The Regional Impact of Economic Shocks: Why Immigration is Different from Import Competition

Prior literature has documented large and persistent employment effects in regions exposed to import competition, but non-lasting effects in locations receiving large immigrant waves. Import competition and immigration are comparable to the extent that imports are thought of as the labor embedded in imported goods. We explain this puzzle by arguing that a fundamental difference between trade and immigration is that whereas immigrants systematically enter metropolitan areas with high housing prices, import competition affects all kinds of local labor markets. We argue that when housing expenditure is decreasing as a share of income, internal migration is more responsive to local shocks in high-price locations. We provide evidence that, irrespective of the local shock, internal migration is indeed more responsive in high than in low housing price locations. Hence, conflicting findings in the literature reflect differences between the average local labor markets receiving each shock, rather than systematic differences in how local labor markets absorb those different shocks.