The Effect of Low-skilled Immigration on U.S. Prices: Evidence from CPI Data

While an extensive literature examines the impact of low-skilled immigration on U.S. native wages, there has been almost no research on the parallel question of how immigration affects the price of goods and services. A standard small open economy model suggests that low-skilled immigration should reduce the relative price of non-traded goods by decreasing the wages of low-skilled workers. Treating U.S. cities as small open economies and using confidential price data on goods and services to estimate reduced-form price effects, I find that, at current immigration levels, a 10 percent increase in the share of low-skilled immigrants in the labor force decreases the price of immigrant-intensive services, such as housekeeping and gardening, by 2.1 percent and of other non-traded goods by 0.7 percent. Structural estimates suggest that lower wages are a likely channel through which these effects take place. However, wage effects are significantly larger for low-skilled immigrants than for low-skilled natives because the two are imperfect substitutes. Overall, the results imply that the lowskilled immigration wave of the 1990s increased the purchasing power of high-skilled natives living in the 25 largest cities by 0.6 percent but decreased the purchasing power of native high school dropouts by 1.3 percent. ∗Email: [email protected]. I am very grateful to Joshua Angrist, David Autor, and Esther Duflo for their support and valuable comments. I thank Daron Acemoglu, Abhijit Banerjee, Jose Tessada, and participants in the field lunches at MIT and in seminars at UCL, UCLA, UCSD, UC Irvine, Chicago GSB, and Northwestern for helpful comments. I also thank the CPI unit of the BLS, in particular William Cook, for generous assistance with the data.