The Labor Market Experience and Impact of Undocumented Workers

Abstract

Working Paper 2008-7 February 2008 Abstract: Using administrative data from the state of Georgia, the authors find that a greater share of undocumented workers in an industry has a statistically significant negative impact on the wages of documented workers. The practical impact, however, is small, given the size of the undocumented workforce. In addition, undocumented workers have significantly lower labor supply elasticity, likely as a result of their limited employment and grievance opportunities. Furthermore, the inflow of undocumented workers does more to displace earlier hired undocumented workers than it does to displace documented workers. JEL classification: J61, J31, J42, F22 Key words: illegal immigration, wage impact, worker displacement The Labor Market Experience and Impact of Undocumented Workers I. Introduction and Background The United States has a long history of immigration debate. Through the last century and into this one, immigration policy has been subjected to changing economic needs, fears, and political whims. Positive contributions of immigration have been identified by Neal and Uselding (1972) who estimate that the flow of immigrants into the United States between 1790 and 1912 resulted in a 13 to 42 percent higher level of capital stock than would have prevailed in the absence of immigration during these years (also see Barro and Sala-i-Martin 1995 and Chiswick et al. 1997). (1) Immigration has also been more recently explored in various countries as a mechanism for replacing retiring baby-boom workers (e.g., Hamada and Kato 2007, Hotchkiss 2005, Denton and Spencer 1997). The concerns surrounding immigration are rooted in an expectation that the arrival of new workers into a labor market would displace native workers and/or put downward pressure on wages. The literature presents a wide range of estimates of the effects of immigration on wages and employment of native workers. The consensus settles on a one to four percent decrease in native wages resulting from a 10 percent increase in the population share of immigrants (for example, see Friedberg and Hunt 1995 and Borjas et al. 2006). The measured impact of immigration on the displacement of workers is less clear. Card (1990), Wright et al. (1997), Butcher and Card (1991), and Card and DiNardo (2000) find no evidence of immigrant inflows affecting native migration patterns or employment outcomes. Whereas, Frey (1996) and Borjas (2005) identify a significant relationship between immigrant inflows and either native outflows or lower net native in-migration, and Card (2001) finds lower rates of employment within cities with high immigrant arrivals. While firmly rooted in the empirical literature measuring the impact of legal immigration on the labor market experiences of natives, this paper deviates slightly by exploring the impact of undocumented workers (assumed to be immigrants) on wages of documented workers, some of which are likely immigrants themselves. The analysis makes use of administrative data from the state of Georgia to investigate how the proportion of undocumented workers affects the wages of documented workers, the displacement of documented workers, and what role different labor supply elasticities might play in the observed wage gap between the two groups of workers. The results presented in this paper are of particular relevance as the immigration debate has recently narrowed its focus on undocumented immigrants. A. The Impact of Immigration The impact of immigration on native worker wages essentially comes down to how complementary or how substitutable the immigrants are with native workers, and how responsive native migration patterns are to the influx of additional workers. Goldin (1994) documents significant wage effects of the large European migration to the United States in the early 20th century. Measured effects of more recent waves of immigrants have been more modest. …