Do firms employing undocumented workers have a competitive advantage? Using administrative data from the state of Georgia, this paper investigates the incidence of undocumented worker employment across firms and how it affects firm survival. Firms are found to engage in herding behavior, being more likely to employ undocumented workers if competitors do. Rivals' undocumented employment harms firms' ability to survive while firms' own undocumented employment strongly enhances their survival prospects. This finding suggests that firms enjoy cost savings from employing lower-paid undocumented at workers wages less than their marginal revenue product. The herding behavior and competitive effects are found to be much weaker in geographically broad product markets, where firms have the option to shift labor-intensive production out of state or abroad.
JEL classification: L1, J23, J61
Key words: undocumented workers, firm dynamics, monopsony, immigration policy
Valuable research assistance was provided by Nicole Baerg, Katharyn Rees, Navnita Sarma, and Menbere Shiferaw. The authors also benefited from consultations with Clark Burdick and Russell Hudson from the Social Security Administration and from discussions with participants at seminars at the Federal Reserve Bank of Atlanta, Oberlin College, and Heriot-Watt University. They also received additional helpful comments and suggestions from Atanas Christev, Jacques Melitz, and Mark Schaffer. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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