables strategy. We then use the model to quantify the welfare effects and the bias of a 20% increase in the number of immigrants in Germany as observed between 2011 and 2017. The welfare of natives increases both through higher wages and profits, and lower prices, with aggregate welfare gains of $4 billion for native workers and $15 billion for firm owners. Immigration leads native workers to reallocate within-sector across firms, a key mechanism that explains the source of the bias. If we estimate the model without firm-level data on immigrant employment, we would underestimate the welfare gains for native workers by 11%.