Low Skilled Local Labor Demand Shocks and Labor Market Outcomes: Evidence from the Mexican Tequila Crisis

Abstract

How does immigration affect natives local wages? A vast literature considers this, much of it focused on Mexican immigration to the United States. Prior work emphasizes the importance of instrumenting for immigrant destinations, the key role of experience-skill cells, and the potential for spillovers to national markets. I build on these, using the Mexican ’Tequila Crisis’ of the mid-1990s as an exogenous shock to immigration. Instrumentation thus includes both a time dimension for the shock period, plus a destination dimension as in prior work. The 1.5% immigration shock of the Tequila Crisis lowered the wages of young low skilled US natives by 1 to 1.5 percent. It also prompted interstate labor reallocation. The share of low skilled workers is estimated to decrease by 2 percentage points as a result of the shock. This explains why within five years, national markets adjust, leaving no evidence of differential spatial impact. JEL Classification: F22, J20, J30 ∗Columbia University. Correspondence: jm3364@columbia.edu. I would like to thank Don Davis for guidance, Bernard Salanie and Eric Verhoogen for detailed comments and encouragement and Miguel Urquiola, Jaume Ventura, Antonio Ciccone, Jonathan Dingel, Ben Marx, Pablo Ottonello, Hadi Elzayn and Harold Stolper for useful comments and discussions. I would also like to thank CREi for its hospitality during July 2012 and the audience at the Columbia International Colloquium, the Applied Micro Colloquium and the INSIDE Workshop. All errors are mine.