Immigration, trade and productivity in services: Evidence from U.K. firms

Abstract

This paper explores the impact of immigrants on the imports, exports and productivity of service-producing firms in the U.K. Immigrants may substitute for imported intermediate inputs (offshore production) and they may impact the productivity of the firm as well as its export costs. The first effect can be understood as the re-assignment of offshore tasks to immigrant workers. The second can be seen as a cost cutting effect due to immigration, and the third as a trade-cost reducing effect. To test the empirical significance and size of these effects, we exploit differences in immigrant inflows across U.K. labor markets and a new firm-level dataset on U.K. service firms. We find that immigrants increase overall productivity in service-producing firms, revealing a cost cutting impact on these firms. They also reduce the extent of country-specific offshoring, consistent with a reallocation of tasks, and they increase country-specific exports, consistent with a reduction in bilateral communication and trade costs.