Rethinking the Gains from Immigration: Theory and Evidence from the U.S

Recent influential empirical work has emphasized the negative impact immigrants have on the wagesof U.S.-born workers, arguing that immigration harms less educated American workers in particular andall U.S.-born workers in general. Because U.S. and foreign born workers belong to different skill groupsthat are imperfectly substitutable, one needs to articulate a production function that aggregates differenttypes of labor (and accounts for complementarity and substitution effects) in order to calculate the variouseffects of immigrant labor on U.S.-born labor. We introduce such a production function, making the crucialassumption that U.S. and foreign-born workers with similar education and experience levels may neverthelessbe imperfectly substitutable, and allowing for endogenous capital accumulation. This function successfullyaccounts for the negative impact of the relative skill levels of immigrants on the relative wages of U.S. workers.However, contrary to the findings of previous literature, overall immigration generates a large positive effecton the average wages of U.S.-born workers. We show evidence of this positive effect by estimating the impactof immigration on both average wages and housing values across U.S. metropolitan areas (1970-2000). Wealso reproduce this positive effect by simulating the behavior of average wages and housing prices in an opencity-economy, with optimizing U.S.-born agents who respond to an inflow of foreign-born workers of the sizeand composition comparable to the immigration of the 1990s.