It has taken me too long to introduce the hero of this story. Borjas has had a series of papers, books and editorials since the mid-80’s that have each challenged the consensus economist’s view on immigration in support of the popular view. His work in the late 80’s uncovered the pattern of a secular decline in the quality of immigrants (in terms of educational attainment, work experience and unobserved skills) since WWII, a trend that is common sense today. He also introduced the idea of self-selection of immigrants and gave conditions for when we’d expect immigrants to be higher or lower quality. In the nineties, while setting the ground work for the work I’ll describe below, he started the conversation on the costs and benefits of immigration, sitting on a panel of the National Academy of Sciences evaluating the economic impact of immigration. He wrote papers encouraging researchers and policy makers to balance the fiscal costs of immigrants (welfare, schooling, etc) against any potential production gains.
In his 2003 paper called “The labor demand curve is downward sloping,” Borjas challenged the consensus that immigration has a zero effect on native employment outcomes. He worried that studies comparing regions did not properly account for spillover effects from trade, capital movements and labor mobility. The problem with goods, capital and labor movements is that they all tend to equalize wages across regions. This means that when you compare regions that have had more or less immigration, you won’t be able to find a difference in wages even as everyone’s wages have gone down.
He suggested, instead, to compare groups that do not admit mobility. Specifically, he looked at the effect of immigration across skill groups where skill is defined by a combination of education and years of work experience. Intranational trade in goods doesn’t operate in this context. Add to that the fact that international trade is probably not important here and the trade channel for spillovers is shut down. Also, workers can only increase work experience one year at a time (thus they can’t decrease it or move to a level of experience more than one year ahead of their own), so its extremely hard for them to change it to respond to incentives and, in the short run, workers can’t change their education. These things suggest the labor mobility channel is shut down, too. Finally, if you assume, as Borjas does, that capital is not skill specific (or at least to the degree it is, it has a small spillover effect) then there’s no role for capital movement to cause spillover effects.
Below I reproduce his suggestion. On the x-axis is the change in the proportion of immigrants from 1990 to 2000 and the y-axis is the change in native wages. Each dot is a education-experience group ((Actually, I cheated and used age instead of work experience which gives the same results but is much easier to calculate.)).
The slope here is negative (-0.35) and quarter standard deviation more negative than the mean found by Longhi, Nijkamp and Poot. This result, which controls for spillover effects, confirms what Borjas says: “immigration lowers the wage of competing workers”.
There are three ways to critique these findings. First, attack the premise. If spillover effects are creating the zero correlation at the local level, we should be able to detect them. We should see native workers fleeing areas of high immigration or we should see industries in high immigration areas reshuffle to take advantage of the skills of immigrants, as trade theory would predict. David Card took up both of these challenges. In 2001, he wrote a paper finding no native flight and in 2007 he wrote a paper finding that least one type of trade spillover doesn’t seem to be emperically important ((That said, there is an opportunity for us to look for other ways trade affects native workers. For example, perhaps immigrants produce new varieties of goods. Much attention in trade theory these days — someone got a Noble for his work on this — is on the trade effects of new varieties. This wouldn’t be a spillover channel, I don’t think there’s factor price equalization in New Trade models, as much as a possible explanation for native/immigrant complementarity, which I haven’t talked about yet. I’m no trade theorist but perhaps the production based models used by Ottaviano and Peri, e.g., are isomorphic to the love of variety trade models. So where those authors see complementarity in production, trade models would see love of new immigrant produced varieties. We’d need micro evidence on immigrant entrepreneurship to differentiate to see which of these models best explains the evidence.)). If spillovers are a problem, they don’t appear to work through the trade and labor mobility channels.
Second, attack the assumption that capital isn’t skill specific or that international trade doesn’t matter. To be honest, I haven’t found any work that does either of these things…
So moving right along. Third, point out that there are much more important indirect effects of immigration than spillover effects. This will be the focus of my next post.
For those of us that believe immigration has a net positive benefit on society, Borjas is the perfect enemy ((He’s also a model academic. Besides his volumes of academic papers, he’s written a well-used textbook, several popular books on immigration and dozens of editorials on the subject)). He has applied honest, fair and constant pressure on our sure beliefs about immigration. His challenges have inspired reams of rebuttals; reams that could not otherwise have been used in support of immigration.