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Poorly educated immigrant workers hurt, help American workers: 2005 study

Let's call this the Home Depot Effect: poorly educated workers compete for jobs, and benefit better educated workers by lowering the cost of goods while stimulating middle class growth.

Following is the abstract of a paper written in 2005 by Gianmarco Ottaviano and Giovanne Peri for the Centre for Economic Policy Research Discussion Paper No. 5226, 2005, (alternative version National Bureau of Economic Research Working Paper No. 11672, 2005: "Rethinking the gains from immigration: theory and evidence from the U.S."

Recent influential empirical work has emphasized the negative impact immigrants have on the wages of US-born workers, arguing that immigration harms less educated American workers in particular and all US-born workers in general. Because US and foreign-born workers belong to different skill groups that are imperfectly substitutable, one needs to articulate a production function that aggregates different types of labor (and accounts for complementarity and substitution effects) in order to calculate the various effects of immigrant labor on US-born labor.

We introduce such a production function, making the crucial assumption that US and foreign-born workers with similar education and experience levels may nevertheless be imperfectly substitutable, and allowing for endogenous capital accumulation.

This function successfully accounts for the negative impact of the relative skill levels of immigrants on the relative wages of US workers. However, contrary to the findings of previous literature, overall immigration generates a large positive effect on the average wages of US-born workers. We show evidence of this positive effect by estimating the impact of immigration on both average wages and housing values across US metropolitan areas (1970-2000). We also reproduce this positive effect by simulating the behavior of average wages and housing prices in an open city-economy, with optimizing US-born agents who respond to an inflow of foreign-born workers of the size and composition comparable to the immigration of the 1990s.

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