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THE IMPACT OF IMMIGRATION ON COMPETING NATIVES’ WAGES: EVIDENCE FROM GERMAN REUNIFICATION Susanne Prantl and Alexandra Spitz-Oener* Abstract—After the fall of the Berlin Wall on November 9, 1989, and the native workers in West Germany.1 To a large degree, their hu- collapse of the German Democratic Republic, a sudden, unexpected, and massive influx of East German migrants hit the entire West German labor man capital from the GDR was transferable to the West due to market. The context is well suited for investigating whether immigration analogies in the education and occupational training systems influences natives’ wages and how the effects depend on product and labor of the FRG and the GDR. Both vocational training systems market conditions. We propose direct measures of potential migration with exogenous variation, compare migrants to natives with similar capabilities, were organized along similar occupational boundaries and and segment the labor market along predetermined margins. We find that emphasized occupation-specific training owing to their joint immigration can have negative effects on the wages of natives. These ef- history before World War II. Building thereon, we catego- fects surface when product and labor markets are competitive but not under regulations that restrict the entry of firms and provide workers with a strong rize East German migrants by the specific occupation within influence on firms’ decision making. which they competed with native West Germans who hold a medium level of education. We use age as a second dimen- sion, treating workers as imperfect substitutes in production I. Introduction if their age-related work experience, their risk of human capi- tal decay, or their life cycle–depending family and retirement HE impact of immigration on the wages of competing planning differ. Tnative workers in receiving countries remains highly de- To tackle migration decisions that can be endogenous to bated despite many studies on the topic. Endogenous migra- native wages, we propose an instrumental variables (IV) ap- tion decisions pose a key challenge for effect identification, as proach where direct measures of potential migration serve as does the selection of immigrants and natives with compara- excluded instruments. East Germans who were freed when ble capabilities. In this paper, we revisit the issue, addressing the GDR’s extensive mobility restrictions broke down qualify both challenges, and we examine the role of product and labor as potential migrants. These include East Germans who mi- market conditions as a source of effect heterogeneity. grated to the destination region, as well as those who stayed in The collapse of the German Democratic Republic (GDR, the source region. To measure the pool of all East Germans East Germany, or the East) and German reunification pro- who were qualified as potential migrants to a specific age- vide an ideal starting point for the analysis in this paper. The occupation-time cell of the West German labor market, we unexpected fall of the Berlin Wall on November 9, 1989, dis- assign East Germans in East or West Germany to these cells mantled the GDR’s ironclad restrictions on mobility. From using data on their occupational training from GDR times that moment, East Germans were free to travel, and a mas- along with age data, in particular. The data come from the sive wave of East Germans hit the labor market of the Federal waves of the German Qualification and Career Survey in the Republic of Germany (FRG, WestGermany, or the West).The winter months of 1991–92 and 1998–99. To determine the en- East German migrants were, in important respects, similar to coding in the case of the survey wave of 1985–86, we set the number of potential migrants equal to 0 before the shock of 1989. For each age-occupation-time cell of the West German Received for publication September 22, 2014. Revision accepted for pub- labor market in the later survey waves, we calculate the num- lication August 23, 2017. Editor: Philippe Aghion. ber of those East Germans who were likely to enter that cell ∗ Prantl: University of Cologne; Spitz-Oener: Humboldt-University given the relevance of their human capital. In this context, Berlin, IAB, IZA. We are grateful to the editor, Philippe Aghion, and the anonymous refer- we use substantial data variation beyond the variation within ees for valuable and constructive suggestions. We also thank Sandra Black, the specific age-occupation-time cell.2 Richard Blundell, Leah Boustan, Christian Dustmann, Christoph Engel, Our measures of potential migration provide exogenous Bernd Fitzenberger, Hans Gersbach, Rachel Griffith, Martin Hellwig, Jen- nifer Hunt, Jörn-Steffen Pischke, John Van Reenen, Jo Seldeslachts, Kon- instrumental variation across West German age-occupation- rad Stahl, Max Steinhardt, Frederik Thenée, Carl Christian von Weizsäcker, time cells. The first source of variation across time fol- Christoph Wigger, Joachim Winter, Fabrizio Zilibotti, Christine Zulehner, lows directly from the shock of 1989. Variation across age- and the participants of many seminars and conferences for helpful com- ments. Prantl is grateful for the hospitality of the Department of Economics occupation cells, as well as further variation across time, at Harvard University, while working on this paper. Both of us gratefully ac- arises due to specific characteristics of the occupational knowledge financial support from the German Research Foundation (DFG) training and education system in the GDR, consequences through the Priority Program 1764 and Spitz-Oener also through the CRCs 649 and TRR 190. We thank the German Federal Institute for Vocational of reforms and policy changes during GDR times, and Education and Training and the Institute for Employment Research for the collection of the data and the GESIS Data Archive for the provision of the data. Neither the producers nor the provider of the data bear any responsi- 1They had native-equivalent economic and political rights, German was bility for the analysis and interpretation of the data in the paper or the online their native tongue, they were better educated than most immigrants arriving appendixes. in Germany, and they were more easily integrated into the West German Supplementary material is available online at http://www.mitpress labor market. journals.org/doi/suppl/10.1162/rest_a_00853. 2See sections IIB and IIIA, and appendix B. The Review of Economics and Statistics, March 2020, 102(1): 79–97 © 2019 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology https://doi.org/10.1162/rest_a_00853 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/rest_a_00853 by guest on 26 September 2021 80 THE REVIEW OF ECONOMICS AND STATISTICS GDR-determined population dynamics. We integrate the The labor market segment where neither regulation plays measures of potential migration as excluded instruments into a role is the one that best fits the assumption of competitive the standard approach for estimating direct partial effects of product and labor markets. The employees in this competitive immigration on the wages of natives who qualify as close sub- segment work in establishments where missing works coun- stitutes in production. Specifically, we estimate the effects of cils imply weak worker influence on firms’ decision making changes in the share of East German migrants per West Ger- and in product markets in which the rules of the Trade and man age-occupation cell across time on the corresponding Crafts Code do not restrict the entry of firms. In the estimation changes in native wages.3 results for the competitive segment, changes in the share of Matching East German migrants to competing native West East German migrants per West German age-occupation cell Germans with similar capabilities fits with competitive equi- across time have a negative effect on the respective changes in librium models of the labor market that consider immigrant the wages of competing West Germans (see section IVB). The labor and native labor as perfect substitutes in production. In main point estimate implies a native wage elasticity to immi- such models, real equilibrium wages are determined by the gration of −1.5656.5 For the intermediate segment, where the marginal product of labor. Newly arriving immigrants shift product or the labor market regulation applies, but not both, the labor supply curve outward and put downward pressure we also find negative coefficient estimates, but these are small on natives’ wages. In contrast, the estimates in section IIIB in value and not statistically different from 0. We do not ob- indicate no significantly negative average effect of changes serve that immigration has a negative effect on the wages of in the share of East German migrants per West German age- competing natives in the segment in which the product and occupation cell across time on the corresponding changes the labor market regulations coexist. There, the entry of firms in the wages of competing West Germans. Facing this find- into product markets is restricted, and worker-empowering ing for the entire West German labor market, we set out to works councils are prevalent. Taken together, the effect es- explore effect heterogeneity driven by deviations from the as- timates indicate strong heterogeneity across the considered sumptions of competitive product and labor markets in these segments of the West German labor market. Moving beyond models. Germany, this finding can be related to differences in the la- We distinguish three labor market segments with differ- bor market consequences of immigration across economies ent product and labor market conditions by relying on two with different product and labor market conditions. core elements of German regulation. These are exogenous to The native wage elasticities to immigration that we re- the labor market consequences of the unexpected German- port for the competitive labor market segment are large when German migration wave due to their long-run stability before compared to the range of estimates in the immigration lit- the 1990s (see also section IIA).

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