Immigration, Worker-Firm Matching, and Inequality Jaerim Choi* Jihyun Park** University of Hawaii at Manoa KISDI August 2, 2018 Abstract This paper develops a novel framework of worker-firm matching to study the dis- tributional impacts of low-skilled immigration on native workers. Adopting an as- signment model from the trade literature, we build a theoretical model where the inflow of immigrants affects natives through the change in worker-firm matching. Theory predicts that the inflow of low-skilled immigrants pushes natives up to match with more productive firms. With complementarity assumption, the benefits are bi- ased toward skilled workers, and inequality rises among native workers. Using Cen- sus and IPUMS American Community Survey over the period 1980-2010, we provide empirical evidence that immigration raises inequality through the matching channel. Keywords: Immigration; Matching; Inequality. JEL Code: F22, F66, J31. *Department of Economics, University of Hawaii at Manoa, [email protected]**Korea Information Society Development Institute, [email protected]
40
Embed
Immigration, Worker-Firm Matching, and Inequality · flux of low-skilled immigrants increases ... Because immigrants have lower education levels and ... 2000 US Census and IPUMS
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Immigration, Worker-Firm Matching, and
Inequality
Jaerim Choi* Jihyun Park**
University of Hawaii at Manoa KISDI
August 2, 2018
Abstract
This paper develops a novel framework of worker-firm matching to study the dis-
tributional impacts of low-skilled immigration on native workers. Adopting an as-
signment model from the trade literature, we build a theoretical model where the
inflow of immigrants affects natives through the change in worker-firm matching.
Theory predicts that the inflow of low-skilled immigrants pushes natives up to match
with more productive firms. With complementarity assumption, the benefits are bi-
ased toward skilled workers, and inequality rises among native workers. Using Cen-
sus and IPUMS American Community Survey over the period 1980-2010, we provide
empirical evidence that immigration raises inequality through the matching channel.
Keywords: Immigration; Matching; Inequality.
JEL Code: F22, F66, J31.
*Department of Economics, University of Hawaii at Manoa, [email protected]**Korea Information Society Development Institute, [email protected]
1 Introduction
What are the distributional effects of immigration in the U.S.? This paper proposes a
new framework, a matching between workers and firms, to think about the impacts of
immigration on inequality.
Immigrants in the U.S. labor market are characterized by less educated immigrants
- there are relatively more immigrants at the lower end of the skill distribution. Thus,
the influx of immigrants may differently affect natives with heterogeneous skills, which
leads to a change in inequality in the U.S. Therefore, it is essential to incorporate hetero-
geneous skills into the theoretical immigration model, not based on representative agent
models, to analyze the impact of immigration on inequality in the U.S. In addition to
heterogeneity in the inflows of immigrants, the U.S. labor market is characterized by pos-
itive assortative matching (PAM) between workers and firms: High-skilled workers are
matched with high-productive firms. Moreover, log wage schedules are increasing and
convex in education levels (Lemieux, 2006, 2008).
Based on these observations in the U.S. labor market, we build a theoretical immigra-
tion model of matching between heterogeneous workers and heterogeneous firms with
complementary production technology in the framework of monopolistic competition
(Sampson, 2014). Heterogenous firms are paired up with heterogeneous workers to pro-
duce differentiated goods. In equilibrium, our model replicates the positive assortative
matching and the convex log wage schedule which are observed in the U.S. labor mar-
ket. When immigrants arrive in the destination country, it changes the skill distribution
of workers, and the influx changes the matching mechanism between workers and firms.
Because the wages are determined by both the skill level of workers and the productivity
level of firms, there would be distributional consequences after immigration.
We analyze two hypothetical cases of immigration. First, we assume that the skill
distribution of immigrants is identical to that of natives. In this case, the matching mech-
anism and the wage function do not change from immigration. Second, we consider a
1
case where immigrants are relatively less skilled than natives. The case of low-skilled
immigration is of great importance because the low-skilled immigration characterizes the
U.S. immigration. The distributional implication, in the second case, presents a starking
contrast to the first case. The model predicts that immigrant inflow changes the matching
mechanism between workers and firms. Native workers can now be paired up with firms
with higher productivities, which increases inequality. Due to the complementary pro-
duction technology between worker’s skill and firm’s productivity, more skilled workers
benefit more from the re-matching process.
We empirically test whether the theory applies to the U.S. local labor markets during
the period from 1980 to 2010. We use U.S. Census 1980, 1990, 2000 and IPUMS Ameri-
can Community Survey 2008-2012 and exploit the variation in the share of immigrants
across commuting zone-year. We assume that immigrants tend to be less-skilled than na-
tives since the foreign-born percentage of the U.S. population in a less educated group is
overrepresented than in other groups (Peri, 2016) and the absolute number of immigrants
in this group outweighs the number of other groups. We use a Baltik-type shift-share
instrument to deal with potential endogeneity issues.
Using the two-stage least squares estimation technique, we demonstrate that the in-
flux of low-skilled immigrants increases inequality within natives. We further explore
whether the increase in inequality comes from the worker-firm matching channel. Be-
cause we cannot directly observe worker-firm matching in our dataset, we define each
commuting zone - industry pair as a proxy unit for a firm. Using a variant of Mincerian
wage regression, we decompose worker’s wage into components related to observable
worker characteristics, unobservable firm heterogeneity (commuting zone - industry het-
erogeneity), other unobservable fixed effects, and residual variation. We use the estimated
firm heterogeneity as a proxy for time-invariant productivities of native workers’ match-
ing counterparts. Empirical results show that low-skilled immigration induces native
workers to match with more productive firms.
2
2 Related Literature
There has been extensive literature on the effect of immigrants on the wages of natives
(Borjas, 2003; Card, 2009; Ottaviano and Peri, 2012; Basso and Peri, 2015). However, stud-
ies in this research arena have not come to a single conclusion as to the direction of the
impact of immigration on the wages of native workers. Borjas (2003) argues that immi-
gration adversely affects the wages of competing native workers. The author assumes
that workers with the same education and different work experience in a national mar-
ket are not perfect substitutes and uses the variations in schooling-experience groups to
measure the wage impact of immigration. On the contrary, Ottaviano and Peri (2012) find
a small positive effect on native wages. Using the national approach as in Borjas (2003),
this study estimates the elasticity of substitution across a different group of workers and
uses the estimated elasticities to calculate the total wage effect of immigration. They find a
small but significant degree of imperfect substitutability between natives and immigrants
under the same education-experience cell, which leads to the overall positive wage effect
of immigration. Similar to Ottaviano and Peri (2012), Basso and Peri (2015) find a zero to
a positive impact of immigration on the wages of native workers using the 2SLS method
with a shift-share instrument. Card (2009) explores the impact of immigration on wage
inequality using cross-city variations in the U.S. The author finds that immigration had
a small effect on wage inequality among natives. However, considering immigrants are
counted in total population, the effect of immigration on total wage inequality becomes
positive as immigrants tend to locate in the upper and lower tails of the skill distribution.
We contribute to this literature by building a new immigration framework to analyze the
impact of immigration on the wages and inequality of native workers. The modeling
framework is based on the heterogeneous workers and heterogeneous firms which allow
us to analyze diverse aspects of immigration on natives. The prediction from the model
and empirical results shed some light on the impact of immigration on the wages of native
workers.
3
Researchers have also studied more micro-founded mechanisms for the impact of
immigration on the wages of native-born workers. Peri and Sparber (2009) argue that
native-born workers and foreign-born workers specialize in different production tasks so
that large influx of less-educated immigrants may not necessarily substitute less-educated
native workers. In the model, immigration will re-allocate task supply in which foreign-
born workers specialize in manual tasks while native workers specialize in communica-
tion tasks. The task specialization mechanism attenuates the negative wage impact of
immigration on native workers. Hunt and Gauthier-Loiselle (2010) find evidence of the
positive spillovers of skilled migration on boosting innovation in the U.S. As immigrants
are more concentrated in science and engineering occupations than natives in those oc-
cupations, immigrants increase innovation as measured by US patents per capital. Since
scientific and engineering knowledge transfers occur easily, this positive spillover makes
native workers better off. Ortega and Peri (2014) show that openness to immigration leads
to higher income per capita. This positive effect operates through an increased total factor
productivity from increased diversity and ideas in the host country. We introduce a new
mechanism, “worker-firm matching,” to explain the distributional effects of immigrants
on the natives. As immigration can be seen as matching between immigrant workers
and native firms, we incorporate the standard matching framework into the model and
analyze how different types of immigration affect the matching function, which maps
workers’ skills to firms’ productivities, in the host country. Through the change in the
skill distribution of workers from immigration, native workers are paired up with new
firms with higher productivities. This matching mechanism affects the wages of native
workers, thereby changing inequality among native workers.
Our insight on immigration, defined as matching between immigrants and native
firms, is based upon the concept of globalization in Kremer and Maskin (1996, 2006).
Kremer and Maskin (1996) propose a model of production by workers of different skills
with complementarity between two tasks. In a closed economy setting, they argue that
4
segregation of high-skilled and low-skilled workers into separate firms will lead to wage
inequality. Kremer and Maskin (2006) extend the analysis to a two-country framework
and analyze the impact of globalization, which is defined as workers from different coun-
tries being able to form a team in the same firm. Globalization enables high-skilled work-
ers in poor countries to be matched with more skilled workers in rich countries. Low
skilled workers in the poor countries are marginalized due to globalization because their
skill levels are so low that rich country workers do not want to match with them.
Our theoretical framework is also closely related to the burgeoning literature in in-
ternational trade that uses an assignment model with heterogeneous workers (Antras,
Garicano and Rossi-Hansberg, 2006; Ohnsorge and Trefler, 2007; Costinot and Vogel,
2010; Sampson, 2014; Grossman, Helpman and Kircher, 2017; Grossman and Helpman,
2018). Antras, Garicano and Rossi-Hansberg (2006) propose a knowledge-based hier-
archy model to analyze the impact of cross-country team formation on the structure of
wages. Ohnsorge and Trefler (2007) study the implication of two-dimensional worker het-
erogeneity and worker sorting on international trade. Costinot and Vogel (2010) develop
tools and techniques to analyze the factor allocation and factor prices in a Roy-like assign-
ment model with a continuum of workers and a continuum of tasks. Grossman, Helpman
and Kircher (2017) develop two industries and two heterogeneous factors of production
framework in which they study the distributional effects of international trade.
In this paper, we base our model upon Sampson (2014)’s monopolistic competition as-
signment model. Then, we apply the monotone comparative statics technique in Costinot
and Vogel (2010) to derive analytical results about the distributional impacts of immigra-
tion. Immigration changes the skill distribution of workers, thus changes the matching
mechanism in the model. The theoretical model developed in this paper, to the best of our
knowledge, is the first application of the assignment model with heterogeneous workers
in the immigration literature.
5
3 Some Observations in the U.S. Labor Market
Fact I. Natives and immigrants are heterogeneous in skills.
There are relatively more immigrants at the lower end of the education distribution,
i.e., immigrant workers have lower education levels compared to native workers (See
Figure 1). Native workers are concentrated in high school graduates, but a significant
share of immigrant workers report their education as none. Moreover, immigrants are
less likely to have excellent communication skills, such as language, than comparably-
educated, native-born workers (Peri and Sparber, 2009). Thus, the influx of immigrants
into the U.S. labor market can be characterized as an increase in the supply of workers
with low skills.
Fact II. Worker-Firm matching shows positive assortative matching.
We use U.S. census data to approximate firms by commuting zone-industry pairs. Be-
cause firm productivities are unobservable to researchers, we set up a variant of Mince-
rian type regression and compute time-invariant commuting zone-industry fixed effects
to proxy for firm productivities (See Section 5.1.5 for more details). Within each firm,
we calculate average schooling years and average imputed log hourly wages of workers.
In the top panel of Figure 2, more educated workers are paired up with more produc-
tive firms. In the bottom panel of Figure 2, higher paid workers are matched with more
productive firms. There is a positive association between worker skills and firm pro-
ductivities. In this literature, we use positive assortative matching (PAM) to denote this
relationship. This relationship also holds for other years (1980, 1990, and 2010).
Fact III. Log wage function is strictly increasing and convex in skills.
Lemieux (2006, 2008) argues that log wages have become an increasingly convex func-
tion of years of education. In 1973 - 1975, the log wage appeared to be a linear function in
years of education. However, in 2003 - 2005, this log wage function had become a convex
6
function in that the return to post-secondary education is much higher than the return to
elementary and secondary education. We revisit this finding using US Census dataset.
First, we show that log hourly wage is strictly increasing in years of education in each
year and returns to an additional year of education is much higher for those with high
school education or more compared to those with secondary education or less. Moreover,
the log wage gap within the same education level between the year 1980 and the year
2010 increases in years of education (See Figure 3).
4 The Model
We build a theoretical immigration framework that can replicate these three observa-
tions in the U.S. labor market: 1. Heterogeneity in skills between immigrants and na-
tives, 2. Positive assortative matching between workers and firms, and 3. Log wage
function is increasing and convex in education levels. More specifically, our model is
based upon Sampson (2014)’s matching model in which heterogeneous firms hire hetero-
geneous workers to produce differentiated goods in a monopolistic competition frame-
work. Using this framework, we extend the model to allow for immigration and study
the distributional effects of different cases of immigration.
4.1 Environment
Consider an economy populated by a mass N of workers indexed by skill level z, and a
mass M of firms indexed by productivity level ϕ. The cumulative distribution of skills is
given by H(z), which is twice differentiable and has a positive density H ′(z) > 0 on the
bounded support [zmin, zmax] with zmin > 0. Similarly, the cumulative distribution of firm
productivities is given by G(ϕ), which is twice differentiable and has a positive density
G′(ϕ) > 0 on the bounded support [ϕmin, ϕmax] with ϕmin > 0. Firms with different
productivities hire different types of workers to produce differentiated goods, indexed
7
by ω, using worker as the sole input to production.
The preference of each individual is given by a CES utility over a continuum of differ-
entiated goods:
U =
[∫ω∈Ω
x(ω)σ−1σ dω
] σσ−1
where Ω is the set of available goods and σ > 1 is the elasticity of substitution between
goods. It follows that the demand for any variety ω is given by:
x(ω) = XP σp(ω)−σ
where X is the aggregate output of composite good, P :=[∫ω∈Ω
p(ω)1−σdω] 1
1−σ is the
aggregate price, and p(ω) is the price of differentiated good ω. Without loss of generality,
we normalize the aggregate price P equal to one. Then, the demand for variety ω can be
expressed as:
x(ω) = Xp(ω)−σ.
Consider a firm that produces variety ω using productivity ϕ and that hires a set Lω of
workers with densities lw(z). Then, the output is given by:
x(ω) =
∫z∈Lω
ψ(ϕ, z)lw(z)dz.
Assumption 1. The productivity function ψ(ϕ, z) is twice continuously differentiable, strictly
increasing, and strictly log supermodular.
Assumption 2. The log productivity function lnψ(ϕ, z) is twice continuously differentiable,
strictly increasing, and second partial derivatives with respect to z are strictly positive.
8
4.2 Profit Maximization
Each firm chooses the employment size and the worker skill level to maximize the fol-
lowing profit:
π(l, z;ϕ) = X1σ [ψ(ϕ, z)l]
σ−1σ − w(z)l,
where w(z) is the wage paid to workers of skill level z. The first order conditions of the
profit maximization problem can be written as follows:
∂π
∂z=σ − 1
σX
1σ [ψ(ϕ, z)l]−
1σ ψz(ϕ, z)− w′(z) = 0,
∂π
∂l=σ − 1
σX
1σ [ψ(ϕ, z)l]−
1σ ψ(ϕ, z)− w(z) = 0.
Rearranging the two conditions, we can obtain the differential equation that characterizes
the trade off relation between the productivity and the wage as follows:
ψz(ϕ, z)
ψ(ϕ, z)=w′(z)
w(z). (1)
Assumption 1 and equation (1) dictate the equilibrium matching pattern, which is the
positive assortative matching (PAM) between firm types and worker types. Denote m(z)
as a matching function that maps worker skill to firm productivity, and w(z) as an equi-
librium wage function.
Assumption 2 dictates the equilibrium log wage schedule. From equations (1), we
know that the partial derivatives of log productivities with respect to skill z are identi-
cal to partial deriviatives of log wage function with respect to skill z. Because the log
productivities are strictly increasing and convex in skill z from Assumption 2, log wage
schedule lnw(z) is strictly increasing and convex in skill z. The equilibrium matching
function and wage function replicate the patterns in the U.S. labor market: the positive
assortative matching between workers and firms (Fact II) and the log wage schedule is
9
strictly increasing and convex in years of eduaction (Fact III).
Using the profit maximization condition, the optimal number of workers, the price,
and the profit that a firm with productivity ϕ, are given by,
l(z;ϕ) =
(σ − 1
σ
)σXψ (ϕ, z)σ−1w(z)−σ,
p(ϕ) =σ
σ − 1
w(z)
ψ(ϕ, z),
π(ϕ) = σ−σ(σ − 1)σ−1X
(w(z)
ψ(ϕ, z)
)1−σ
.
4.3 Labor Market Clearing
Consider a set of workers [zmin, z] and the set of firms [ϕmin,m(z)] that matched with these
workers in the equilibrium. The labor market clearing condition can be expressed as:
M
∫ m(z)
ϕmin
(σ − 1
σ
)σXψ
(ϕ,m−1(ϕ)
)σ−1w(m−1(ϕ))−σdG(ϕ) = N
∫ z
zmin
dH(z)
where the left-hand side is the demand for workers by firms with productivity level be-
tween ϕmin andm(z) and the right-hand side is the supply of workers matched with those
firms. Differentiating this equation with respect to z yields,
m′(z) =N
MX
(σ
σ − 1
)σw(z)σ
ψ(m(z), z)σ−1
H ′(z)
G′(m(z)), for all z ∈ [zmin, zmax] (2)
with the two boundary conditions ϕmax = m(zmax) and ϕmin = m(zmin). This differential
equation with two boundary conditions, together with equation (1), uniquely determine
the matching function m(z) and the wage function w(z) .
10
4.4 Equilibrium
Definition 1. The equilibrium is characterized by a set of functions,m(z) (the matching function)
and w(z) (the wage function), such that
(i) Optimality: Firms maximize profits that satisfy equation (1),
(ii) Labor Market Clearing: The labor markets clear as in equation (2)
4.5 The Distributional Effects of Immigration
Suppose that this economy, entirely composed of natives, starts to open doors to immi-
grants. Because immigrants have lower education levels and communication skills com-
pared to natives (See Fact I), we consider a case where low-skilled immigrant workers
migrate to the destination country. We assume that they are integrated into the pool of
workers and that they are relatively less-skilled than native workers. We can model this
case as follows. First, the number of workers increases such that N ′ > N where N ′ de-
notes the number of workers after immigration, and N represents the number of workers
before immigration. Second, the skill distribution of workers after immigration changes
such thath′(z′)
h′(z)≤ h(z′)
h(z)for all z′ ≥ z where h′(z) is the skill distribution function after
immigration and h(z) denotes the skill distribution function before immigration. We can
decompose the effect of immigration into two channels: 1) the change in the number of
workers and 2) the change in the worker skill distribution.
Proposition 1. Suppose that the number of workers increases such that N ′ > N . Then,
(i) The matching function, m(z), does not change;
(ii) The wage function, w(z), does not change.
Proof. See Appendix 7.1.1.
In this case, the increase in the size of the workers does not affect matching patterns
and wages. The impact of immigration on native workers is neutral. However, based on
the Fact I, we analyze the impact of the change in the worker skill distribution as follows.
11
Proposition 2. Suppose that there are relatively more low-skilled workers after immigration such
thath′(z′)
h′(z)≤ h(z′)
h(z)for all z′ ≥ z. Then,
(i) The matching function, m(z), shifts upward;
(ii) The wage inequality rises such thatw′(z′)
w′(z)≥ w(z′)
w(z)for all z′ ≥ z.
Proof. See Appendix 7.1.2.
Since immigrant workers are less-skilled than native workers, the lower part of the
worker’s skill distribution thickens, which induces native workers to match with more
productive firms: the upward shift of the matching functionm(z). Due to the log-supermodularity
of the production function, more skilled workers benefit more from the increase in match
quality than less skilled workers. Therefore, the wage inequality rises.
4.6 Extension
We extend the impacts of immigration to a case in which the skill distribution of immi-
grants is more diverse than that of natives.
Proposition 3. Suppose that there are more diverse workers after immigration such thath′(z′)
h′(z)≥
h(z′)
h(z)for all z′ ≥ z ≥ z and
h′(z′)
h′(z)≤ h(z′)
h(z)for all z > z′ ≥ z. Then,
(i) There exists a skill level z∗ such thatm′(z) ≥ m(z) for all z ∈ [zmin, z∗], andm′(z) ≤ m(z)
for all z ∈ [z∗, zmax];
(ii) The wage inequality increases among low-skilled workers such thatw′(z′)
w′(z)≥ w(z′)
w(z)for
all z∗ > z′ ≥ z > zmin and the wage inequality reduces among high-skilled workers such thatw′(z′)
w′(z)≤ w(z′)
w(z)for all zmax > z′ ≥ z > z∗.
Proof. See Appendix 7.1.3.
Because immigrant workers are concentrated in the extreme tails of the skill distri-
bution, the impacts of immigration differ across groups. Among high-skilled natives,
12
immigration causes native workers to match with less productive firms. However, im-
migration induces native workers to be paired up with more productive firms among
low-skilled native workers. The combined effects lead to the increase in wage inequality
among the low-skilled group and the decrease in wage inequality among the high-skilled
group. Hence, the mid-skilled native workers relatively benefit the most from the case of
immigration with diverse immigrants.
5 Empirical Analysis
In this section, we analyze whether our theoretical model can explain the effect of the
influx of immigrants in the U.S. from 1980 through 2010. First, we give an overview of
our dataset and construct key variables. Then we empirically show that the immigrant
inflow increases the inequality in the U.S., consistent with our theory, and show that the
worker-firm matching channel operates.
5.1 Data and Variables
5.1.1 Data overview
Our primary datasets are 5% 1980, 1990, 2000 U.S. Census and 2009-2011 3-year IPUMS
American Community Survey for 2010. We restrict samples to all individuals in age 18
to 64. ‘Immigrants’ refer to individuals who were born in a foreign country, and ‘natives’
refer to those who were born in the U.S.1 We use commuting zones as geographical units
following Autor, Dorn and Hanson (2013) and Basso and Peri (2015). An instrumental
variable for the share of immigrants in each year and commuting zone is estimated by
a shift-share method based on the foreign-born population in the 1% 1950 U.S. Census.
Hourly wages are calculated by dividing the wage and salary income by weeks worked
1U.S. territories are excluded.
13
and usual hours worked per week. Hourly wages in the lowest and the highest 1% of the
distribution and those of less than one dollar are dropped.
Table 1 presents descriptive statistics for natives and immigrants. The share of im-
migrants at the national level in our sample gradually rises from 6.45% in 1980, 9.37% in
1990, 13.83% in 2000, to 17.11% in 2010. It also shows that immigrants tend to have a lower
share of female and lower share of managers. The share of female and the share of man-
ager in 2010 are 43.44% and 6.62% among immigrants, respectively, while they are 49.31%
and 9.04% among natives. The level of education shows that immigrants are less-skilled
than natives. In 2010, 6.30% of natives had less than high school while 26.08% of immi-
grants have less than high school. In the same year, 39.38% of natives have more than a
high school degree while 35.45% of immigrants have more than a high school degree.
5.1.2 Commuting zone
We use commuting zones as primary geographical units following Autor, Dorn and Han-
son (2013) and Basso and Peri (2015). States are too large to represent local labor markets,
and counties are too small and often do not overlap with labor market regions. Metropoli-
tan areas include regions around urban areas and have a limitation in representing rural
areas. Commuting Zones are developed by Tolbert and Sizer (1996) to approximate lo-
cal labor markets, and they can be consistently constructed over the full period of our
analysis.
The U.S. Census and American Community Survey files provide geographical units
that are smaller than states – State Economic Areas (1950), Country Groups (1980), and
Public Use Micro Area (PUMA, 1990, 2000, 2009-2011). These geographical units are
mapped to commuting zones using the mapping file (http://ddorn.net/). While many
units fall into a single CZ, some geographical units are matched to several CZs with each
probability. For example, 20% of workers in a PUMA commute to the first CZ and 80% to
the second CZ. Each observation in that PUMA is now split into two CZs with probability
14
.2 and .8, and personal weights are also split by .2 and .8 (Autor, Dorn and Hanson, 2013).
5.1.3 Share of immigrants
The number of immigrants in each commuting zone is endogenously determined by the
pull factors of each region, such as labor market conditions. To remove the endogeneity,
we construct an instrumental variable for the share of immigrants in each commuting
zone and year (ImmigShareg,t) by a shift-share method based on the foreign-born popu-
lation in 1950 US Census as follows:
P opg,o,t = Popg,o,1950 ∗PopUS,o,tPopUS,o,1950
(o = US and other origin countries)
ImmigShareIVg,t =
∑o 6=US P opg,o,t∑o P opg,o,t
(3)
where g denotes a commuting zone, o represents a origin country, and t is year. We group
origin countries into 16 origin regions.2 For each origin region o, immigrant population in
1950 in commuting zone g (Popg,o,1950) is increased by the national increase rate between
1950 and year t ( PopUS,o,tPopUS,o,1950
).
The stock of the native population in each commuting zone and year is estimated sim-
ilarly and noted as o = US. We calculate the stock of all immigrants in each commuting
zone and year by aggregating the number of immigrants over all origin regions, excluding
the U.S. Lastly, the share of immigrants in commuting zone g and year t, ImmigShareIVg,t ,
is calculated by the stock of all immigrants (∑
o 6=US P opg,o,t) divided by the sum of both
immigrants and natives (∑
o P opg,o,t).
We then examine the weak instrumental variables problem. The first stage regression
result shows that the F statistics is 70.32 which is higher than 16.38 – 10% critical value
2Sixteen origin regions are United States, Other North America, Central America and Caribbean,South America, Northern Europe, United Kingdom and Ireland, Western Europe, Southern Europe, Cen-tral/Eastern Europe, Russian Empire, East Asia, Southeast Asia, India/Southwest Asia, Middle East/AsiaMinor, Africa, and Oceania.
15
for one endogenous variable and one excluded instrument. Hence, we reject the null
hypothesis that our shift-share instrument is weak.
5.1.4 Inequality
To measure inequality within group k (k ∈ Total, Nat, Imm), we first compute the uth
percentile of log wages within commuting zone g and year t, which we denote as ln(wage)k,g,t(u).
Then, we define four different measures of inequality as the difference between the higher
percentile of log wage minus the lower percentile of log wages as follows:
iii) m′(z) < m(z) for all z ∈ (z0, z1) and m′(z) > m(z) for all z ∈ (z1, z2).
There are two possible cases: z1 < z and z1 ≥ z. Suppose that z1 < z. m′z(z0) ≤ mz(z0)
and m′z(z1) ≥ mz(z
1) implies that:
m′z(z1)
m′z(z0)≥ mz(z
1)
mz(z0).
Using equation (2), we can derive the following inequality:
[w(z0)
w(z1)
]σh(z0)
h(z1)≥[w′(z0)
w′(z1)
]σh′(z0)
h′(z1).
h′(z1)
h′(z0)≤ h(z1)
h(z0)requires that:
w′(z1)
w′(z0)≥ w(z1)
w(z0).
25
However, this is a contradiction. Since m′(z) < m(z) for all z ∈ (z0, z1), it must be that
w′(z1)
w′(z0)<w(z1)
w(z0).
Suppose that z1 ≥ z. m′z(z2) ≤ mz(z2) and m′z(z
1) ≥ mz(z1) implies that:
m′z(z1)
m′z(z2)≥ mz(z
1)
mz(z2).
Using equation (2), we can derive the following inequality:
[w(z2)
w(z1)
]σh(z2)
h(z1)≥[w′(z2)
w′(z1)
]σh′(z2)
h′(z1).
h′(z1)
h′(z2)≤ h(z1)
h(z2)requires that:
w′(z1)
w′(z2)≥ w(z1)
w(z2).
However, this is a contradiction. Since m′(z) > m(z) for all z ∈ (z1, z2), it must be that
w′(z1)
w′(z2)<w(z1)
w(z2).
Consequently, there exists a skill level z∗ such that m′(z) ≥ m(z) for all z ∈ [zmin, z∗], and
m′(z) ≤ m(z) for all z ∈ [z∗, zmax].
(ii) The proof is identical to that of Proposition 2 - (ii).
26
7.2 Figures and Tables
Figure 1: Education distributions of natives and immigrants
Notes: The figure plots cumulative distribution functions for natives and immigrants by years ofeducation. The blue line denotes natives who were born in the U.S. in age 18 to 64 while the redshort-dashed line represents immigrants who were born in a foreign country in age 18 to 64. The source ofdata is the US Census 2000.
27
Figure 2: Positive assortative matching between workers and firms
Notes: The figure shows the relation between firm’s productivity and average education level of workers(top) and the relation between firm’s productivity and average imputed log hourly wages of workers(bottom) in each commuting zone-industry pair. Firm’s productivity is estimated as in section 5.1.5 andwage is imputed with observable characteristics of each worker. Each circle indicates the commutingzone-industry pair, and the size of the circle and fitted line is weighted by the total number of workers.The source of data is the US Census 2000.
28
Figure 3: Log wage function
Notes: The figure shows log wage functions for workers by schooling group and year. We regress log wageon education and square of education in each year as follows: Wi = β0 + β1 ∗ Si + β2 ∗ S2
i + εi. Then, weplot the fitted values from the regression. The sources of data are 1980, 1990, 2000 U.S. Census and2009-2011 3-year IPUMS American Community Survey for 2010.
29
Figure 4: The share of immigrants and inequality across commuting zones
(.1095365,.8571071](.045321,.1095365](.0163717,.045321][.0001756,.0163717]No data
Notes: The data are taken from 2010 US Census. The upper panel shows geographical variation of theinstrumental variable for the share of immigrants in year 2010, ImmigShareIVg,2010. The lower paneldepicts the geographical variation of the inequality measure defined as the difference between the loghourly wages of the 90th percentile and the log hourly wages of the 10th percentile, Inequalityp(90)−p(10)
g,2010 .The inequality measure only includes natives.
30
Figure 5: The distribution of estimated firm productivity
Notes: Data are from 1980, 1990, 2000 U.S. Census and 2009-2011 3-year IPUMS American CommunitySurvey for 2010. N = 24, 324. The figure shows estimated firm fixed effects. We regress the followingform: ln(Wage)i,g,j,t =α0 + α1Sexi + α2Agei + α3Age
Then, we plot the distribution of the estimated values of Firmg,j .
31
Figure 6: Effects of immigrants on natives’ wages
Notes: Data are taken from 1980, 1990, 2000 US Census and IPUMS ACS 2009-2011. Each circle reportsestimated coefficients from a separate regression. We report the impact of immigration on uth quantilevalue of wages among native workers. The unit of observation is commuting zone by year. Eachobservation is weighted by person. Clustered robust standard errors are reported.
Notes: Data are from 1980, 1990, 2000 US Census and IPUMS ACS2008-2012. Immigrants refer to stock of foreign born between age 18and 64, and natives refer to stock of population between age 18 and64 who were born in the U.S. Unit of observation is individual andsummary statistics are weighted by personal weights.
Fixed effects:Commuting zone - Industry YesYear Yes
Observations 31,187,838R-square 0.215
Notes: Data are taken from 1980, 1990, 2000US Census and IPUMS ACS 2009-2011. Theunit of observation is individual. Each obser-vation is weighted by person. Robust stan-dard errors are in parentheses. *** p<0.01, **p<0.05, * p<0.1.
34
Table 3: The Effects of Immigration on Inequality, 1980-2010Dependent variable: Inequality
I. All II. Natives III. Immigrantsp(90) - p(10) p(75) - p(25) p(90) - p(10) p(75) - p(25) p(90) - p(10) p(75) - p(25)
Notes: Data are taken from 1980, 1990, 2000 US Census and IPUMS ACS 2009-2011. The unit of observation iscommuting zone by year. Each observation is weighted by person. Baseline specifications, columns (1)-(2), in-clude all popluation. In columns (3)-(4), we include natives only. In columns (5)-(6), we include immigrantsonly. p(90) - p(10) denotes the log hourly wages of the 90th percentile minus the log hourly wages of the 10thpercentile in each commuting zone and year. p(75) - p(25) denotes the log hourly wages of the 75th percentileminus the log hourly wages of the 25th percentile in each commuting zone and year. Clustered robust standarderrors are in parentheses. Errors are clustered at commuting zone. *** p<0.01, ** p<0.05, * p<0.1.
35
Table 4: The Effects of Immigration on Inequality, 1980-2010Dependent variable: Inequality
I. All II. Natives III. Immigrantsp(90) - p(50) p(50) - p(10) p(90) - p(50) p(50) - p(10) p(90) - p(50) p(50) - p(10)
Notes: Data are taken from 1980, 1990, 2000 US Census and IPUMS ACS 2009-2011. The unit of observation iscommuting zone by year. Each observation is weighted by person. Baseline specifications, columns (1)-(2), in-clude all popluation. In columns (3)-(4), we include natives only. In columns (5)-(6), we include immigrantsonly. p(90) - p(50) denotes the log hourly wages of the 90th percentile minus the log hourly wages of the 50thpercentile in each commuting zone and year. p(50) - p(10) denotes the log hourly wages of the 50th percentileminus the log hourly wages of the 10th percentile in each commuting zone and year. Clustered robust standarderrors are in parentheses. Errors are clustered at commuting zone. *** p<0.01, ** p<0.05, * p<0.1.
36
Table 5: The Effects of Immigration on Matching, 1980-2010Dependent variable: uth quantile of firm productivity among native workers
Notes: Data are taken from 1980, 1990, 2000 US Census and IPUMS ACS2009-2011. The unit of observation is commuting zone by year. Each ob-servation is weighted by person. p(u) denotes the uth quantile value offirm productivity among native workers. Clustered robust standard errorsare in parentheses. Errors are clustered at commuting zone. *** p<0.01, **p<0.05, * p<0.1.
37
References
Antras, Pol, Luis Garicano, and Esteban Rossi-Hansberg, “Offshoring in a Knowledge
Economy,” Quarterly Journal of Economics, 2006, 121 (1), 31–77.
Autor, David H., David Dorn, and Gordon H. Hanson, “The China Syndrome: Local
Labor Market Effects of Import Competition in the United States,” American Economic
Review, 2013, 103 (6), 2121–68.
Basso, Gaetano and Giovanni Peri, “The Association between Immigration and Labor
Market Outcomes in the United States,” 2015.
Borjas, George J, “The Labor Demand Curve Is Downward Sloping: Reexamining the
Impact of Immigration on the Labor Market,” Quarterly Journal of Economics, 2003,
pp. 1335–1374.
Card, David, “Immigration and Inequality,” American Economic Review, 2009, 99 (2), 1–21.
Costinot, Arnaud and Jonathan Vogel, “Matching and Inequality in the World Econ-
omy,” Journal of Political Economy, 2010, 118 (4), 747–786.
Grossman, Gene M and Elhanan Helpman, “Growth, trade, and inequality,” Economet-
rica, 2018, 86 (1), 37–83.
, , and Philipp Kircher, “Matching, Sorting, and the Distributional Effects of Interna-
tional Trade,” Journal of Political Economy, 2017, 125 (1), 000–000.
Hunt, Jennifer and Marjolaine Gauthier-Loiselle, “How Much Does Immigration Boost
Innovation?,” American Economic Journal: Macroeconomics, 2010, pp. 31–56.
Kremer, Michael and Eric Maskin, “Wage inequality and segregation by skill,” Technical
Report, National Bureau of Economic Research 1996.
and , “Globalization and inequality,” Technical Report, Working Paper 2006.
38
Lemieux, Thomas, “Postsecondary Education and Increasing Wage Inequality,” American
Economic Review, 2006, pp. 195–199.
, “The changing nature of wage inequality,” Journal of Population Economics, 2008, 21 (1),
21–48.
Ohnsorge, Franziska and Daniel Trefler, “Sorting It Out: International Trade with Het-
erogeneous Workers,” Journal of Political Economy, 2007, 115 (5), 868–892.
Ortega, Francesc and Giovanni Peri, “Openness and income: The roles of trade and
migration,” Journal of International Economics, 2014, 92 (2), 231–251.
Ottaviano, Gianmarco IP and Giovanni Peri, “Rethinking the effect of immigration on
wages,” Journal of the European economic association, 2012, 10 (1), 152–197.
Peri, Giovanni, “Immigrants, Productivity, and Labor Markets,” Journal of Economic Per-
spectives, 2016, 30 (4), 3–29.
and Chad Sparber, “Task Specialization, Immigration, and Wages,” American Economic
Journal: Applied Economics, 2009, 1 (3), 135–69.
Sampson, Thomas, “Selection into trade and wage inequality,” American Economic Jour-
nal: Microeconomics, 2014, 6 (3), 157–202.
Tolbert, Charles M and Molly Sizer, “US commuting zones and labor market areas: A