A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Hartog, Joop; Zorlu, Aslan Working Paper The Effect of Immigration on Wages in Three European Countries IZA Discussion Papers, No. 642 Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Hartog, Joop; Zorlu, Aslan (2002) : The Effect of Immigration on Wages in Three European Countries, IZA Discussion Papers, No. 642, Institute for the Study of Labor (IZA), Bonn This Version is available at: http://hdl.handle.net/10419/20940 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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IZA Discussion Paper No. 642 November 2002 ABSTRACT The Effect of Immigration on Wages in Three European Countries We extend the Altonji and Card (1991) framework for analysing the impact of immigrants on natives’ wages from two to three labour types and estimate reduced form wage equations for The Netherlands, United Kingdom and Norway. We find very small effects on natives’ wages and no dominant robust patterns of substitution and complementarity. Effects on wages of earlier immigrants are larger but less reliable. Further work should focus on these own effects. JEL Classification: J15, J31 Keywords: immigration, wages, substitutes and complements Corresponding author: Joop Hartog Department of General Economics University of Amsterdam Roetersstraat 11 1018 WB Amsterdam The Netherlands Tel.: +31 20 525 4298 Fax: +31 20 525 4254 Email: [email protected] Data on the Netherlands (LSO 1997) have been made available by CEREM, Statistics Netherlands. The British QLFS have been made available by the Office for National Statistics through the Data Archive, University of Essex. Norwegian KIRUT data have been made available by NSD, Bergen. We are grateful to these organisations. None of these organisations bear any responsibility for the analyses or interpretations of data sets used in this paper. We are also grateful to seminar participants at CPB The Hague, in particular our discussant Daniel van Vuuren for their comments. 1 Introduction Since the paper of Grossman (1982), several studies have been conducted on the impact of immigration on the host country labour market. Most of these studies concern traditional immigration countries like the United States, Canada and Australia (see surveys: Friedberg and Hunt, 1995; Borjas, 1994). In Europe, the number of studies is still limited, although increasing in the last few years (Winkelmann and Zimmermann, 1993; De New and Zimmermann, 1994; Gang and Rivera-Batiz, 1994; Pischke and Velling, 1997; Venturini, 1999). In this paper, we study the effect of immigration on natives’ wages in three European countries. In the next section, we extend the Altonji-Card (1991) model from two to three production factors, to obtain a richer model for predicting wage effects. We then present estimates for The Netherlands, the United Kingdom and Norway and we conclude by comparing and assessing the results from these three countries. The countries were selected for data availability and for interesting contrasts in their immigrant population, as we spell out in the concluding section. 2 A System of Connected Local Labour Markets Altonji and Card (1991) analyse the effect of immigration with a partial equilibrium model for local labour markets. A local economy is assumed to produce one good that is consumed both locally and exported to other cities and to import another good. The quantity Y of the local good is produced by a single competitive industry with constant returns to scale using labour inputs and other inputs with exogenously fixed prices. Extending the two-factor model of Altonji and Card, we consider low, medium and high skilled labour as production factors in local labour markets. The technology is characterised by constant returns to scale. The total labour force, L, consists of low skilled LU , medium or ‘centrally’ skilled, LC and high skilled, LH ; L LLLUCH. The respective proportions of low, medium and high skilled labour are ULLCLLHLLNU, NC , and NH, with UCHNN N1. In an initial equilibrium, the skill distribution is given as low skilled, U N , medium skilled CN and high skilled workers H N . Suppose that an immigrant flow of size I occurs: a fraction of immigrants, U I , is low skilled, CI , is medium skilled and the rest is high skilled workers, H I . The proportional changes in wage rates of each labour type must satisfy equality of wage-induced demand shifts and supply shifts due to immigration adjusted for skill composition and product demand composition: .UI I UUUUUUCCUHH/ logwww log log (1) ULN 0 .CI I C/ CUlogwww U CC C log C CH log H (2) CLN 0 3 .1UC I /II logww log log w (3) HHUUHCCHHHH 1 UCLNN0 where log wi is the log wage change for skill group i, ij is the elasticity of labour demand for skill group i with respect to the wage of group j, i indicates the elasticity of labour 1 supply of skill group i and i are adjustment coefficients , 0i 1, defined as YY Y UUCH1 1kkCH e , where NIII U 11 (4) YY UUCHINII1 YY Y CCUH1 1,kkUH e where NIII C 22 (5) YY CCUHINII1 YYY H 1HUC 1kkUC e , where NIII H 33 (6) YY HHUCINII1 Yi is consumption by skill group I, ij is the Marshall-Hicks labour demand elasticity ij j ij (7) Where j is the wage bill of group j relative to output value, ij is the partial elasticity of substitution2 of skill group i with respect to group j and is the demand elasticity of local output to its relative price p (a weighted average of elasticities of local consumers and export). The left-hand sides of equations (1)-(3) indicate the effective proportional increase in the supply of labour for the respective skill groups as a result of the immigration flow. The right-hand side gives the response of skill groups' local excess demand to the changes in the wage rates. If immigrants have the same skill composition as natives (kii 1, all ) and the export share Ye is zero, wages are unaffected by immigration, because of constant returns to scale. Only immigration with deviant skill composition has wage effects. If we reduce the model to homogeneous labour, where immigrant skill composition cannot differ from native skill composition, cross demand elasticities ij are zero and all output is exported (i 1), we have the standard comparative result of an isolated labour market 1 I log w (8) L 1 They are slightly rewritten from Altonji and Card’s specification to bring out the role of the export share in demand. 2 If there are only two inputs, the partial elasticity of substitution between two inputs is dual to the Hicksian partial elasticity of complementarity cc, 1 from the duality of production and cost functions. If there are more than two inputs, then U1 c (Hamermesh, 1993).