Labor Market Effects of Selective Immigration Policies

The "la Caixa" Foundation supports ground-breaking research at the Barcelona Graduate School of Economics through the "la Caixa" Foundation Research Grants on Socioeconomic Well-being.

Project overview

The goal of the project is to analyze whether and how skilled immigration differently affects the labor market relative to general immigration. The project intends to quantify the effect of skilled immigration on wages, labor market participation and occupation decisions, and human capital investment decisions by native workers and previous generations of immigrants. To that end, the project will evaluate the effects of the two main selective immigration policies (in terms of skills) observed in recent U.S. history: the H-1B visa program and the National Origins Formula. A second goal of the project is to determine the level of selectivity of the immigration policy (and, potentially, a transfer scheme) that maximizes native workers’ wellbeing.

Main results

  • Uncovers the two main mechanisms by which the immigration of high skilled workers affects natives: the "competition effect" and the "knowledge spillover effect"
  • Poses and estimates a general equilibrium model of endogenous technological progress, human capital accumulation, and labor supply decisions that accounts for these two mechanisms
  • Proposes a method to estimate such a model (with 260 parameters) that is not only feasible, but also much faster than the standard estimation algorithms used in the literature

Summary, output, and dissemination

Research summary

The Syrian refugee crisis has put immigration policy back at the core of the political debate in many developed countries. The possibility of exerting a larger control on immigration and of having stronger borders was one of the main arguments used to support Brexit, it was a salient issue in President Donald J. Trump's presidential campaign, who proposed the construction of a wall on the Mexico-United States border, and it has been central in several (some of them successful) presidential campaigns in many European countries. Unlike in the case of general immigration policies, however, the policies that favor the inflow of highly skilled workers are generally less challenged and often encouraged. Immigration policies in Canada, Australia, and the United Kingdom are mostly based on points systems that favor immigration of skilled workers, and Japan recently implemented a similar policy. Canada recently launched as well the Global Skills Strategy, a program that gives Canadian employers faster access to highly skilled foreign workers. In the United States, the H-1B visa program and some of the executive actions approved by President Barack Obama in November 2014 aimed at facilitating immigration of highly skilled workers. And even President Trump, who has questioned the efficacy of the H-1B program in bringing in high quality immigration, and announced changes to prevent fraud and to make it more selective, has not threatened its existence.

Are there economic gains of selective immigration policies relative to general immigration? Whose labor market prospects are improved by skilled immigration, whose are worsened, and by how much? Does high skilled immigration discourage native investments in human capital? Are there knowledge spillovers from skilled immigration? What level of selectivity in immigration policy maximizes natives' utility? The answers to these questions are fundamental for the design of immigration policy. This project seeks to provide answers to these questions.

In this project, the researchers uncover the two main mechanisms by which the immigration of high skilled workers affects natives. The first one is the "competition effect". Natives and immigrants compete for jobs in the labor market. The inflow of additional competitors puts downward pressure on the wages offered in the occupations where these immigrants compete the most. What is novel in the team's approach is to account for the important changes in education and career prospects that these wage changes imply. For example, the inflow of low skilled immigrants fosters education of those individuals who, in the absence of immigration would decide to work in, say, construction, but are pushed towards an architect career by the increased relative difficulty of finding a job in the construction sector. Other natives, on the other hand, may be discouraged from graduating as, say, a computer scientists because the increased competition for computer science jobs induced by Indian workers arriving to the country increases the possibility of them having to accept a job as a sales person in an IT store. Hence, in the context of high skilled immigration, this competition effect would discourage native investments in education and would push native workers towards lower skilled career paths.

Importantly, this is not the end of the story. There is a fundamental second type of effect, the "knowledge spillover effect". High skilled immigrants (and high skill workers in general) contribute to production beyond their direct labor input, by generating ideas that make everyone else more productive. In this model, the production of ideas occurs unintendedly when firms use skilled labor and capital equipment in general production. For example, if a bank hires an engineer to design a banking app this app not only constitutes output in itself (e.g. increases the revenues of the bank attracting more customers), but also increases productivity of other workers in other sectors (e.g. clerk of the firm that purchases the same services as before but using the app is now more productive in her job because she does not need to physically go to the bank and queue to issue a wire transfer).

The results suggest that, through this channel, high skilled immigration increases generally the productivity of all workers (i.e. total factor productivity), but it does more so for the STEM workers themselves, especially in comparison to blue-collar workers (i.e. it generates skill-biased technological change). In particular, the following graph shows how the relative demands for labor in the different occupations is changed over the years because of the spillovers generated in the model:


All in all, this channel increases the relative wages of skilled workers and therefore encourages natives to undertake further investments in human capital.

The results discussed above are only the first stone of a universe of questions that will be addressed with this model through simulation exercises. These simulations will allow researchers to provide quantitative answers to the questions posed above. In particular they will be able to (i) disentangle which of the two effects dominate in practice, (ii) evaluate the impact of existing selective immigration policies, and (iii) design optimal mix of immigration policies that maximize the wellbeing of native workers in the economy. The team expects these future findings will be disruptive. This view is shared by the European Comission, which decided to adjudicate a European Research Council Starting Grant to principal investigator Joan Llull's broader project on labor mobility and human capital accumulation for which the research funded by the current grant was a fundamental seed.

Competitive European funding

The principal investigator Joan Llull has been awarded an ERC Starting Grant for the related project, "Dynamic Modeling of Labor Market Mobility and Human Capital Accumulation"

Invited seminar presentations

Presentations in invited seminars addressed to researchers at the following Economics departments presenting the work in progress paper “Selective Immigration Policies and the U.S. Labor Market” that presents the main findings of this project:

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