The Labor Market Effects of Immigration

Introduction

Though the immigration phenomenon is regarded as a demographic one, reasons for both its emergence and consequences are intimately linked with the economy. Especially the possible unfavorable effects of immigration on the employment and wage rates of the native population are one of the much-debated subjects on economic theory. Research on the area is divided into three main areas: Concerns of the domestic residents that immigrant workers would increase competition for jobs, and therefore wages will fall and unemployment will rise, concern that immigrants would affect the social security system of the receiving country negatively, and finally the prospect of rising migration would affect wealth distribution (Dustmann & Glitz, 2005)

This chapter is about an analysis of the relation between the immigration and the labor market of receiving countries, specifically focusing on employment and wages.

There is vast empirical literature for the US and the other traditionally immigrant-receiving countries. There is a common perception that, at least in the short run, immigrants would substitute the native workers and increase unemployment in the host country, or that immigrant would accept lower wages than the natives, and therefore may create downward pressure on the wage rates of the native workers. These perceptions are one of the reasons for more conservative migration policies enforced by governments. However, these perceptions do not find confirmation in the previous research on this literature. According to Jean and Jimenez (2011), the evidence is, at best, mixed.

The effect of the immigrants on the welfare of the native population is a fundamental issue in the public debate. There is a vast empirical literature for the US and the other traditional countries of immigration. However, most European countries experienced large-scale immigration more recently than for countries like Australia, the US, or Canada. Moreover, the US and European experience are very different from each other since the composition and size of the immigrants are specific to the each receiving country. Therefore results of one empirical analysis are unlikely to hold for another one (Dustmann & Frattini, 2011).¹

Immigration can affect the host countries’ economy, through different channels, such as changes in output structure, technology and competitiveness, and complementarities and additions to the skill base (Dustmann, Frattini, & Glitz, 2007). For instance, immigration may affect the composition of goods and services produced in the economy and the structure of the labor market. Or immigration may alter the technology in a specific sector. (Gaston & Nelson, 2000; Hanson & Slaughter, 2002; Lewis, 2004; Gonzales & Ortega, 2007; Dustmann & Glitz, 2008). In addition to these, the impacts of immigration on the wage rates and employment levels of the native workers also depend on to what extent migrant’s skills are complements or substitutes to the skills of native workers (Borjas, 1995). If the skills of migrants and native workers are substitutes, in the short-run, immigration may increase competition and decrease the wages in the labor market. Should, on the other hand, the skills of migrants be complementary to native workers, productivity in the economy shall increase, and this, in turn, may lead a rise in the wages of all workers. All of these cases shall have different impacts on the labor market.