The Immigration/Labor Demand Elasticity Puzzle
While labor demand elasticity is pretty clearly negative, virtually all estimates have an absolute value less than 2. Yet estimated effects of immigration on native wages are tiny. Kerr and Kerr’s summary is typical.
The documented wage elasticities are small and clustered near zero. Dustmann et al. (2008) likewise found very little evidence for wage effects in their review of the UK experience. This parallels an earlier conclusion by Friedberg and Hunt (1995) that immigration had little impact on native wages; overall, their survey of the earlier literature found that a 10% increase in the immigrant share of the labor force reduced native wages by about 1%. Recent meta-surveys by Longhi et al. (2005, 2008) and Okkerse (2008) found comparable, small effects across many studies.
How are both these results possible? The easy answer is that “wage elasticity of labor demand” and “wage elasticity of immigration” are conceptually distinct. Quite true, but they’re also conceptually related. Indeed, unless labor supply is fairly elastic, a low wage elasticity of labor demand seems to imply a high wage elasticity of immigration.
What gives? Top potential reconciliations:
1. Labor supply is actually quite elastic. Tempting, but this implausibly means immigration avoids wage effects by inducing lots of voluntary native unemployment. Kerr and Kerr also report very little evidence of this.
2. Left-wing bias. Within economics, labor is known as a liberal field of study. So labor economists gravitate toward (a) low estimates of labor demand elasticity, and (b) low estimates of the economic harm to natives of immigration – despite the tension between these results. While I find this somewhat plausible, labor economists also have offsetting publication biases in favor of statistically significant results.
3. Native and foreign labor are distinct goods, so an increase in the supply of immigrant labor barely increases supply in the labor markets where most natives actually work. In fact, native and foreign labor are generally complementary goods, so when the supply of immigration goes up, so does the demand for most native workers. Implausible? Check out the weighty evidence in its favor.