The Rybczynski Theorem, Factor-Price Equalization, and Immigration: Evidence from U.S. States

Recent literature on the labor-market effects of U.S. immigration tends to find little correlation between regional immigrant inflows and changes in relative regional wages. In this paper we examine whether immigration, or endowment shocks more generally, altered U.S. regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade theory. This theorem describes how regions can absorb endowment shocks via changes in output mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we search for evidence of regional output-mix effects using a new data set that combines state endowments, outputs, and employment in 1980 and 1990. We have two main findings. First, state output-mix changes broadly match state endowment changes. Second, variation in state unit factor requirements is consistent with relative factor-price equalization (FPE) across states, which is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest that states absorb regional endowment shocks through mechanisms other than changes in relative regional factor prices. * Email addresses: [email protected] and [email protected]. For helpful comments we thank Patty Anderson, Don Davis, Neil Gandal, Jim Harrigan, Ed Leamer, Doug Staiger, Dan Trefler, and seminar participants at Boston College, Dartmouth College, the Federal Reserve Bank of New York, Harvard University, the University of Michigan, Purdue University, and the University of Toronto. Hanson acknowledges financial support from the National Science Foundation and the Russell Sage foundation; Slaughter acknowledges financial support from the Russell Sage Foundation. Keenan DworakFischer provided excellent research assistance. The Rybczynski Theorem, Factor-Price Equalization, and Immigration: Evidence From U.S. States Abstract. Recent literature on the labor-market effects of U.S. immigration tends to find little Recent literature on the labor-market effects of U.S. immigration tends to find little correlation between regional immigrant inflows and changes in relative regional wages. In this paper we examine whether immigration, or endowment shocks more generally, altered U.S. regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade theory. This theorem describes how regions can absorb endowment shocks via changes in output mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we search for evidence of regional output-mix effects using a new data set that combines state endowments, outputs, and employment in 1980 and 1990. We have two main findings. First, state output-mix changes broadly match state endowment changes. Second, variation in state unit factor requirements is consistent with relative factor-price equalization (FPE) across states, which is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest that states absorb regional endowment shocks through mechanisms other than changes in relative regional factor prices. JEL Classification: F16, F22, J31, J61