Minimum Wages and the Labor Market Effects of Immigration
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Anthony Edo and Hillel Rapoport
The labour market effect of immigration is one of the most controversially discussed issues in modern labour economics. In theory, after an immigration-induced labour supply shock wages are expected to fall. In the real world three reasons may prevent this: firstly, natives and immigrants are not perfect substitutes, i.e., they have different education or complementary skill sets. Secondly, immigrants sort into labour markets with high wages and auspicious employment prospects, and finally, labour market imperfections like union bargaining or minimum wages cause wage rigidity.
In their recent CESifo Working Paper Anthony Edo and Hillel Rapoport look at the interplay between minimum wages and the labour market effects of immigration. More precisely, they exploit the existence of different minimum wages across local labour markets within the United States to measure the causal effect of an increase in the federal minimum wage on natives’ wages and employment. The coexistence of federal and state minimum wages is unique to the US. Individual US states are allowed to set their minimum wage higher than the federal minimum wage. In practice, some states systematically have higher minimum wages than the federal level. If the federal government decides to raise the federal minimum wage, this is non-binding for states with much higher minimum wages, only partly binding for states with moderate add-ons, and fully binding in states that adopt the federal level. For instance, the increase of the federal minimum wage in 2008-2010 from 5.15 USD to 7.25 USD. disproportionately affected these states with a minimum wage initially close to 5.15 USD. To estimate the effects on natives’ wages and employment, the authors apply a two-step strategy. Their first step uses the state-skill panel data now standard in the US immigration literature to examine how changes in immigration affect natives’ outcomes within a state-skill combination. In a second step, Edo and Rapoport exploit a difference-in-differences approach by comparing states where the federal minimum wage is binding (treatment group) with states that are not affected by changes in the federal minimum wage (control group) before and after a federal minimum wage increase. The key insight that the authors gain from their analyses is that immigration has negative but small effects on the wages and employment of native workers within the same state-skill group. However, high state minimum wages exert a protective effect on natives’ wages and employment, making them even less sensitive to competition from immigrants. To illustrate this result, Edo and Rapoport report the magnitude of this protective effect. A 10 percent immigration-induced increase in the labour supply in a given state-skill group on average reduces wages by 1 percent (employment by almost 1 percent), versus a decrease of just 0.3 percent (0.5 percent) for a USD 1 increase in the minimum wage. With their CESifo Working Paper Anthony Edo and Hillel Rapoport deliver a fascinating contribution to one of the most widely discussed issues not just in labour economics, but also in politics and the public debate. They show that immigration has a small negative impact on natives’ wages and employment, but more importantly that high minimum wages dampen these effects and therefore protect incumbent workers in the labour market. However, this may possibly come at the price of preventing labor market integration of immigrants.
Original title of the article : «Minimum Wages and the Labor Market Effects of Immigration», Edo, Anthony and Hillel Rapoport.
Published in: CESifo Working Paper No. 6547, June 2017 et CEPII Working Paper 2017-12
Available at: https://ideas.repec.org/p/ces/ceswps/_6547.html
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