Labour Market Effects of Immigration: Evidence from Canada

Labour Market Effects of Immigration: Evidence from Canada A Thesis Submitted to the College of Graduate Studies and Research in Partial Fulfillment of the Requirements for the Degree of Masters of Arts in the Department of Economics, University of Saskatchewan, Canada. By Md. Asadul Islam Saskatoon, Saskatchewan © Copyright Asad Islam August 2003. All Rights Reserve PERMISSION TO USE In presenting this thesis in partial fulfillment of the requirements for a postgraduate degree from the University of Saskatchewan, I agree that Libraries of the University may make it freely available for inspection. I further agree that permission for copying this thesis, in whole or in part, for scholarly purposes may be granted by the professors who supervised my thesis work or, in their absence, by the Head of the Department or the Dean of the College in which my thesis was done. It is understood that any copying or publication or use of the thesis or parts thereof for financial gain shall not be allowed without my permission. It is also understood that due recognition shall be given to me and to the University of Saskatchewan in any scholarly use to which my thesis may be put. Requests for permission to copy or to make use of material in this thesis in whole or in part should be addressed to: Head of Department of Economics University of Saskatchewan 9 Campus Drive Saskatoon, Saskatchewan S7N 5A5, Canada i Abstract: Immigration, the subject of repeated policy debates throughout the last two decades, has once again assumed a central position on the policy agenda. This debate has become more intense in recent years in Canada; the fear is over the potential job displacement and unemployment of Canadian-born workers, and the consequence to the Canadian economy. The recent immigrant incomes have been falling compared to their older counterparts helped to trigger the current policy debate. This thesis attempts to address this debate by providing an objective assessment of the displacement of Canadian-born workers due to immigration and the unemployment-immigration dynamics over the past 40 years of immigration to Canada. The thesis consists of two objectives: Objective-I: Job Displacement Effects of Immigration on Canadian-born First I address the job displacement effects on Canadian-born due to exogenous shifts in immigration flows. It is, therefore, necessary to consider the substitutability or complementarity between Canadian-born and immigrant workers. This is examined by estimating the set of wage earnings equation from the “Generalized Leontief Production Function”. The model specification abstracts from the role of capital, by assuming that labor and capital are separable in production. I then derive the iterated Zellner-efficient estimator (IZEF) (which is numerically equivalent to the maximum likelihood estimator) from the set of wage earnings equations. Then the degree of substitutability or complementarity is calculated using Hick’s (as opposed to Allen’s) elasticity of complementarity. The estimated Hicksian elasticities suggest, in the aggregate, there is no displacement of Canadian-born workers by immigration, although there is some displacement by industry. Objective-II: Unemployment and Immigration Dynamics Next, I consider immigrant not only as an additions to the existing labor force but also job creation effects through their effects for goods and services. Here immigrants are considered as endogenous and I model the dynamics of unemployment and immigration. As a first step, statistical causality is investigated between immigration and unemployment. But causality methods can suffer from omitted variable problem. So, I construct a theoretical labor market and use the cointegration analysis to determine the long run relationship among unemployment rate, immigration level, real wage, and real GDP. Then, I estimate the short-run dynamics with a specification in difference form where the parameters of the cointegrating vectors from the first-step are fixed and entered as an error correction mechanism. The causality test finds no evidence of a significant effect of Canadian unemployment on immigration. The estimation of the long-run and short-run parameter indicates that no statistically significant relationship exists between unemployment and immigration. ii ACKNOWLEDGEMENT: I wish to express profound gratitude to my supervisor Professor Mobinul Huq for his excellent research guidance, constant source of inspiration, encouragement and advice during this research work and my Masters program of study at the University of Saskatchewan. I wish to thank Professor Robert Lucas and Professor Kien C Tran for their extremely helpful comments, unique insights and deep perspectives. I would like to thank Professor Peter Li, an external examiner, for his fruitful comments to the completion of the thesis. I also extend my thanks and appreciation to Professor Joel Bruneau, Professor Morris Altman for their support and contribution towards the completion of the thesis. My sincere thanks to Chris, Rokon, Nikhil, Sanaz and all of my well wishers here at Saskatoon for their encouragement to overcome various difficulties during my Masters program of study here at U of S. A sincere thanks to Dr. S.M. Ashiquzzaman, and Prof. M.A Taslim, my undergraduate teacher, for their insightful ideas and never-ending inspirations for higher studies in abroad. Finally I express my special gratitude and heartfelt thanks to my parents, my Brother Mr. Rafiq for their continuous support and encouragement to go on with my education. This work is dedicated for them. iii DEDICATION To My Parents And My Elder Brother iv Table of Contents: Permission to Use i Abstract ii Acknowledgement iii Dedication iv Table of Contents v List of Table vii List of Figure vii CHAPTER-1: INTRODUCTION 1 1.1 The Debate about Immigration 1 1.2 Motivation 3 1.3 Methodology 4 1.3.1 Substitutability and/or Complementarity 4 1.3.2 Unemployment and Immigration 5 1.4 A Road Map 5 CHAPTER-2: IMMIGRATION IN CANADA 6 2.1 Trends and Patterns in Immigration to Canada 6 2.3 An overview of the Canada’s Immigration Policy 11 2.3 Labor Market Effects of Immigration: Theoretical Framework 16 2.3.1 Effects on the Wage Rate 16 2.3.2 Immigration and Aggregate Unemployment 19 2.3.3 Aggregate Unemployment and Immigration Dynamics 20 2.4 Labor Market Effects of Immigration: Review of the Literature 22 2.4.1 Substitutability and Complementarity: 22 2.4.1(A) Canadian Studies 22 2.4.1(B) Other Countries 23 2.4.2 Aggregate Unemployment and Immigration 25 2.4.2(A) Canadian Studies 25 2.4.2(B) Other Countries 26 CHAPTER-3: MODEL SPECIFICATION 29 3.1 Substitutability and Complementarity 29 3.1.1 The structure of Production 29 v 3.1.2 Statistical Specification 31 3.1.3 Determination of the Socio-Economic Variables 32 3.1.4 Parameters of Interest 33 3.1.5 Econometric issues 33 3.2 Immigration and Aggregate Unemployment Dynamics 35 3.2.1 Causality Test: Immigration and Unemployment 35 3.2.2 Identification of the Long-run and Short-run Structure 36 3.2.2(a) Identifying a Long-run Relationship 36 3.2.2(b) Short-run Dynamics of Unemployment and Immigration 38 CHAPTER-4: ESTIMATION RESULTS AND INTERPRETATION 39 4.1 The Data and Analysis 39 4.2 Estimation Results 43 4.2.1 Elasticity Estimates 44 4.2.2 Substitutability / Complementarity by Industry 47 4.3 Aggregate Unemployment Immigration Dynamics 50 4.3.1 Estimation of statistical Causality 50 4.3.2 Cointegration Analysis 52 4.3.2(a)The E-G Methodology 52 4.3.2(b) The Johansen Methodology 54 4.3.3 Error-Correction Models 57 CHAPTER 5: CONCLUSION AND FUTURE RESEARCH 59 Appendix-I 64 Appendix-II 68 Appendix-III 69 References 71 vi List of Table: Table 4.1: Descriptive Statistics of Selected Variables 40 Table 4.2: Symmetry Constrained Wage Equations using OLS 43 Table 4.3: Symmetry Constrained Wage Equations using the FIML 44 Table 4.4: Hicksian elasticity of complementarity using FIML estimation 45 Table 4.5: Symmetry Constrained Wage Equations Disaggregated by Broad Industrial Classification 48 Table 4.6: Tests for Statistical Causality between Immigration and Unemployment 50 Table 4.7: Test for Unit Root 52 Table 4.8: Test for Cointegration 53 Table 4.9: Johansen Test for Cointegration 55 Table 4.10: Cointegration Test for the System 56 Table 4.11: Temporal Causal Test from Error Correction Models 58 List of Figure: Figure 2.1: Immigrants by Origin and Period of Arrival 7 Figure 2.2: Immigrants by Class, 2001 8 Figure 2.3: Canadian Population Age-Sex Structure, 2000 8 Figure 2.4: Education by Origin (Population 15+), 1996 9 Figure 2.5: Substitute Inputs Case 17 Figure 2.6: Immigrants and Canadians are Complements 18 Figure 5.1: Test for Structural Break in Data 51 vii CHAPTER-1 Introduction 1.1The Debate about Immigration Canada is a country of immigrants and sons and daughters of immigrants. Immigration has shaped the rate of growth of the Canadian population and its demographic composition; it also created much socioeconomic diversity within Canadian society. Historically, immigration has been an essential building block of the Canadian nation, the strength and validity of an astonishing society that is the envy of the world. While the post-world war II immigrants flow was from Europe, the United States, & the British Isles, the post-1967 immigration flows are more from Asia. The debate surrounding immigration policy has become multifaceted especially in recent years over the controversy of the decline in income of recent immigrants. Studies (Coulson & DeVoretz 1993, Baker & Benjamin 1994) have shown that while earlier immigrant income has caught up to that of native Canadians, the recent immigrant income has not. There is also fear that newcomers take job away from native Canadians1.

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