Economists Are Finding a New Perspective on Immigration

As recently as twenty years ago, economists taught that as the supply of unskilled labor increased due to immigration, legal or otherwise, the wages and employment of natives would fall as the two groups competed for a fixed number of jobs. This perspective casts immigration as a potential threat to native workers’ employment prospects. Now, however, many economists’ views on immigration are evolving toward a more complex paradigm. Labor economist Giovanni Peri captures this sea change in his literature review of over fifty studies on immigrants and wages conducted since 2000. He concludes that recent research shows immigrants to the United States are improving wages and economic growth by maintaining complementarity, increasing specialization and increasing total factor productivity.

First, Peri observes that several landmark theoretical papers conceptualize college-educated and non-college-educated workers as complementary groups. This means that as long as the two groups are present in relatively similar numbers they should increase each other’s wages. Thus, if the U.S. were receiving more unskilled immigrants than skilled ones — a common fear of those opposed to immigration on economic grounds — then all low-skilled workers would see their wages fall as the number of each type of worker diverged. However, empirical data actually indicates that immigrants in America are quite balanced between college degree holders and those without a college degree. Thus, immigration does not appear to lower the wages of unskilled Americans by raising the number of non-college-educated relative to college-educated workers.

By combining ten peer-reviewed articles, Peri also documents how economists are increasingly aware that immigrants do not compete with native-born citizens within skill groups. Instead, immigrants and natives of the same general skill set are often hired for different specific responsibilities. For instance, unskilled immigrant workers will fill manual labor roles while unskilled natives fill communication and customer interaction positions at the same firm. This phenomenon prevents natives’ wages from falling as more immigrants arrive because natives fill roles for which immigrants do not have the requisite abilities. Similarly, in the realm of skilled labor, college-educated immigrants tend to specialize in math-analytical jobs that require less language and cultural knowledge — think scientists and engineers — while college educated natives have largely shifted to managerial jobs. This specialization suggests immigrants are increasing the wages of natives by increasing total productivity at the firms that hire them.

Finally, using empirical analyses from nine separate papers, Peri reports that immigrants increase overall economic productivity. Immigrants tend to cluster in cities and, on average, living in a city allows for greater productivity because of lower transportation costs. These cost savings, in turn, increase local learning and the efficiency of labor markets — specifically, the ability of workers and firms to find an optimal match.

Peri does acknowledge that the effects of immigration are not always positive. His review includes some studies of European countries that suggest immigrants are lowering the wages of natives. Yet, Peri identifies European countries’ low labor market flexibility, which is due to relatively stringent worker protections making it costly to hire or lay off workers, as preventing the specialization needed for immigration to be a positive economic force. In European countries, immigrants often have more difficulty assimilating because of language and legal barriers. As a result, they tend not to participate in the labor market at all or to hold jobs below their skill level. Immigrants being constrained to either of these situations limits growth. For immigration to boost wages and growth, flexible labor markets and cultural assimilation are essential.

The movement in economics towards a richer understanding of how labor markets respond to skilled and unskilled immigration holds a generally positive view of immigration’s effects on natives’ wages and employment prospects, as well as the economic vitality and growth of the nation at large. This suggests that efforts to reduce immigration will be unlikely to stop the stagnation in working class Americans’ wages because immigration is not the cause of lower wages. Moreover, such efforts will almost certainly not lead to stronger growth and may even curtail growth. In light of Peri’s review, such policy approaches should be reconsidered.

Article Source: Peri, Giovanni. “Immigrants, Productivity and Labor Markets.” Journal of Economic Perspectives 30 (4) 2016: 1-30.

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