Lecture 10 - Immigration, Labour Markets, and Empirical Identification
1. Structure of the Lecture
This lecture examines immigration through four interconnected lenses:
- Empirical facts about immigration, with a UK focus
- The impact of immigration on the local labour market
- The decision to migrate
- The fiscal implications of immigration
The analytical core lies in labour market equilibrium and the identification of causal effects.
2. Equilibrium in the Labour Market
The standard competitive labour market diagram presents:
- Downward sloping labour demand
- Upward sloping labour supply
- Equilibrium wage
- Equilibrium employment
Interpretation
Firms demand labour up to the point where the real wage equals the marginal product of labour. Workers supply labour according to the wage relative to reservation utility.
Competitive labour market equilibrium occurs where labour supply equals labour demand, determining equilibrium wage
Economic intuition
The wage adjusts to clear the market. If wages are above equilibrium, unemployment emerges. If below equilibrium, firms face labour shortages. The equilibrium wage equalises the marginal cost of labour with its marginal product.
3. Labour Mobility and Wage Convergence
This slide compares two regional labour markets, North and South.
Key result:
- Labour mobility shifts supply curves across regions
- Wages converge toward a common
If workers move from low-wage to high-wage regions:
- Labour supply falls in the origin region → wages rise
- Labour supply rises in the destination region → wages fall
Implication
Mobility → supply adjustment → wage equalisation
However, full convergence requires zero mobility costs.
In a spatial equilibrium model, workers move until the utility differential across regions equals mobility costs. Perfect wage convergence implies zero migration costs and identical amenities. In reality, mobility frictions sustain persistent regional wage differentials.
Empirical Evidence on Convergence
Blanchard and Katz document wage convergence across US states.
This provides evidence that:
- Labour is mobile
- Regional shocks are partly absorbed by migration
Exam relevance
If asked about regional labour market adjustment, mention both wage flexibility and migration as adjustment mechanisms.
4. Short-Run Impact of Immigration
Immigration is modelled as an outward shift in labour supply.
Baseline Prediction
- Total employment increases
- Equilibrium wages fall
But effects depend critically on whether immigrants are substitutes or complements.
4.1 Immigrants and Natives as Substitutes
If immigrants and natives have similar skills:
- Labour supply shifts right
- Wage falls from
- Native employment may decline
Substitutes are workers whose skills are sufficiently similar that firms can replace one with the other at low cost.
Economic mechanism
Increased supply of substitute labour → downward wage pressure
4.2 Immigrants and Natives as Complements
If immigrants complement natives:
- Native marginal productivity increases
- Native wages rise
Example:
- Migrants in manual tasks allow natives to specialise in communication-intensive tasks
Complementarity occurs when one type of labour raises the marginal product of another.
If migrants perform routine tasks, natives can specialise in higher value activities. This raises overall productivity and can increase native wages.
5. Long-Run Adjustment
In the long run:
- Capital adjusts
- Firms invest more
- Labour demand shifts outward
Result:
- Wages may return toward initial levels
- Output permanently increases
In a neoclassical growth framework, capital deepening offsets labour supply increases. With endogenous capital adjustment, the long-run wage effect of immigration may be small, while output gains persist.
6. The Immigration Surplus
This diagram decomposes national income effects.
Key elements:
- Initial national income: area
- After immigration: supply shifts from
- Wage falls
- Total output rises
The immigration surplus is triangle
Immigration surplus is the net gain to native residents from immigration, arising because wages fall but total output increases more.
Who gains and who loses?
- Employers gain
- Consumers may gain via lower prices
- Competing native workers lose
- Immigrants gain wage income
Size depends on labour demand elasticity.
Always separate aggregate efficiency gains from distributional effects. Immigration can raise total surplus while harming specific groups.
7. Empirical Identification Challenges
7.1 Spatial Correlations
Regression framework:
Where:
Problem
Migrants choose high-wage cities.
This creates:
Endogeneity bias
If migrants move to booming cities:
- True causal effect may be zero or negative
Correlation between migrant share and wages does not imply causation. Migration decisions are endogenous.
7.2 Fixed Effects
Model:
City fixed effects
This uses within-city variation over time.
Interpretation
We compare a city to itself over time, not across cities.
Fixed effects eliminate time-invariant heterogeneity. Identification relies on temporal variation in migrant inflows within a city.
But migrants still choose where to move.
8. Natural Experiments: The Mariel Boatlift
In 1980:
- 125,000 Cubans arrived in Miami
- Labour force rose by 7 percent
- Sudden and unexpected shock
David Card used this as a natural experiment.
Difference-in-Differences (DiD)
The DiD estimator:
It compares:
- Before vs after
- Miami vs control cities
Assumption
Common trends assumption:
Absent immigration, Miami wages would have followed the same trend as control cities.
Always state the identifying assumption explicitly when discussing DiD.
9. Borjas Critique
Borjas argues:
- Geographical units may not define labour markets
- Natives may move away
- Adjustment may occur across skill groups, not locations
Thus, analysis should focus on:
- Skill-experience cells
- National labour markets
If labour is mobile internally, local effects may be attenuated. The relevant labour market may be defined by skill, not geography.
10. Broader Economic Themes
This lecture illustrates several core economic principles:
- General equilibrium effects matter
- Distributional consequences differ from aggregate gains
- Identification requires credible counterfactuals
- Institutional and mobility frictions shape outcomes
Section Summary
- Immigration shifts labour supply outward
- Short-run wage effects depend on substitutability vs complementarity
- Long-run capital adjustment mitigates wage impacts
- Immigration generates a positive immigration surplus
- Empirical identification requires fixed effects or natural experiments
- DiD depends on the common trends assumption
- Labour market definition critically shapes conclusions
Bibliography
Blanchard, O.J. and Katz, L.F. (1992) ‘Regional Evolutions’, Brookings Papers on Economic Activity, 1, pp. 1–61.
Borjas, G.J. (2003) ‘The Labor Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market’, Quarterly Journal of Economics, 118(4), pp. 1335–1374.
Card, D. (1990) ‘The Impact of the Mariel Boatlift on the Miami Labor Market’, Industrial and Labor Relations Review, 43(2), pp. 245–257.
University of Nottingham (2026) ECON1016 Current Economic Issues: Lecture 2 Slides.