Federico S. Mandelman, Yang Yu, Francesco Zanetti, and Andrei Zlate
Working Paper 2024-1
January 2024
Abstract:
We document a slowdown in low-skilled immigration that began around the onset of the Great Recession in 2007, which was associated with a subsequent rise in low-skilled wages, a decline in the skill premium, and labor shortages in service occupations. Falling returns to education also coincided with a decline in the educational attainment of native workers. We then develop and estimate a stochastic growth model with endogenous immigration and training to rationalize these facts. Lower immigration leads to higher wages for low-skilled workers but also to higher consumer prices and lower aggregate consumption. Importantly, the decline in the skill premium reduces the incentive to train native workers and hurts aggregate productivity over time, which reduces welfare. We assess the implications of stimulus policies implemented during the COVID-19 pandemic and show that the shortage of low-skilled immigrant labor amplified the increase in consumer prices, partially eroding the effectiveness of stimulus.
JEL classification: F16, F22, F41
Key words: international labor migration, skill premium, task upgrading, heterogeneous workers
https://doi.org/10.29338/wp2024-01
The authors thank Amelie Constant, Rosario Crino, Brad Hershbein, Pravin Krishna, Giovanni Peri, Fernando Rios-Avila, Henry Siu, and participants at several conferences and seminars for useful comments. They also acknowledge Nick Croteau and Li Guo for excellent research assistance. 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.
Please address questions regarding content to Federico S. Mandelman, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree St. NE, Atlanta, GA 30309-4470, 404-498-8785; Yang Yu, Shanghai Jiao Tong University; Francesco Zanetti, University of Oxford; and Andrei Zlate, Federal Reserve Board of Governors.To receive e-mail notifications about new papers, subscribe. Under "Publications" select "Working Papers."