ABSTRACT

What is the causal effect of low-skilled immigration on native wages? In spite of a vast literature on the wage effects of migration, no consensus yet exists. In this paper, I use the Mexican Peso Crisis of the mid-1990s, which raised net Mexican migration to the US by approximately 50 percent, as an exogenous push factor. I combine this novel push factor with the migration networks instrument widely used in the literature in order to study the short and long-run effects of immigration. In the short run, states that received large inflows of Mexican immigrants experienced substantial low-skilled wage declines: a 1 percent labor supply shock to a local labor market decreased wages of low-skilled US natives by 1-1.5 percent on impact. Within five years, these local shocks spread to the rest of the economy through net interstate labor reallocation. Fewer young low-skilled native workers migrated to the local labor markets shocked by Mexican immigration. The documented interstate reallocation implies that there are spillovers from high-immigration local labor markets to the rest of the economy, limiting the suitability of this natural experiment for evaluating longer-run impacts. Instead, I build a many-region model that depends on the two key parameters estimated in the short-run regressions: the local labor-demand elasticity and the sensitivity of internal reallocation to local shocks. Using these two parameters I calibrate my model to US state-level data. The model matches the documented patterns in the data and allows me to obtain the counterfactual wage evolution in the various local labor markets absent the immigration shock.