The effect of immigration on the Phillips curve
Over the period 1995-2006, Spanish unemployment decreased by almost 12 percentage points, from 22% to 8%, while inflation remained roughly constant at around 3 - 4%. As a result, the Phillips curve, which graphically represents the historical inverse relationship between the rate of unemployment and the rate of inflation in a country, has become much flatter in Spain than in any other euro area country. The authors of CEPR DP6604 argue that this favourable evolution is largely due to the impact of the huge rise in the immigration rate, from 1% of the population in 1995 to 9.3% in 2006, on the labour market.
A New Keynesian Phillips curve is derived accounting for the effects of immigration, a variable that shifts the curve because preferences towards labour supply or the bargaining power of immigrants and natives differ. In general, immigrants are less well represented by labour unions, tend to be more mobile and are more willing to take low-paid jobs than natives. The findings show that while the average unemployment rate over the last 8 years would have caused the inflation rate to increase by 2.5 percentage points, the effect was largely offset by the surge in immigration. The authors also estimate industry-specific Phillips curves, finding that the relative immigrant unemployment rate is larger for the industries with a higher share of immigration. Overall, these effects may decay over time, as immigrants integrate and their labour supply becomes closer to that of natives, but it is too soon to detect such evolution in the case of Spain.
Topics: Labour markets