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  • 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, choijm@hawaii.edu**Korea Information Society Development Institute, jhnpark@kisdi.re.kr

  • 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 workers skill and firms 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 workers 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

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