Unit 4 Macro: The effect of immigration on wages and prices

Immigration lowers the wages of relatively low-skilled native employees in sectors of the service economy that hire bigger shares of foreign workers. But the cost reductions that employers enjoy from lower wages are typically passed on to consumers: price inflation is much higher for services with no change in immigrant employment than for services where immigrant employment is growing.These are among the findings of research by Professors Bernt Bratsberg and Oddbjørn Raaum, published in the latest issue of the Economic Journal. Their study confirms that there are clear winners and losers from labour migration: low- and semi-skilled workers face increased competitive pressures on their wages and employment while consumers enjoy more services at lower prices.

With the integration of European labour markets, reliable evidence on how international migration affects receiving and sending economies is of considerable interest. But the wage effects of immigration are difficult to observe directly in data because immigrants tend to locate in labour markets with high demand and high wage growth, which tend to disguise the effects of immigration.

This study makes use of the fact that some segments of the Norwegian construction sector – such as electrical installation and plumbing – are covered by strict licensing and certification requirements. Others – such as carpentry and painting services – are not covered. The licensing requirements in some trades pose a big obstacle to immigrants entering the construction sector and lead to variation in the share of immigrants across different sub-sectors of the industry.

Building trades with a rapid increase in the proportion of immigrant workers – such as carpentry and painting – have lower wage growth and lower price increases (and vice versa). Wage effects are strongest for the less educated and for earlier immigrant arrivals – and they are much less significant for high-skilled workers