The Effect of Low-Skilled Immigration on US Prices: Evidence from CPI Data

Abstract

While an extensive literature examines the impact of low-skilled immigration on US native wages, there has been almost no research on the parallel question of how immigration affects the price of goods and services. A standard small open economy model suggests that low-skilled immigration should reduce the relative price of non-traded goods by decreasing the wages of low-skilled workers. Treating US cities as small open economies and using confidential price data on goods and services to estimate reduced-form price effects, I find that, at current immigration levels, a 10 percent increase in the share of low-skilled immigrants in the labor force decreases the price of immigrant-intensive services, such as housekeeping and gardening, by 1.3 percent and of other non-traded goods by 0.2 percent. Structural estimates suggest that lower wages are a likely channel through which these effects take place. However, wage effects are significantly larger for low-skilled immigrants than for low-skilled natives because the two are imperfect substitutes. Overall, the results imply that the low-skilled immigration wave of the 1990s increased the purchasing power of high-skilled natives living in the 25 largest cities by 0.65 percent but decreased the purchasing power of native high school dropouts by 2.66 percent.