MOST STUDIES OF the economic impact of immigration are motivated by the desire to understand how immigrants affect various dimensions of economic status in the population of the host country. This motivation explains the persistent interest in determining whether immigrants "take jobs away" from native workers, as well as the attention paid to measuring the fiscal impact that immigration inevitably has on host countries that offer generous welfare benefits.(1)
For the most part, the existing literature overlooks the factor that places immigration issues and the study of labor mobility in general at the core of modern labor economics. The analysis of labor flows, whether within or across countries, is a central ingredient in any discussion of labor market equilibrium. Presumably, workers respond to regional differences in economic opportunities by voting with their feet, and these labor flows improve labor market efficiency.
In this paper I emphasize this different perspective to analyzing the economic impact of immigration: immigration as grease on the wheels of the labor market. Labor market efficiency requires that the value of the marginal product of workers be equalized across labor markets, such as U.S. metropolitan areas, states, or regions. Although workers in the United States are quite mobile, particularly when compared with workers in other countries, this mobility is insufficient to eliminate geographic wage differentials quickly. The available evidence suggests that it takes around thirty years for the equilibrating flows to cut interstate income differentials by half.(2)
I argue that immigration greases the wheels of the labor market by injecting into the economy a group of persons who are very responsive to regional differences in economic opportunities.(3) My empirical analysis uses data drawn from the 1950-90 U.S. censuses to analyze the link between interstate wage differences for a particular skill group and the geographic sorting of immigrant and native workers in the United States. The evidence shows that interstate dispersion of economic opportunities generates substantial behavioral differences in the location decisions of immigrant and native workers. New immigrant arrivals are much more likely to be clustered in those states that offer the highest wages for the types of skills that they have to offer. In other words, new immigrants make up a disproportionately large fraction of the "marginal" workers who chase better economic opportunities and help equalize opportunities across areas. The data also suggest that wage convergence across geographic regions is faster during high-immigration periods. As a result, immigrant flows into the United States may play an important role in improving labor market efficiency.
The paper presents a simple theoretical framework for calculating this efficiency gain from immigration. Simulation of this model suggests that the efficiency gain accruing to natives in the United States--between $5 billion and $10 billion annually--is small relative to the overall economy, but not relative to earlier estimates of the gains from immigration (which are typically below $10 billion). It seems, therefore, that the measurable benefits from immigration are significantly magnified when estimated in the context of an economy with regional differences in marginal product, rather than in the context of a one-region aggregate labor market.
The intuition underlying the hypothesis developed in this paper is easy to explain.(4) There exist sizable wage differences across regions or states in the United States, even for workers with particular skills looking for similar jobs.(5) Persons born and living in the United States often find it difficult (that is, expensive) to move from one state to another. Suppose that migration costs are, for the most part, fixed costs, and that these are relatively high. The existing wage differentials across states may then fail to motivate large numbers of native workers to move, because the migration costs swamp the interstate differences in income opportunities. …