Immigrant-Native Complementarity Revisited

I’ve often been asked what I think about the Ottaviano-Peri finding that there are strong complementarities between comparably skilled immigrants and natives—complementarities that lead them to conclude that immigration raises wages for many natives.

I’ve always been a little skeptical of the Ottaviano-Peri evidence. A couple of years ago, Jeff Grogger, Gordon Hanson, and I worked on a paper that examined the link between immigration and African-American economic status. As a by-product of that work, we explicitly attempted to replicate the Ottaviano-Peri finding--but couldn’t. Since then, we’ve been quite interested in trying to see what explains the discrepancy between our evidence and theirs.

Well, we have finally figured it out. Here’s the abstract to our new paper:

In a recent paper, Ottaviano and Peri (2007a) report evidence that immigrant and native workers are not perfect substitutes within narrowly defined skill groups. The resulting complementarities have important policy implications because immigration may then raise the wage of many native-born workers. We examine the Ottaviano-Peri empirical exercise and show that their finding of imperfect substitution is fragile and depends on the way the sample of working persons is constructed. There is a great deal of heterogeneity in labor market attachment among workers and the finding of imperfect substitution disappears once the analysis adjusts for such heterogeneity. As an example, the finding of immigrant-native complementarity evaporates simply by removing high school students from the data (under the Ottaviano and Peri classification, currently enrolled high school juniors and seniors are included among high school dropouts, which substantially increases the counts of young low-skilled workers ). More generally, we cannot reject the hypothesis that comparably skilled immigrant and native workers are perfect substitutes once the empirical exercise uses standard methods to carefully construct the variables representing factor prices and factor supplies.

English translation: The Ottaviano and Peri data includes currently enrolled high school juniors and seniors. They classify these high school juniors and seniors as part of the "high school dropout" workforce. Their finding of immigrant-native complementarity disappears if the analysis excludes these high school juniors and seniors.

Things that seem too good to be true usually aren’t.

(For the econometric geek who wants to play around with the data and see for himself/herself what is going on: We've created a STATA program archive that allows easy replication of all of the results in our paper. It is available here).

Comments

[Robert Hume]

Is anyone expert enough in the field to read the original Ottaviano and Peri paper and estimate whether this error could have been an innocent mistake?

[Gritsforbreakfast]

The study you describe may well have a flawed methodology, but I don't think I buy your stance either, Doc, based on mere empirical observations. E.g., some new condos just went up behind my house using largely illegal immigrant labor, I discovered in conversation with the workers. They had a great deal of particular constructions skills that I don't possess and I doubt most African American youth do either. So I don't know how you can postulate in such cases the labor could be a "perfect substitute."

More likely, IMO, these skilled and semi-skilled labors are plugging holes in the labor market where the education system has failed to adequately train workers (vocational ed in TX is a joke, and schools train kids for college, not construction jobs), and do not suffer similar labor price discounts to truly unskilled immigrant OR native workers. In turn, their spending boosts the economy as a whole from the demand side, which IMO is a big reason why Texas' economy has been doing so well, despite the dour predictions of those who say illegal immigration harms economic growth.

[Richard A.]

Jagdish Bhagwatti in an article that can be found here --
http://tinyurl.com/2ccmhm
argues that technology and not free trade nor immigration is what's putting downward pressure on low wage workers.

He writes -
"Second, the same goes for the econometric studies by the best labor economists regarding the effects of the influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz of Harvard also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made."

I wonder what necessary adjustments he's talking about?

Wage inequality is greater in the US than Japan and has been increasing in the US since about 1970.

Given that Japan is as technologically advanced as us, Bhagwatti's assertion that labor-saving technical change is what's putting downward pressure on the wages of the unskilled must be wrong.

Furthermore, Japan's trade restrictions on average are no worse than ours. Bhagwatti's assertion that free trade is not the problem must be correct.

OTOH, we are importing an underclass in mass while the Japanese allow little immigration. This is suggestive that it is indeed US immigration policy that's behind increasing wage inequality.

[bill]

Of course you are correct - we have imported an underclass.

Fortunately, Arizona has seen the light and is encouraging self deportation

it is working

as the example of japan shows, once the 20 million illegals all self deport, we will see the higher wages that japan has.

Japan has shown us the way. And self deportation of the 20 million is on its way

already, the wages for us citizens in arizona who work in restaurants has gone up

[Robert Hume]

GritsforBreakfast: Somehow all those condos got built in cities which had very little immigration in the 50's-70's.

Most construction skills are learned on the job, not in schools.

In the future though, we can expect that natives will not know the skills, as the chain of apprenticeship collapses as those citizens who have the skills leave the fields and/or retire early. Those folks who used to do all the work in the DC metro area are nowhere to be seen; they have been replaced. We *never* see a newspaper article about where they have gone. I think back to more rural areas in Maryland, Virginia, and W. Virginia. They have taken the bluegrass and country music market with them.

[Neil]

In another paper, Peri also found that real wages for high school dropouts declined by almost 12% between 1990-2004. He was unable to find his way to a link between this drop and illegal immigration. Of course the paper was published in a journal related to the American Immigration Lawyers Association. Sigh....

Peri has also had a tendency to mix legal and illegal immigrants, which are very different populations in terms of skill mix. It makes his data sort of useless when looking at the impact of illegal immigration.

You don't need econometrics to know that when you flood a market with 10-12 million low skill commodity illegal workers, it is going to lower the wages of all workers in that category.

What is important about this paper is that the earlier OP work provided the fictional mask of the complimentary worker for policy makers to hide behind. This paper removes the mask. People like Ed Lazear (sad to say an old professor of mine) can no longer use this fiction to support a policy that has hurt the lowest wage portions of our economy.

Now that we know that immigrants and non-immigrants are (almost) perfect substitutes, what is the wage loss caused by increasing capacity massively in the unskilled labor market? Would that 12% loss in real wages have been a 3-4% gain in wages without all the excess labor.