Opening the Floodgates: Industry and Occupation Adjustments to Labor Immigration

Abstract

This paper investigates the impact of a large shock to labor supply from immigration on occupational wages, labor costs and industry growth. We develop a simple factor-proportions theory where individuals sort into occupations, and industries use occupations with different factor intensities. The model delivers an empirical framework and testable hypotheses that we confront with a rich data set on industry performance, occupational characteristics and immigration. We apply the methodology to one of the largest labor immigration shocks of the 21th century: The immigration wave to Norway after the Eastern enlargement of the European Union. We introduce a novel instrument that exploits the fact that the language requirements are significant barriers for foreign workers and these requirements vary across occupations. The results point to labor migration leading to large adjustments in relative industry employment, labor costs and wages, and these effects are particularly strong in industries that are initially intensive in the use of immigrant occupations. Finally, a quantification of the general equilibrium of our model shows that the welfare effect of immigration was close to zero for natives, but negative for the existing population of immigrants.

Keywords: Eastern enlargement, Immigration, Industry Adjustments

JEL Classification: F22, J61