Local, Open Economies Within the U.S.: How Do Industries Respond to Immigration?

Abstract

A series of studies has found that relative wages and employment rates in different local labor markets of the US are surprisingly unaffected by local factor supplies. This paper evaluates two explanations for this puzzling empirical fact: (1) Interregional trade mitigates the local impact of supply shocks. (2) Production technology rapidly adapts to the local mix of workers. The author tests these alternative explanations by estimating the effect of increases in relative supplies of particular skill groups on the relative growth rates of different industries and on the relative utilization of these skill groups within industries. Labor supply shocks are identified with a component of foreign immigration driven by the historical regional settlement patterns of immigrants from different countries. Using establishment-level output and capital stock data from the Longitudinal Research Database, augmented with employment and labor force data from the 1980 and 1990 Censuses of Population, changes in local labor supply during the 1980s are shown to have had little influence on local industry mix. Instead, citywide increases in the relative supply of a particular skill group lead to increases in relative factor intensity, with little or no effect on relative wages. These patterns suggest that industries adapt their use of labor inputs to local supplies, as predicted by theoretical models of endogenous technological change. Consistent with this A series of studies has found that relative wages and employment rates in different local labor markets of the US are surprisingly unaffected by local factor supplies. This paper evaluates two explanations for this puzzling empirical fact: (1) Interregional trade mitigates the local impact of supply shocks. (2) Production technology rapidly adapts to the local mix of workers. The author tests these alternative explanations by estimating the effect of increases in relative supplies of particular skill groups on the relative growth rates of different industries and on the relative utilization of these skill groups within industries. Labor supply shocks are identified with a component of foreign immigration driven by the historical regional settlement patterns of immigrants from different countries. Using establishment-level output and capital stock data from the Longitudinal Research Database, augmented with employment and labor force data from the 1980 and 1990 Censuses of Population, changes in local labor supply during the 1980s are shown to have had little influence on local industry mix. Instead, citywide increases in the relative supply of a particular skill group lead to increases in relative factor intensity, with little or no effect on relative wages. These patterns suggest that industries adapt their use of labor inputs to local supplies, as predicted by theoretical models of endogenous technological change. Consistent with this interpretation, on-the-job computer use expanded most rapidly over the 1980s in cities where the relative supply of educated labor grew fastest.