Processing Immigration Shocks: Firm Responses on the Innovation Margin

43 Pages Posted: 20 Sep 2017

See all articles by Rowena Gray

Rowena Gray

University of California, Merced - School of Social Sciences, Humanities and Arts

Giulia Montresor

University of Essex - Department of Economics

Greg C Wright

University of California, Merced

Date Written: August 31, 2017

Abstract

The extent to which firms respond to labor supply shocks has important implications for local and national economies. We exploit firm-level panel data on product and process innovation activities in the United Kingdom and find that the large, low-skill labor supply (immigration) shock generated by the 2004 expansion of the European Union to Eastern European countries increased process innovation and reduced product innovation. This implies that the innovation response to labor supply shocks may be more nuanced than previous literature has suggested. Both of these effects are increasing in the low-skill intensity of firm production as well as firm size. In addition, the reduction in product innovation is lessened for firms whose output is sold locally. We interpret this last finding as evidence in favor of a demand side effect that mitigates the overall decline in product innovation generated by the labor supply shock. We present a model that illustrates the channels through which firms may respond to labor supply shocks, and find that our results are mostly consistent with the model’s predictions.

Keywords: product innovation, process innovation, immigration, labor supply shocks

JEL Classification: J230, J610, F220, O310, O330

Suggested Citation

Gray, Rowena and Montresor, Giulia and Wright, Greg C, Processing Immigration Shocks: Firm Responses on the Innovation Margin (August 31, 2017). CESifo Working Paper Series No. 6624. Available at SSRN: https://ssrn.com/abstract=3038674

Rowena Gray

University of California, Merced - School of Social Sciences, Humanities and Arts ( email )

P.O. Box 2039
Merced, CA 95344
United States

Giulia Montresor

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Greg C Wright (Contact Author)

University of California, Merced ( email )

P.O. Box 2039
Merced, CA 95344
United States

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