Gains from "Diversity": Theory and Evidence from Immigration in U.S. Cities

The recent empirical literature finds negative (or weakly negative) distributional effects of the inflows of immigrants on the wages and employment of US-born workers especially low skilled and very small overall gains if we include the effect on capital. Our paper begins by revealing an empirical regularity apparently at odds with these findings: in a panel of citylevel data over time (1970-2000) the inflows of immigrants has a robust positive association with average wages, employment and value of housing of US-born citizens. At the same time the negative effect of foreign-born on wages of U.S. born in the same skill group is confirmed by our analysis. We reconcile these two findings by showing that if foreign-born workers provide skills (and produce services) that are not perfectly substitutable for those provided by US-born workers, and with a distribution across education-experience groups "complementary" to that of U.S. born, then migration generates overall gains (average positive effects) as well as distributional effects that hurt, in relative terms, some skill groups (negative relative effect). We provide a simple model that quantifies the impact of immigrants on average wages of US-born workers. For an increase in foreign-born worker of 6% of the initial US employment (as experienced by the US in the 1990-2000 decade) the average wages of US workers increase by 2% of their levels. We then simulate a more complete model of open city-economies that, using structural parameter values, reproduces fairly well the response of average wages, price of housing and internal migration of US-born to an immigration shock.