Tuesday, 11 December 2018

Do foreign migrants ‘grease the wheels’ of the labour market?

[by Michael Amior]

Recent political developments in the US and Europe have led to renewed interest in the large and persistent regional disparities which plague our societies. These disparities have been partly driven by a secular decline in manufacturing employment, whose impact has been heavily concentrated geographically. In principle, these disparities should be eliminated by regional mobility. But at least in the US, fewer people are making long-distance moves than in the past.

In the face of these challenges, it has famously been argued that foreign migration can "grease the wheels" of the labour market. Given that new immigrants have already incurred the (fixed) costs of moving, they are very responsive to regional differences in economic opportunity - and therefore accelerate local population adjustment. If foreign migrants do indeed settle quickly in those regions where they are most needed, forcibly dispersing them within receiving countries (as several European countries do with refugees) may hurt natives as well as the migrants themselves.

In a recent CEP discussion paper I revisit this question using US census data spanning five decades (1960-2010) and 722 commuting zones. Remarkably, I find that new foreign migrants account for 30 to 60 percent of the average population response to local changes in labor demand. However, population is no more responsive in locations better supplied by new migrants: a bigger response from foreign workers is almost entirely offset by a reduced one from internal mobility. This is fundamentally a story of “crowding out”: I estimate that new foreign migrants to a commuting zone crowd out existing US residents one-for-one. This is entirely due to a reduction of internal moves in to the affected areas, rather than larger moves out.

The magnitude of the crowding out effect is puzzling. If Americans take time to adjust geographically to local declines in manufacturing employment, why do they appear so responsive to the location decisions of new immigrants? One plausible explanation is under-coverage of unauthorized migrants in the US census. This would overstate the crowding out effect (and also imply an even larger foreign contribution to local adjustment).

Even in the extreme case of complete crowd-out, a regionally flexible migrant workforce can save natives from having to incur potentially steep moving costs themselves. It is also worth stressing that the US population is generally considered to be relatively mobile. One might expect that foreign migration "greases the wheels" more effectively in parts of Europe where internal population adjustment is more sluggish.

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