The Effects of Temporary Immigration on Prices of Non Traded Goods and Services

Abstract

This paper analyzes the impact of temporary immigration on the prices of nontradable goods and services. It presents a model of a small open economy that produces two goods/services, one tradable and one non tradable. It is assumed that temporary immigrants are confined to work in the non-traded sector and that they are only imperfect substitutes for permanent immigrants and native low skill workers. In our theoretical set-up temporary immigration is predicted to have a negative effect on the prices of non-traded goods and services, while the effect of permanent immigrants depends on the relative low skill domestic labor intensity of the non tradable sector. We test these predictions empirically using a panel dataset of 14 U.S. cities for the period 2000-2006. In line with other recent empirical studies we find that both types of immigration have a negative impact on the relative price of non-tradable services as a whole. These findings confirm that immigration, like trade and offshoring, has the potential to increase welfare through the reduction of consumer and input prices. When distinguishing individual non tradable sectors, though, we find evidence that permanent immigration increases the price of transport and health services. This finding is in line with the predictions of earlier theoretical work and suggests in the context of our model that these sectors are less low skill domestic labor intensive than tradable goods and services.