The Impact of New Immigration on Native Wages: A Cross-Occupation Analysis of a Small Open Economy

Abstract

This paper examines how immigration affects native wages by exploiting an unexpected episode of immigrant influx. The episode happened in Hong Kong, when its government unexpectedly relaxed the restriction on immigration from mainland China in 1993, resulting in a seven-fold increase in the net inflow of Chinese immigrants between 1992 and 1993. We use variation in the employment share of immigrants across occupations for identification. To tackle endogeneity between wages and immigrant inflows across occupations, we use Welch’s (1999) congruence indices, which capture the degree of substitutability between workers from different skill groups, to construct instruments for the prevalence of Chinese immigrants in an occupation. Using micro-level data, our two-stage-least-squares estimates show that a 1 percentage point increase in the ratio of new Chinese immigrants to natives decreases native monthly real wages in the same occupation by 2.8-3.6 percents (controlling for immigrant shocks in similar occupations). Within an occupation, female and more skilled native workers experience more adverse wage impact, reflecting a high switching cost associated with occupation-specific human capital.