Are Immigrants Holding Down the Wages of Native Americans?

By Yhu Kuni

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The fear of immigrants stealing jobs has traditionally been an issue in United States’ history and still exists today. Such an idea is echoed by the replacement hypothesis, where there is a misconception that only a fixed number of jobs exist in any economy and immigrants decrease employment opportunities for natives and depress wages for existing jobs. However, others believe that foreign and native workers may be complements in production. This paper will first focus on two theories that predict the impact of immigration on native employment levels and wages. Then empirical is reviewed to test whether the theoretical analysis applies to the actual labor market. The results of the empirical evidence differ according to the method of study, area covered, and industry.

All three findings however suggest that immigration had a greater impact on employment levels among the low skilled labor market. Furthermore, although immigrants had negative effects on native minorities, analysis showed that low skill levels among minorities, as well as family breakdown may in part be responsible for high minority unemployment and low earnings.

Theory

According to the human capital theory, wages are a monetary return on skills that an individual worker brings to the labor market. Jobs themselves do not play a significant role in the theory: they only provide a worker with the means by which his or her skills and abilities can be given their proper economic reward. Implicit in this argument is the view that employers hire workers solely on the basis of skills that they believe will maximize production and profits, regardless of a person’s race, sex or national origin. Thus, if such practice occurs on a large scale, competition between American minorities and immigrants is likely to result.

However, the segmentation hypothesis argues that the entry of foreign workers into labor market does not result in significant displacement since immigrants "take a distinct set of jobs, jobs that the native labor refuses to accept" (Piore 1979). Since the labor market is divided into two types of jobs, primary and secondary, native workers and immigrants do not compete for jobs. The secondary labor market suffers from relative labor scarcity because of its negative social implications in addition to low wages and sub-standard working conditions. Thus native workers are more inclined to work in the primary market while immigrants are pushed to the low-paying jobs in the secondary market.

If the human capital theory approach is correct, then immigrants can perform the same job and produce the same output as the native worker and can substitute for the native on a one-to-one basis. This is shown in Graph 1. Since the amount of total labor increases, the demand for native labor will decrease and lower the native wage from W0 to W1 after immigrants have pushed out the supply curve S0. In the long run, L0 decreases to L1 because native workers leave the job market, unwilling to work at the new equilibrium wage W1.

Looking at the total labor market (Graph 2), the total amount of workers in the market increases and the new supply curve, S1, shifts out to the right. Now, the new market equilibrium wage rate is point EII, where total labor is now L2 and both immigrant and native wage rates fall to W1. However, the new native equilibrium wage shifted down from point EI to point A. The demand curve for native workers has shifted down from D0 to D1. Therefore, both the wage rate and number of jobs suffer as a result of increases in immigration.

On the other hand, if the primary/secondary labor market approach is correct, immigrants are complements to native labor. Native workers can gain both employment and wages by specializing in those industries and occupations in which they have a comparative advantage. Graph 3 depicts this situation. With an increase in immigrant labor, greater demand is generated for native workers. The labor demand curve shifts up from D0 to D1. As a result, the equilibrium wage of native labor increases from W0 to W1, and the number of native labor that is employed increases from L0 to L1.

Analysis and Results

Kposowa conducted two studies: one at the state level analysis and another at the Metropolitan (SMSA) level analysis.

At the national level, immigration was positively related to minority unemployment in 1950, 1960, 1970, and 1980. However, immigration had no statistically significant effect on minority unemployment except in 1970 and 1980. In 1970, a 1% increase in the percentage of immigrants in a state led to nearly a 7% increase in non-whites out of work. These results appear to suggest that immigrants displaced some minorities, at least in the 1960 to 1970 decade.

However, results also showed that in 1960 and 1980, females appeared to have displaced minorities in employment. The same held for the 1970 to 1980 decade. The findings further seem to have suggested that not only may immigrants and minorities be substitutes and competitors in the labor market, but females and minorities may also be substitutes and competitors.

Metropolitan level analysis showed that the percentage of immigrants had no statistically significant effect on non-white unemployment in 1980. However, results of the impact of immigration on minority earnings indicated that on average, immigrants significantly affected minority wages. A 1% increase in the percentage of immigrants led to a decrease in minority earnings of nearly $25.32 on average in 1980.

Borjas used two approaches to analyze the effects of immigration on the labor market: area analysis and factor proportion analysis.

The 1980 area approach analysis for males showed an insignificant effect of the increased supply due to immigrants on native wages. However, the 1990 numbers revealed positive coefficients of immigration on native males. As the geographic area covered widened, the coefficient on the change in immigrant/native ratio tended to become less positive or more negative. This may be because migration of native workers responds to immigrant-induced increase in supply in any locale.

Borjas concentrated on two comparisons using the factor proportions approach: high school dropouts versus all other workers; and high school equivalents versus college equivalents. The immigration induced change in the ln supply of high school dropouts relative to other workers from 1980 to 1990 was .120, while the immigration induced change in the ln supply of high school relative to college equivalents was .023. Thus immigration had been important in reducing the pay of high school dropouts, while immigration and trade had contributed modestly to the falling pay of high school equivalent workers.

Regional studies collected by Lewis showed mixed results. In the New York City metropolitan area, black and Hispanic immigrants were substitutes for their native counterparts, and in the Los Angeles Basin, Hispanic immigrants were complementary workers. In the South, illegal Hispanic immigrants were competing with native Hispanic workers in the low skill labor market. On the other hand, there was no evidence showing illegal workers in the Chicago metropolitan area were competing with natives since illegal workers and legal workers worked in separate labor sectors. As for industrial studies, construction, manufacturing, and contract cleaning industries were the sectors most affected by immigrants. Foreign workers served as complements to natives in food service and agriculture.

Concerning the effect on wages, immigrants did not have a large impact on the earnings of native groups in the New York City region. In the LA area, native wages in the unskilled sector were decreased primarily by Hispanics entering the work force. In the South, wages of low-skilled native Mexicans were more affected than wages of high-skilled workers.

Findings present evidence to suggest that, on average, non-white groups within the US may be hurt by major increases in immigration. The replacement theory is supported by the fact that immigration in 1970 and 1980 had direct increasing effects on non-white minority unemployment. Furthermore, increases in unemployment rates among non-whites between 1970 and 1980 were directly linked to corresponding increases in the immigration rate between the two periods.

Immigrants, especially the low-skilled, may be substitutes for, and competitors with, native minorities at the lower end of the economic spectrum. This may happen for many reasons. One is the simple fact that they lack sufficient knowledge about their new country to be able to take full advantage of whatever opportunities exist. Second, unless they initially entered the US with high skills or as students who subsequently became skilled, immigrants are likely to settle in areas already inhabited by previous immigrants. If the latter are still in secondary labor market jobs, the new entrants are likely to begin there themselves.

Two possible explanations may be offered for this finding. First, immigrants, especially the low-skilled, and minorities fight for scarce jobs in the secondary labor market. Since there is an abundant supply of labor, and supply exceeds demand, employers have no reason to raise wages. As a result, general wage levels in a given metropolitan area remain low, so minority earnings are low.

A consistent and disturbing finding is the persistent effect of low minority skill level (percentage of unskilled minorities) on unemployment among minority groups. Result seem to suggest that one of the main determinants of unemployment among minorities may well be an inability of these groups to improve on their human capital. A 1% increase in the percentage of minorities without skills increases the minority unemployment level by 2% on average, controlling for the potentially confounding effects of other variables in the equation. A 1% increase in percentage of divorced, separated, single, or widowed decreases minority earnings by $65.89. Work disability is strongly tied to low minority earnings. A 1% increase in the percentage of work disabled depresses minority earnings by $127.42. Lack of skills among minorities is tied to low earnings, with the former lowering earnings by $104.49.

The negative effects of immigration on minorities within the United States cannot be ignored. Some analysts and labor leaders have long pointed to competition in the labor market as evidence of the need to adopt restrictive immigration policies. While findings here show evidence of competition, results have shown that low skill levels among minorities constitute a far more important reason for their lower benefits in the economy than immigrants. Thus, the real solution to the disadvantaged position of minorities in the US labor market is to address and redress fundamental problems that may be linked to their skill levels.

References:

George J. Borjas, Richard B. Freeman and Lawrence F. Katz, "Searching for the Effect of Immigration on the Labor Market". National Bureau of Economic Research Working Paper No. 5454, 1996.

Augustine J. Kposowa, "The Impact of Immigration on Unemployment and Earnings among Racial Minorities in the United States", in Ethnic and Racial Studies, Volume 18, Number 3, July 1995, pp. 605-628.

Staughton Y. Lewis, "Impacts of Immigration on U.S. Natives' Employment and Earnings: A Summary of the Evidence" in Thomas J. Espenshade, (editor), A Stone's Throw From Ellis Island: Economic Implications of Immigration to New Jersey, University Press of America, Lanham, Maryland, 1994, Chapter 4, pp.169-215.