When Immigrants Come, Don't Fear for Your Job
The effect of immigration on native jobs is far lesser than commonly perceived, or feared, by people and politicians and it is usually positive, three works co-authored by Gianmarco Ottaviano of the Department of Economics reckon.
In Rethinking the Gains of Immigration on Wages (forthcoming in the Journal of the European Economic Association) Ottaviano and Giovanni Peri (University of California, Davis) modify a pre-dating George Borjas' general equilibrium model in order to take into account that immigrants and natives are not perfect substitutes for each other in the labour market even when sharing the same demographic and educational features and that physical capital adjusts as a reaction to the productivity gain resulting from the employment of less expensive immigrants. Simply put, immigrants compete only with a small share (around 10%) of native workers in the labour market, not directly affecting the rest. Furthermore, companies, thanks to the use of less expensive labour, become more competitive and can open new plants, employing both immigrants and natives. Accounting for these two effects and testing the model on US wage and immigration data in the period 1990-2004, they find that in the long run the average wage of US-born workers experienced a significant increase (+1.8%) as a consequence of immigration and that the group of least educated US-born workers suffered a smaller wage loss than previously calculated.
In Immigration, Offshoring and American Jobs (NBER Working Paper 16439), Ottaviano, Peri and Greg Wright (University of California, Davis) build on the idea of imperfect substitution and compare the effect of immigration and offshoring on employment in 58 US manufacturing industries in the period 2000-2007. Moving along a spectrum that spans from more manual- and routine-intensive to more cognitive-intensive jobs, the productivity of immigrants decreases (hence they are employed in the routine end of the spectrum), while offshoring costs increase (making its use at the cognitive end unlikely). The model predicts that in equilibrium each industry hires immigrants for the more routine-jobs, offshores the intermediate tasks and hires natives for the cognitive ones. "As a result", Ottaviano and Peri write, "a decrease in offshoring costs increases the range of offshored tasks, reducing the share of tasks performed by natives and immigrants, pushing natives towards more cognitive-intensive tasks and immigrants towards more manual-intensive tasks", while a decrease in immigration costs reduces the share of offshored tasks but has only a small or no effect on native workers. Most importantly, lower costs of offshoring and immigration produce cost-savings and productivity-enhancing effects, thus offsetting either partially or totally the negative effect on the labour share of natives. The predictions are confirmed by the empirical test, which specifies that the total effect on native workers' employment level (as opposed to share) is positive in the case of immigration and null in the case of offshoring.
In The Labor Market Impact of Immigration in Western Germany in the 1990s (in European Economic Review, Volume 54, Issue 4, May 2010, Pages 550-570; doi: 10.1016/j.euroecorev.2009.10.002), Ottaviano, Peri and Francesco D'Amuri (Bank of Italy and University of Essex) assess the effect of immigration on native workers in a labour market much less flexible than the US. While in the flexible US market wages respond to the shock produced by immigration, for the more rigid German market the scholars need to adapt their model to allow for employment as well as wage responses.The scholars develop the idea of imperfect substitution doubling up the category of immigrants into old immigrants (having been working in Germany for 5 years or more) and new immigrants. They find that the rigidity of wages implies a negative effect of immigration on the overall employment, but that old immigrants bear the brunt of it, natives being unaffected. "Our estimates", they write, "suggest that, for any 10 new immigrants, three to four old immigrants are driven out of employment, whereas no native is affected".
Interestingly, the authors compare the actual cost (wage bill and welfare) of the immigrants' inflow of the 1990s for German coffers and the hypothetical cost in a scenario of perfect wage flexibility. The result is that the cost of immigration is 20 times larger under the actual scenario of wage rigidity and unemployment insurance than in the scenario with full wage flexibility and no effect on employment. The normative implication: when immigrants flow into your country, let the market work.