Immigrants reduce geographic inequality

Brian C Cadena, Brian Kovak 12 August 2013

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Recently, economists have noticed some disturbing trends in the US economy. Job creation, job destruction, and job-to-job switches are all in decline (Davis, Faberman, and Haltiwanger 2012; Hyatt and Spletzer 2013). Further, fewer and fewer people are making long-distance moves in order to take better jobs (Molloy, Smith, and Wozniak 2011). This slowdown is problematic because labour mobility, especially across geography, is a key contributor to the dynamism of an economy, and it tends to reduce inequality in economic outcomes across space (Blanchard and Katz 1992). Additionally, research consistently reveals that low-skilled workers (those with at most a high school degree) are especially unlikely to move between cities or states in response to changing job prospects (Bound and Holzer 2000, Wozniak 2010).

The tendency for these workers to remain in place is especially problematic during a severe downturn like the Great Recession. Recessions lead to particularly poor labour-market outcomes for low-skilled workers (Hoynes 2002; Hoynes, Miller, and Schaller 2012). Moreover, there was a great deal of variance in the depth of the Great Recession from city to city. Some cities such as Detroit, Phoenix, and Sacramento saw job losses as high as 20-25% for low-skilled workers, while others such as Austin and Omaha experienced small rates of employment growth. Without less skilled workers willing to move from the hardest hit markets to cities with better employment prospects, the economy faced the possibility of very unequal changes in employment rates across cities.

Immigrants serve as an equilibrating force

There is a group of low-skilled workers, though, who are quite sensitive to labour-market conditions in choosing where to locate: immigrants. George Borjas (2001) showed that newly arriving immigrants tend to select states within the US that offer better wage prospects. Thus, immigrant inflows help “grease the wheels of the labor market” by reducing the variation in wages across locations. In our new paper (Cadena and Kovak 2013), we show that immigrants continued to serve this important function during the Great Recession. We find a substantial reallocation of the low-skilled immigrant population from 2006 to 2010, especially among those from Mexico, with the population shifting systematically toward cities with milder downturns. Roughly 20% of this shift occurred because new arrivals chose relatively stronger labour markets, and the remaining 80% occurred through immigrants who were already in the US migrating internally or leaving the country entirely.

To demonstrate Mexican immigrants’ strong responses, we leverage the fact that during the Great Recession employers were much more likely to cut costs by eliminating jobs rather than by cutting wages (Daly, Hobijn, and Lucking 2012; Daly, Hobijn, and Wiles 2012; Rothstein 2012). This downward wage rigidity means that the severity of a city’s decline in demand for labour can be measured directly using changes in payroll employment from the County Business Patterns (CBP). We then look to see whether cities with bigger employment declines lost population to cities with fewer job losses.1

For college-educated workers, we see considerable mobility in the expected direction for all demographic groups. In contrast, we find that among those with no more than a high school degree, only foreign-born populations move in substantial numbers to stronger labour markets. Further, responsive mobility among immigrants appears to be driven almost entirely by the Mexican-born. For this group, a percentage point larger (smaller) decline in employment leads to a 0.75 percentage point smaller (larger) growth rate in the Mexican-born population of a city. Figure 1 shows the stark contrast in this relationship for less skilled native-born and Mexican-born men. Each circle represents a city; the x-axis measures the local change in employment from 2006 to 2010, and the y-axis measures the population growth rate over the same period. The figure clearly shows that the native population responds very little to changes in employment, while the Mexican-born respond markedly.

Figure 1. Population responses to employment shocks: native-born and Mexican-born low-skilled men

This difference in responsiveness between natives and Mexicans is quite robust. In the paper, we rule out various alternative explanations for the geographic shifts in population, including the possibility that this movement was the continuation of an ongoing diffusion away from traditional immigrant enclaves, or that migration was driven by local anti-immigrant policies (e.g. SB 1070 in Arizona). We also find that this redistribution was not already happening prior to the recession, and we use two separate instrumental variables strategies to address the possibility of reverse causality. In the end, we conclude that the population response among Mexican-born individuals was caused by geographic variation in the depth of the recession.

Immigrants’ willingness to relocate to stronger labour markets will, on average, improve their employment outcomes. Moreover, we show that their mobility also has a side effect – it tends to reduce the variation of labour-market outcomes for native workers, who mostly remain in their initial location. As Mexican-born workers left cities with the largest employment declines, they reduced competition for job vacancies among remaining workers, which improved the likelihood that those workers found employment. Similarly, as Mexicans arrived in stronger labour markets, they increased competition and reduced the employment probability for similarly skilled natives. Thus, Mexican mobility partially equalised differences in natives’ experiences of the Great Recession across cities.

To demonstrate this point, we measure the extent to which changes in natives’ employment rates are related to their city’s overall job losses. In a perfectly fluid labour market with many workers moving away from weak markets in favour of strong ones, we would find no relationship. Given enough movement, workers in all cities would end up equally likely to be employed, regardless of how varied the job losses were. Since we find large population responses only among the Mexican born, a natural hypothesis is that cities with more access to this mobile factor will experience outcomes that are less tied to the local downturn. We address this hypothesis by dividing our sample of cities into those that have historically attracted many Mexican immigrants (e.g. Dallas and Los Angeles) and cities that have attracted relatively few (e.g. Miami and Philadelphia). As expected, there is a much weaker relationship between local job losses and natives’ employment probabilities in cities that have historically attracted large Mexican-born workforces, which highlights the equalising effect of Mexican mobility.

Figure 2. Mexican mobility smooths natives' employment outcomes: change in native-born male low-skilled employment/population ratio vs. change in payroll employment

Figure 2 shows this comparison graphically. The gray triangles represent cities with high Mexican-born shares of workers, and thus a more mobile low-skilled labour force. The black circles show cities with a smaller Mexican-born concentration. As the fitted lines show, in cities with many highly mobile Mexican workers, employment probabilities for natives were less related to their city-specific job losses.

The value of immigrants’ mobility

Immigrants’ mobility therefore serves to allocate the supply of labour towards the areas where it is in the highest demand. As a result, employment rates vary less across cities than they would have if no workers had been willing to move. Avoiding extremely low employment rates is quite valuable because long periods of unemployment can have permanent consequences, including discouraged workers leaving the labour market and a subsequent depreciation of workers’ skills. Our results show that natives in cities like Phoenix or Riverside, with large concentrations of Mexican immigrants, fared better than natives in cities like Detroit or Palm Beach, with small Mexican-born populations, even though all of these cities experienced similarly larger-than-average job losses.

Our results, however, do not imply that these benefits are ‘free’. Our analysis suggests that, at least during the Great Recession, less skilled immigrants and natives did in fact compete in the labour market. Natives in relatively strong labour markets faced more competition for remaining jobs than they would have in the absence of immigrants moving in. Thus, the mobility of the Mexican-born functions like labour-market insurance, dampening the highs in order to reduce the risk of especially bad labour-market outcomes. From an ex ante perspective, therefore, low-skilled workers in markets with a high immigrant share experience utility gains as long as they are risk averse.

Conclusions

The welfare gains from the efficient spatial allocation of labor are an important but understudied benefit that should be considered in immigration policymaking. Although our paper does not address the question of whether the U.S. should admit more or fewer less-skilled immigrants, our results imply that it is valuable to maintain immigrants' geographic flexibility whatever the overall level of immigration. There is no guarantee, of course, that Mexican immigrants will continue to be as responsive under alternative policy regimes. For example, Mexican immigrants are currently much less likely to receive unemployment insurance benefits compared to similarly skilled natives, which likely increases the urgency of finding new employment. Nevertheless, to the extent that immigrants continue to show a greater willingness to move in response to demand changes, our findings demonstrate the benefits of allowing them to do so. The recently passed Senate immigration reform bill (S.744) would create a new temporary guest-worker programme for less skilled workers (W visa) that would not restrict workers to a particular employer or location. Workers would be free to move to markets offering better opportunities, and our analysis implies that this feature would be a welcome component of an immigration policy overhaul.

References

Blanchard, Olivier Jean and Lawrence F Katz (1992), “Regional Evolutions”, Brookings Papers on Economic Activity 1, 1-75.

Bound, John and Harry J Holzer (2000), “Demand Shifts, Population Adjustments, and Labor Market Outcomes during the 1980s”, Journal of Labor Economics, 18(1), 20-54.

Borjas, George J (2001), “Does Immigration Grease the Wheels of the Labor Market?”, Brookings Papers on Economic Activity 1, 69-133.

Cadena, Brian C, and Brian K Kovak (2013), “Immigrants Equilibrate Local Labor Markets: Evidence from the Great Recession”, NBER Working Paper 19272.

Daly, Mary, Bart Hobijn, and Brian Lucking (2012), “Why Has Wage Growth Stayed Strong?", FRBSF Economic Letter 10, 1-5.

Daly, Mary C, Bart Hobijn, and Theodore S Wiles (2012), “Dissecting Aggregate Real Wage Fluctuations: Individual Wage Growth and the Composition Effect", FRBSF Working Paper 23.

Davis, Steven J, R Jason Faberman, and John Haltiwanger (2012), “Labor Market Flows in the Cross Section and Over Time”, Journal of Monetary Economics 59, 1-18.

Hoynes, Hilary W, Douglas L Miller, and Jessamyn Schaller (2012), “Who Suffers During Recessions?", The Journal of Economic Perspectives 26(3), 27-47.

Hoynes, Hilary W (2002), “The Employment, Earnings, and Income of Less Skilled Workers over the Business Cycle", in David Card and Rebecca Blank (eds.), Finding Jobs: Work and Welfare Reform, Russell Sage Foundation, Chapter 1, 23-71.

Hyatt, Henry R, James R Spletzer (2013), “The Recent Decline in Employment Dynamics”, US Census Bureau Center for Economic Studies Paper CES-WP-13-03.

Molloy, Raven, Christopher L Smith, and Abigail Wozniak (2011), “Internal Migration in the United States”, Journal of Economic Perspectives 25(3), 173-196.

Rothstein, Jesse (2012), “The Labor Market Four Years into the Crisis: Assessing Structural Explanations", Industrial and Labor Relations Review 65(3), 467-500.

Wozniak, Abigail (2010), “Are College Graduates More Responsive to Distant Labor Market Opportunities?”, Journal of Human Resources 45(4), 944-970.


1 The CBP data are collected only by industry and not by education level. We construct skill-specific employment declines by taking a weighted average of the industry-level job losses using pre-recession industry shares (for each skill group) as weights.

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Topics:  Labour markets

Tags:  US, immigration, Mexico