Does Immigration Reduce Imbalances among Labor Markets or Increase Them? Evidence from Recent Migration Flows

By Keeton, William R.; Newton, Geoffrey B. | Economic Review - Federal Reserve Bank of Kansas City, Fourth Quarter 2005 | Go to article overview

Does Immigration Reduce Imbalances among Labor Markets or Increase Them? Evidence from Recent Migration Flows


Keeton, William R., Newton, Geoffrey B., Economic Review - Federal Reserve Bank of Kansas City


Immigration from abroad has increased dramatically since the 1960s, as workers from less-developed countries have moved to the United States in search of higher wages. The recent influx represents the second great wave of immigration in this country, the first having occurred in the late 1800s and early 1900s when people moved here from Europe. The new wave of immigration has reignited the debate about the impact of immigration on the economy. While the U.S. economy was booming in the second half of the 1990s and workers were in short supply, the debate over the economic impact of immigration attracted little attention. However, the issue moved back into the limelight during the current decade as immigration continued to grow and employment was slow to recover from the 2001 recession.

One way immigration affects the economy is through the labor market. At the national level, immigration is widely believed to harm native workers with similar skills by reducing their wages or their probability of obtaining a job. Since a relatively high proportion of new immigrants are unskilled, these adverse labor market effects should fall most heavily on unskilled native workers. But in addition to changing aggregate supplies of workers of different skills, immigration can significantly alter the allocation of workers across markets-either for better or for worse. If immigrants gravitate to markets with unusually strong labor demand, they will reduce differences in wages and unemployment between strong and weak markets, making it unnecessary for as many native workers to move. On the other hand, if immigrants move to markets with average or below-average labor demand, they may create an excess supply of workers with similar skills in these markets. Some natives may move out of these markets to avoid a cut in wages, and other natives may avoid these markets even if they would be well suited to living there on other grounds.

This article sheds new light on the impact of immigration on the allocation of workers across markets by examining migration flows in metropolitan areas and towns during the second half of the 1990s. The article finds support for both views of the impact of immigration on the allocation of labor across markets. Immigrants tended to gravitate to markets that could be expected to experience strong growth in labor demand based on their initial industrial mix. At the same time, however, natives tended to stay out of markets that could be expected to experience high immigration based on past settlement patterns. From these findings, the article concludes that the impact of immigration on the geographic allocation of labor is neither as harmful as immigration opponents sometimes suggest, nor as beneficial as immigration supporters sometimes claim.

The first section of the article explains the possible effects of immigration on the allocation of labor across markets. Specifically, the section shows that immigration could either reduce imbalances across labor markets or increase them, depending on why new immigrants choose to locate where they do and how natives and established immigrants respond. The second section describes the migration data used in the article and provides an overview of migration flows during the period 1995-2000. The third section presents the empirical results on the impact of immigration on the allocation of labor across markets.

I. EFFECTS OF IMMIGRATION ON THE GEOGRAPHIC ALLOCATION OF LABOR

Much of the current controversy over immigration relates to its effect on the distribution of income among different groups of people within the United States. Standard economic models suggest that an influx of immigrants should benefit native-born workers with different education and skills by freeing up those workers for more productive tasks. However, standard economic models also suggest that an influx of immigrants should harm native-born workers with similar education and skills by increasing the total supply of such workers and reducing their wages. …

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Does Immigration Reduce Imbalances among Labor Markets or Increase Them? Evidence from Recent Migration Flows
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