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3. AVERAGE EFFECTS OF IMMIGRATION ACROSS CITIES: WAGES, VALUE OF HOUSING AND
EMPLOYMENT

The most striking and potentially controversial finding of Table 2 is, however, the large positive overall gains for U.S.-born labor. Since this aggregate effect is impossible to detect from national aggregate data, we aim to measure it by using cross-city variations. We intend to provide not only empirical evidence in favor of this positive aggregate effect, but also a detailed account of how such an effect can be produced and maintained in a long-run equilibrium. Hence we accompany wage regressions with regressions of cross-city values of housing and changes in employment.

In prior work (Ottaviano and Peri 2005; Ottaviano and Peri, forthcoming) we have detected a positive and very robust relationship between the average wages of U.S.-born workers and the share of foreigners across U.S. cities. These articles separately analyze the wage-rent equilibrium (Ottaviano and Peri 2005) and the wage-employment equilibrium (Ottaviano and Peri, forthcoming), concluding that the simultaneous positive effects of immigration on all the variables analyzed (concerning U.S.-born workers) can only be reconciled with the idea that immigrants tend to provide a positive influence on the productivity of native workers.

We have illustrated in section 2 how the overall positive effects on the U.S.-born emerge from the various complementarities of the foreign-born across skills. Here we reproduce some of the wage-employment-rent estimates across cities which confirm these positive effects from immigration on each variable, while in the next section we quantitatively match these estimates with a simple general equilibrium open-city model.

Data across the 86 largest metropolitan areas in the United States for the 1970-2000 period suggests a strong positive correlation between the share of foreign-born and each of the three variables. Metropolitan areas where foreign-born workers abound exhibit faster growth in the average wages, employment, and property values of U.S.-born workers. The described statistics show that more immigrants are associated with all the characteristics of a booming metropolitan economy.

For the remainder of this section we analyze more formally these positive correlations in order to understand whether they are likely to be spurious or due to omitted variables. Using the Integrated Public Use Microdata of the U.S. censuses of 1970, 80, 90 and 2000 for individuals in 86 metropolitan areas, we estimate regressions which consider as an explanatory variable “The Percentage Increase of the total employment of city i in decade t; due to immigration”, defined as the percentage change in employment due to an influx of foreign-born workers.

The coefficient C1 captures the elasticity of U.S.-born employment to an increase of foreign-born workers. The coefficient C2 quantifies the percentage increase in the average real wage (in 2000 constant dollars) of U.S.-born workers in city i and decade
t from an increase in foreign-born workers.12 Finally coefficient C3 quantifies the percentage increase in the real average house value (in 2000 constant dollars) for U.S.-born workers in city i and decade t in response to an increase in foreign-born workers relative to total employment. Table 3 reports the estimates of the coefficients C1, C2 and C3. Column I reports those obtained with the panel of 86 cities over 4 census years and column II reports those based on 117 cities over 3 census years.

Table 3. Estimates of the Total Effects of Immigration on Average Wages, Housing Values and In/Outflows of US-born Residents: US Metropolitan Areas.

* Statistically significant at 5% confidence level.

The first row of Table 3 shows the estimated impact of immigration on the employment of native workers. This effect is positive but quite imprecisely estimated. No evidence exists that increasing aggregate emigration of U.S.-born workers from cites attracts larger number of immigrants. The impact of immigration on wages (rows 2 and 3) and on the value of housing (rows 4 and 5) of U.S.-born residents is significantly positive.

Alternatively we use yearly or hourly wages of U.S.-born workers (rows 2 and 3) and control for individual characteristics. The estimates in row 2 and 3 imply that a 1% increase in the share of foreign-born workers in total employment raises average wage of U.S. workers by between 0.35 to 0.46 percentage points.

The last two rows calculate the impact of foreign-born workers on the value of housing for U.S.-born residents. We use gross rents and values of housing as alternative measures of the value of housing. The estimated coefficients imply that an increase of foreign workers by 1% of the initial employment causes an increase in the value/price of housing for the U.S.-born by 1.1 to 1.6 percentage points.

These estimates imply a strong positive impact from foreign-born workers on city economies, which put upward pressures on wages and housing prices, and attract native workers. Remarkably the average effect from immigrants on U.S. wages (mostly between 0.35 and 0.38) is very close to the effect of immigration on the average wages calculated in Table 2, row 3, equal to 0.34.

Table 4. Simulation of the Long-Run Impact of Immigration Shock on Wages, Housing Values and In/Outflows of US-born residents, from the City-Model.

Table 4 considers the following scenario: total immigration inflow: 8%, increase in High-School dropouts inflow of 1.9%, increase in High-School graduates of 1.5%, increase in College dropouts of 1.5% and increase in College graduates of 3%. Maintaining the common average shock that mirrors the actual increase in foreign-born workers during the 1990s, the columns correspond to simulations for different combinations of parameter values. The first two rows report the short-run effects from immigration on the average wages and housing values for U.S.-born workers. The following three rows report the effects on the average variables for U.S.-born individuals (i.e., the percentage change in average wage, the percentage change in the value of housing, and in- or out-migration), all calculated in the new ‘long-run’ equilibrium, after internal migration takes place and the new equilibrium is reached.

The first column of Table 4 (specification I) shows results from the main simulation that uses the baseline choices for the parameters. Specification II employs the parameter values that are closer to the point estimates of Table 1. The remarkable feature of these two specifications is that they generate long-run elasticities of average wages and rents that match very closely the estimated range of elasticities in Table 3. Specification III is shown purely for reference as it assumes very high values for the elasticity of substitution between U.S. and foreign born (not supported by the evidence).

It is clear that the large positive effect on average wages and rents depends heavily on the imperfect substitutability between the U.S. and foreign born. If, as in this specification, natives and foreigners are close to perfect substitutes, then the effect on wages and rents is smaller, and is accompanied by a net out-migration of U.S.-born workers.

Specifications IV to VII show the robustness of the simulated elasticities to changes in other parameters. Specification IV increases the elasticity of substitution between local services (produced by U.S. and foreign born workers) to 7; specification V increases the share of total expenditures on housing services to 25%; specification VI reduces the share of spending on food-entertainment to 15%; and specification VII increases the elasticity of substitution between schooling groups to 2.

Each specification produces the results that are either positive or very close to 0, confirming that there seem to be no strong tendencies for U.S.-born residents to leave cities that experience migration. Thus, for plausible parameter values, our simple (and quite standard) model finds significant positive effects of immigration on the average wages and rents of U.S.-born workers. Quite remarkably, the magnitude of this effect is equal to what our IV estimates produce across U.S. cities.

4. CONCLUSION

Along with goods and capital, the increased movement of people across countries has been a prominent feature of the last few decades. While in general economists are among the staunchest supporters of freer trade and capital movement, they have primarily argued that migration hurts U.S. native workers, in particular those with low skills.

It turns out both empirically and theoretically that immigration, as we have known it during the nineties, had a sizeable beneficial effect on the wages of U.S.-born workers. For a flow of migrants that increases total employment by 10% and a skill distribution that mirrors the one observed in the nineties, U.S.-born workers experience a 3-4 percentage points increase in their wages. This results because U.S. and foreign-born workers are not perfectly substitutable, even when they have similar observable skills. Workers born, raised and partly educated in foreign environments are not identical to workers born and raised in the U.S. This set of differences that we might label ‘diversity’ is the basis for the gains from immigration that accrue to U.S.-born workers. Even a small degree of difference, captured by a relatively high elasticity of substitution between U.S. and foreign-born workers (between 4 and 7), is enough to generate the average wage gains that we estimate from U.S. metropolitan data.

We believe that sharpening our understanding of the complementarities and substitutability between the U.S. and Foreign born in different sectors and skills, along with using an aggregate production function approach, are crucial steps in quantifying the benefits of immigration to the U.S. economy. We hope that this article may encourage a line of research into such “gains” from immigration, rooted in production complementarities (between workers and with physical capital) that may account for these important and thus far neglected effects from immigration.

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