Increased Immigration Leading to Higher Wages for Native Born Citizens?

Could the United States learn a thing or two from the small nation of Denmark when it comes to immigration? Policy makers in most developed nations worry about the economic effects of international migration flows. In particular, arguments to limit or even eliminate external migration find resonance during times of economic contraction. The argument goes something like this: Newcomers enter the receiving country with few transferable skills and limited language proficiency, the number of jobs in lower skilled occupations are finite, newcomers take over the limited number of lower skilled jobs, and the previous native born workers find themselves unemployed. While such an argument may be possible when labor markets are viewed as static and non-dynamic, the case of Denmark between 1991 and 2008 empirically demonstrates the opposite, showing that even supply driven immigration may result in net positive employment and additional job market improvements.

Mette Foged and Giovanni Peri argue in their August 2013 NBER Working Paper “Immigrants and Native Workers: New Analysis Using Longitudinal Employer-Employee Data” that dogmatic and static labor market analyses are oversimplified. If anything, they find that the entry of lower skilled immigrant workers bolsters the employment outcomes of native born workers. Moreover, the researchers determine that after the entry of lower skilled immigrants, native born workers earned higher wages, experienced increased occupational mobility, and gained higher specialization resulting in increased productivity.

Beginning in the early nineties, Denmark began experiencing a significant inflow of refugees primarily from Bosnia, Somalia, and Iraq. All three countries were embroiled in conflict and the refugee arrivals were followed by family reunifications. Foged and Peri extract their data from the Danish Integrated Database for Labor Market Research. The datasets are rich insomuch as they permitted the authors to follow individuals and firms over time. The study tracked labor force participants between the ages of 18 and 65, and identified their employment status, occupation, wage (adjusted to inflation), and country of origin. The authors then control for age, labor market experience, job tenure, education, and marital status. Using the information on country of origin, the authors categorize workers as either foreign born or native born.

Foged and Peri derive four main conclusions from their research. First, native born workers in municipalities that accepted larger immigrant inflows saw their wages increase and experienced higher occupational mobility. The probability that workers in these municipalities saw an inflation adjusted raise was 25 percent higher than in the municipalities that did not experience migrant inflows. Second, less educated native workers in all municipalities saw some wage increases (though not statistically significant, meaning the differences may have been due to chance). Third, highly skilled native born workers saw the highest level of increase in occupational mobility levels, both across firms and towards other municipalities. Fourth, the level of complexity within occupations for the lowest educated Danish workers increased approximately five years after the inflow of immigrants to the municipality, resulting in higher productivity and higher wages. The probability that the highest skilled workers saw a raise was varied between 39 and 45 percent. Interestingly, occupations in the public sector, which are normally restricted to Danish nationals, did not experience higher wages that were statistically significant. The authors underscore that the migratory inflows did not increase the probability of native born Danes becoming unemployed.

Importantly, the authors note that the Danish labor market is extremely flexible, in contrast to most of its European counterparts. Coupled with the inflow of less educated and low language proficiency immigrants along with family members, the hiring, firing, and transitions across jobs and occupations were frequent and not costly compared with more ridged labor markets. Moreover, wage bargaining was mainly done at the decentralized firm level, similar to current practices in the United States.

Even though the labor markets of the United States and Denmark vary in size, scope, and industries, their relative flexibility and openness make them structurally comparable. The Danish experience, while not a panacea, ought to inform policy makers in the United States concerned with the plight of less educated lower skilled American born workers, and add insight to the ongoing immigration reform debate.

Feature Photo: cc/(Nick Thompson)