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Speaking of the Economy
Speaking of the Economy - Nicolas Morales
Speaking of the Economy

June 21, 2021

The Role of Immigration in Labor Markets

Topic: Labor Force Participation
Audiences: Economists, General Public, Policymakers
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Nicolas Morales discusses his research and other work done on the interplay between immigrants and native-born workers in labor markets and how immigration can contribute to U.S. productivity. Morales is an economist in the Research Department of the Federal Reserve Bank of Richmond.

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Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

My guest today is Nicholas Morales, an economist who joined the Richmond Fed in 2019. Nicholas's research lies at the intersection of international trade and labor economics, focusing on international migration. He recently wrote an Economic Brief about the role of college-educated immigrants in the United States labor markets. This will be the focus of our discussion today.

Thanks for being here, Nicholas.

Nicolas Morales: You are very welcome.

Gerena: Immigration has been the center of many conversations about our nation's history, both social and economic. What brought you to this topic, this line of research?

Morales: Well, being an immigrant myself and coming to the U.S. for my PhD studies brought my attention to the impact of immigrants in an economy. There is the impact they have here, but also the impact they might have on their home countries. Through my time in the U.S., I met many immigrants from a variety of countries who have different life experiences, work in different occupations, and who, like me, also had to figure out how to assimilate into the American culture in their own way, find jobs where they can contribute to the economy and build a new life here.

This dynamic occurs on a global scale as well. People flow into and out of countries in search of new opportunities. Yet, as we know, it tends to be a heated political debate on whether a country wants to increase or decrease the number of immigrants. In that line, I got fascinated [with] how we can use [the] tools of economics and statistics to really understand and quantify the benefits and the cost of immigration to inform policy.

Once I started looking into the literature on immigration, I noticed it heavily focused on the impact of immigration on wages and employment of native workers. But little attention was paid on how firms and production adjust in response to immigration, which I think is a very important factor to understand immigration.

So I started combining new economic tools and data to understand how the economy responds to immigration, but through a lens of the employers who hire the immigrants. This meant looking into the impact of immigrants on some new dimensions, such as international trade, multinational activity and, particularly, the production decision of firms.

Gerena: What have you learned so far from your research and other people's work?

Morales: I think there's a key puzzle in immigration regarding the competition between immigrants and natives in the labor market, which we hear a lot about but it seems that this might not be as detrimental as we would assume.

Let me just give you an example to think about the competition argument. Let's say they're just 100 jobs in the economy and all of them were taken by native workers. Then, if 20 immigrants were suddenly hired, that should either make the native workers have to accept a lower wage in order to keep those 100 jobs, or some of those natives will need to exit the labor market if the number of jobs were fixed. However, most of the immigration studies don't really find those effects. They tend to find positive and small effects on the labor supply and wages of natives. This means that immigrants not only don't seem to take away job opportunities for natives, but they seem to even help create additional jobs in the economy.

Gerena: That's very interesting. How do you explain that?

Morales: Well, the way we think about it, there are three main ways that the economy adjusts to an influx of immigrants.

First is that immigrants do not tend to go into labor markets or industry sectors where jobs are scarce. They don't go to a little town in the U.S. where there are no jobs. They tend to go into markets that are rapidly growing and sectors that demand skills that maybe are not available locally. This suggests that immigrants might be supplying jobs wherever there aren't enough natives, for whatever reason, to meet such labor demand.

Second, native workers are not stuck in their jobs as well. They can respond to immigration by changing the jobs they do. For example, if there's a lot of competition within the ranks of a given occupation, natives might respond by also switching occupations, which would alleviate this competition effect.

Finally, immigrants may also bring skills that help increase the total number of jobs in the economy. They may specialize in certain tasks that allow total production to expand even more.

Gerena: Tell me more about how the addition of immigrant labor can expand productivity. Certainly, an economist would tell you that one way to increase the amount of stuff we produce is to add more workers to the labor force, right?

Morales: Yeah, definitely. But I think there's more going on here. As I mentioned before, immigrants and natives specialize in different types of work.

There are two very interesting papers by Giovanni Peri and Chad Sparber [published in 2009 and 2011] who look into the similarities and differences in the tasks performed by immigrants and natives. Let me give you an example. Let's say someone works in an occupation in woodworking. The tasks this person needs to perform require certain finger dexterity and require the ability to operate machinery. On the other hand, if someone wants to be a computer scientist, they will need to perform tasks that require operating a computer or they will need mathematical and analytical skills.

What Peri and Sparber did is they grouped occupations based on the similarity of the tasks performed to do that occupation. And what they found is that immigrants and natives specialize in different types of tasks. For example, among college graduates, they found that immigrants tend to specialize in more analytical tasks, while natives tend to specialize in more communication-intensive tasks where they have a clear advantage over immigrants because of a language, because of the knowledge of cultural norms in the U.S. and so on. Among non-college graduates, they find a very similar pattern. Immigrants tend to specialize in more manual tasks, thus they require more manual ability, while natives also specialize in more communication-intensive tasks.

This specialization generated by immigration has two main implications. The first one is that natives can mediate the competition with immigrants by specializing in tasks like, for example, that require communication. For example, they can become managers that require communication skills and go away from occupations that might face more competition. Second, this specialization helps production to become more efficient and expand the employment by more than if it's just the natives performing both types of tasks.

Gerena: Interesting. Are there other ways that immigration can expand productivity?

Morales: Another channel is that immigrants are known to disproportionately contribute to innovation. They can develop new technologies or products that create more job opportunities for immigrants and natives alike.

There's a recent paper by Rebecca Diamond and other researchers from Stanford University who use patents as a way to measure innovation, which is very common in the economics literature. What they find is that while immigrants are roughly 10 percent of the population, they account for 16 percent of inventors who are the ones that create the patents and 23 percent of total patents produced. So they're disproportionately contributing to innovation. Furthermore, the patents created by immigrants are of similar quality as those produced by natives.

What's interesting about this paper is that it separates the direct and indirect contributions of immigrants to innovation. Their direct contribution is the patent that the immigrants create themselves. The indirect contribution is that natives might also become more productive after collaborating with immigrants which, in turn, might lead the natives themselves to patent more because of immigration.

The third channel which immigrants can contribute to U.S. productivity, I think, is through our language skills and cultural knowledge of other countries, which facilitates the communication between firms here and firms abroad. Economists Konrad Buchardi, Thomas Chaney and Tarek Hassan show in their paper that if a county in the U.S. doubles the number of immigrants from a given foreign country, employment at subsidiaries of multinationals in that county would increase by about 7.3 percent.

What's even more interesting about this paper is that this effect that they show of the multinational employment of the home country is not only for first-generation immigrants, but you can see it for second-generation immigrants as well. Second-generation immigrants also have a certain advantage of language and knowledge of cultural norms that they learn from their parents that also help facilitate communication between affiliates and multinationals. And when there's more multinationals coming to the U.S., there's more jobs both for immigrants and for natives.

My own research actually supports this idea. I looked at the H-1B program and I found that most multinationals who operate in the U.S. disproportionately hire immigrants from their home country because these immigrants are useful for communication with the parent. These workers are particularly important for companies that are starting their operations in the U.S. who have a larger need for communicating between the subsidiary and the parent.

Gerena: Thank you for doing that deep dive for us.

Let's zoom back out for a moment. Where does the United States stand today in terms of number of immigrants and their educational attainment? What skills do they bring to the table?

Morales: In 2018, the U.S. had more than 37 million workers who were born outside of the country. Out of those 37 million, 19 million had at least some college education, at least one year of college.

The share of immigrants in the U.S. population has grown significantly over the years. It went from around 5 percent of total population in 1980 to 11 percent in 2019.

The occupations of immigrants are very different if we look at college and non-college immigrants. Immigrants with college degrees are heavily concentrated in the information technology sector, and they work in occupations such as engineering or computer science. In fact for computer science, for every 10 natives working as computer scientists in 2019, there were about 4.2 immigrant computer scientists. So almost a third of the computer scientists in the U.S. are immigrants. Other large immigrant occupations for college graduates are physicians, nurses, and college professors.

For non-college graduates, immigrants are heavily concentrated more in other industries like, for example, services or construction or farming. For example, if we look at farmworkers, for every two American-born farm workers, there's one immigrant. So again, a third of the farm workers are immigrants.

Gerena: What does that mean in terms of the impact of immigrants on U.S. productivity?

Morales: If we look at the occupations where immigrants are concentrated, I think there's a clear pattern. Immigrants are more likely to get jobs where it's hard to find American workers to fill those vacancies. It's particularly interesting when thinking about the highest skilled workers who, as we talked about before, might be responsible for developing innovative products and technologies that help maintain our competitiveness against other countries.

The U.S. is the largest immigrant destination in the world. However, other countries attract more college-educated immigrants as a share of their population than we do. For example, college-educated immigrants represent 16 percent of Canada's total population and they represent 14 percent of Australia's total population in 2015. But in the U.S., they represent just 5.4 percent. That's closer to what we see in countries like the United Kingdom, for example. This is important because our ability to attract high-skilled immigrants can help maintain our competitiveness in high technology industries.

Research from Britta Glennon, a professor from Wharton, shows that whenever U.S. immigration policy becomes more stringent, companies are more likely to set up operations and expand their operations abroad through offshoring. My own research actually supports this idea. Whenever immigration of college graduates is restricted, the IT high-tech manufacturing sectors would partially relocate to other countries like Canada or India in response to these restrictions.

Gerena: You touched on immigration policy. How does our country's regulation of the flow of immigrants shape their economic impact?

Morales: Our immigration system is actually quite complicated because it has multiple visa programs that are targeted for workers with different skills.

Most workers without college degrees come to the U.S. through green cards obtained as part of family reunification policies. That is, immigrants who already became U.S. citizens can sponsor their spouses, their parents, their children and other family members to also come and work here. There's no limit on the number of family reunification green cards in the U.S., so about a million people come through those type of family reunification green cards every year.

Workers who are not eligible for family reunification green cards have to come through an employment visa in order to work in the U.S. For workers with college degrees, there are multiple options. There's the H-1B program, there's the L-1 program that focuses on intercompany transfers from multinationals with subsidiaries abroad, there's the TN visa for Canadian and Mexican skilled workers, [and] the entrepreneur visa for those willing and able to invest at least $1.8 million in the U.S. and multiple other visa categories as well.

Gerena: Can you tell us more about the H-1B program. That has generated a lot of attention during past debates about immigration policy?

Morales: Yes, definitely.

The H-1B is the one focused on college graduates where firms need to recruit and sponsor the visa for workers they want to hire. The main feature of the program is that the total number of new visas is capped every year at 85,000 visas for the private sector. This means that universities, government agencies and nonprofit institutions are exempt from the gap. But for the private sector, if the number of applications exceeds the cap, the applications go to a lottery system to determine the winners of the visas.

A few things to note. The cap on the H-1B visas has remained unchanged at 85,000 since 2006. But the number of applications has been growing every year and has exceeded the cap by over 200 percent every year since 2014. This means that the uncertainty for companies and migrants on being able to get an H-1B visa has increased significantly over the past few years.

On top of that, the H-1B is valid for three years and it can be renewed for three additional years. After that, the worker becomes eligible for an employment-based green card if they want to stay in the U.S. and they have an employer willing to sponsor them for the green card. However, employer-sponsored green cards are also capped and no single country can exceed 7 percent of the total green cards awarded. This implies that for workers from China or India, the queues for getting a green card are becoming extremely long. That increases the uncertainty of being able to stay in this country in the long term.

This uncertainty is important because it can have significant impact on who decides to come to the U.S. We've shown that the most skilled workers are the ones that respond the most to the uncertainty on immigration, as they probably have better competing opportunities in their home countries. Such uncertainty may mean that the very best might decide not to come to the U.S. when it gets harder to get a visa to stay in the US.

Gerena: So what can we done to improve U.S. immigration policy?

Morales: One solution is to make immigration more certain for workers whose skills are needed in the economy. A good example of this is foreign students of American universities who, once they graduate, if they want to stay for more than a couple of years, they need to get an H-1B or some other type of employment visa in order to stay in the country. Such transitions could be facilitated, perhaps.by making those student visas not subject to a cap once they graduate.

Other policies that have been proposed is that the U.S. should change the way that visas are selected. The proposals include setting up a minimum wage for H-1B workers to guarantee that those 85,000 people who immigrate here every year are the highest paid workers who presumably have the most valuable skills. However, this is not so easy because this would negatively affect smaller companies that might not be able to afford very high wages. And it may also affect negatively younger workers who generally, just because of their tenure, earn lower wages.

Gerena: Let's wrap up by looking ahead. What other aspects of immigration will you be researching in the future?

Morales: I think there's still a lot we don't know about how firms respond to immigration. The adjustment at the firm level is crucial to understanding how production and the quantity and quality of jobs available in the economy change in response to immigration.

One of my projects [is] using data from Germany to look at what type of firms are more intensive on immigrants. Somewhat surprisingly, we find a stark positive relationship between firm size and the intensity of immigrants, meaning that large firms spend a higher share of their payroll on immigrants than smaller firms. This is important to understand how the economy adjusts, since large firms, for example, have a large influence on how much prices change in the economy.

In a second line of research, we use data from firms in the U.S. to understand the mobility patterns of American workers in response to immigration. We ask the question of how do wages change when similar workers are hired in the firm and whether American workers move to different types of firms in response to immigration. What we're hoping here is that this research can provide more insight into how immigrants seem to expand the total supply of jobs, whether this happens within the firm and the firm grows, or whether natives relocate to other firms with different characteristics.

Gerena: Well, so far your work has yielded some interesting findings for all of us to consider. Thanks for taking the time to speak with us.

Morales: Thank you very much for the invitation.

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