Immigration, Worker-Manager Matching, and Inequality

What are the distributional impacts of immigration on native workers? We develop a theoretical model based on worker-manager matching to study the impacts of immigration and empirically test the model for the U.S. labor market. In our model, we assume heterogeneity in skills of workers and managers and convexity of the wage schedule where wages are an increasingly convex function of skills (Lemieux, 2006, 2008). The competitive equilibrium exhibits positive assortative matching in which more skilled workers match with more able managers. Immigration is defined as a matching between immigrant workers and native-born managers and it changes factor endowments and factor distributions in the local labor market, thereby changing the matching mechanism between workers and managers. We focus on the influx of immigrant workers whose skill levels are relatively lower than those of the native workers. In this case, immigration will increase the relative supply of workers, intensifying competition among workers, and thereby reducing wages paid to native workers (matching ratio channel). However, native workers are now pushed up to be matched with managers with higher skills, which leads to an increase in wages for native workers (matching quality channel). The model predicts that inequality among native workers widens as native workers benefit from better matching and more skilled native workers benefit more from the increase in qualities of counterpart managers due to the convexity of wage schedule. We use U.S. Census and IPUMS American Community Survey over the period 1980-2010 for the empirical analysis. We construct a shift-share instrument for the stock of low-skilled immigrants and exploit the variation across commuting zone-year-industry to validate the model’s predictions. As predicted in the model, we demonstrate that the influx of low-skilled immigrants increases the relative supply of workers (matching ratio channel) and induces native workers to match with more able native-born managers (matching quality channel) in the local labor markets. Combining these two channels, the distributional impacts of the influx of low-skilled immigration in the U.S. are heterogeneous across different skill levels of native workers. Especially, inequality among native-born workers widens as more skilled workers benefit more from re-matching in the local labor markets.