Immigration and Wages : New Evidence for Britain

This paper uses 1997-2005 LFS data to study the impact of immigration on natives’ wages, and wage distribution. We present a theoretical model where we show that if capital is supplied at a price fixed on international markets, immigration will have on average a positive wage effect, as long as immigrants differ from natives in their skill composition. However, along the distribution of wages, some workers will lose, while others will gain We derive from this model estimating equations that we use for our empirical study. In accordance with theory, we find evidence of overall positive wage effects of immigration. Investigation of the effects of immigration along the distribution of wages of nonimmigrant workers suggests that there are clear and significant differences. Natives in the middle of the wage distribution gain from immigration, while natives at the bottom of the distribution lose in terms of wages. Migrant Workers and the National Minimum Wage 2 In 2001, the last census year, 4.8m immigrants lived in the UK, which amounts to 8.47 percent of the total population, or 9.75 percent of the working age population. Since then, Britain has experienced a further increase in its foreign born population, and the share of foreign born in the total population in 2005 was 11.5 %. There are concerns about the effect that this increase in foreign born individuals may have on wages and employment of native workers. Most of the empirical literature on immigration for the US establishes only small employmentand wage effects (see e.g. LaLonde and Topel 1991, Card 2001), although this view is not unanimous (see e.g. Borjas 2003). These findings for the US may not necessarily be transferable to the UK, as the skill structure of immigrants differs between the two countries. Recent work on the British labour market (Dustmann, Fabbri and Preston 2005) points to possible small negative employment effects, in particular for workers in medium skill categories, but no, or positive wage effects. In this paper, we provide new analysis of wage effects of immigration to Britain, using a wider framework of analysis and evaluation than in our earlier work, and concentrating on recent immigration to Britain. Furthermore, we will particularly focus on the effect of immigration on logs of native wages at different percentiles in the wage distribution. The usual underlying theoretical framework for analysis of immigration on wages and employment is a simple one output economy, with capital and two types of labour (skilled and unskilled) as input factors (see e.g. Altonji and Card 1991). Simplification of this model by assuming that capital supply is perfectly elastic, so that the marginal product of capital is constant (see e.g. Borjas 1999), leads in effect to a simple framework, with only skilled and unskilled labour as inputs. This assumption is not unreasonable when studying small open economies, like Britain. In this setting, an increase in unskilled labour supply through immigration would lead to a decrease in wages of unskilled workers, and to an increase in wages of skilled workers. As the wages immigrants receive are equal to the marginal product of the last immigrant, this model generates a migration surplus, which is allocated to skilled workers. The size of this surplus depends on Migrant Workers and the National Minimum Wage 3 elasticity of demand for unskilled labour, and the share of unskilled labour in national income. We show below that for any technology and production function, the surplus that goes to skilled workers through wage increases will always be at least as large as the loss unskilled workers experience through wage cuts. An immediate, but often overlooked consequence of this is that immigration can never, in such a setting, lead to a decrease in average wages, although it can decrease wages of particular skill groups. A further and clearly acknowledged consequence of this simple model is that immigration only affects wages and employment, and only creates a surplus, if immigrants differ from native workers in their skill composition. If immigrants resemble native workers in terms of skill mix, immigration will not affect wages. The empirical literature concerned with identifying the effects of immigration on wages and employment faces a number of tough challenges. The key issue is re-construction of the counterfactual outcome distribution for native workers that would be observed if immigration had not taken place. There are different approaches in the literature, all of them based on the idea to divide the national labour market into smaller labour markets which are differently exposed to immigration, and then comparing native outcomes across these markets, or cells. 1 The obvious problem is selection into cells that is correlated with outcomes – for instance, immigrants are likely to select into cells that are economically doing well. A further problem may be that individuals of native origin leave cells that have experienced in-migration. Both problems lead to underestimation of the impact of immigration. The first problem can be overcome by exploiting quasiexperimental situations where immigrants are exogenously allocated to regional labour markets (like Card 1990 and Glitz 2006), or instrumental variable techniques. To address the second problem, Borjas (2003) and Aydemir and Borjas (2006) define labour markets as skill-age groups at different points in time on a national level, and assume that workers in different education-age cells are imperfect substitutes. In our empirical analysis, we draw on an approach that is natural in our setting by defining labour markets as regional units at different points in time. 1 Existing studies define labour markets in various ways, using for instance education-region-time cells, or education-age-region cells (Card 2001). Migrant Workers and the National Minimum Wage 4 Alternatively, and as a robustness check, we define labour markets as educationage groups at different points in time. For our first approach, we take account of non-random selection of immigrants into labour markets defined in this way by using IV type estimators. We also point to the possible surplus that is generated through immigration. We embed our empirical findings into a simple theoretical model, where we set out with the assumption that capital is perfectly mobile, and that the price of capital is set on international markets. This seems to us a perfectly reasonable assumption, in particular for a small open economy like Britain. With capital being perfectly mobile, immigration must lead to overall average wage effects that are zero (in case immigrants resemble the native population in terms of skill structure), or positive (in case immigrants differ from natives in their skill allocation). In line with that, we do find positive overall wage effects of immigration for all the different estimation techniques and identification assumptions we use. As the impact of immigration will not be equally distributed across the skill distribution, there will be some labour types who see their wages being decreased as well as others who experience wage increases. We find that, although the overall effect of migration on wages is positive, wages at the low end of the wage distribution decrease, while wages in the middle of the distribution increase. 1. Data and Descriptives