“ IMMIGRANTS IN THE LABOR MARKET: IMPACT, INTEGRATION AND METHODS ” By Zvi Eckstein Tel-Aviv University, University of Minnesota and CEPR and Sarit Cohen Bar-Ilan University Prepared for the 2001 Annual Conference of the European Society for the Population Economics, Athens, June 14-16, 2001

The Lecture Covers three topics of research on “IMMIGRANTS IN THE LABOR MARKET” Macroeconomic Implications and The Impact on Natives: Aggregate Data Wage Growth, The Value of Human Capital and Convergence: Cross-sectional Data Local Human Capital: Training, Occupational Choice and Experience: Panel Data

Definition of an Immigrant: An immigrant is an individual who moves from one society to another with the intention to stay permanently Main Reason for Immigration: Improve standard of living Immigration Decision: Endogenous vs. Exogenous The Process of Immigration: Location (Housing), Language learning, Training, Job Search and Occupational Choice A case-study: Immigration of Jews from Former Soviet Union to Israel: large growth in population

Macro Effects Large Growth of Labor Force Response of GNP, Capital stock and Consumption Large change in the composition of the Labor Force : Education, Age and Occupations Impact on Wages of Natives

Population and GNP per Capita (annual growth rates)

Capital Stock and Consumption per Capita (annual growth rates)

Composition of Labor Force

Aggregate Employment and Gross Capital Stock per Employee

Several Papers and Results: Eckstein and Weiss (2000), following Jorgenson and Griliches (1967), proposed a simple method for quality adjustment of employed natives and immigrants to show that capital labor ratio is relatively constant. Immigrants are transformed into equivalent Israelis by using relative wages predicted from regression as weights. The resulting capital labor ratio for is consistent with CRS aggregate production function.

Adjusted and Unadjusted Capital – Labor Ratio

Average Annual Growth Rate of Real Wages of Natives and Immigrants

Cohen and Hsieh (2000)“Macroeconomic and Labor Market Impact of Russian Immigration in Israel” Calibration results on impulse response of immigration are consistent with the data, that is: Russians were quickly absorbed into the labor market. Sharp initial fall in wages, small increase in unemployment. But quick recovery due to capital accumulation (inflows of foreign capital) Calibrated a one-sector macro model with labor and capital adjustment costs. Assume labor endowment increased between due to immigration (using the actual growth rates)

Hercowitz and Yashiv (1999) use an open- economy neo-classical model to analyze the impact of entry of immigrants into the labor and goods markets on the dynamics labor demand. They use aggregate data to estimate two reduced form equations that relate employment on natives and immigrants. They find a negative effects of immigration on native employment a year and a half after arrival.

K. Storesletten (JPE 2000) calibrated an OLG model for the US economy. He considered immigration policies that would help some of the current fiscal problems that are due to demographic changes.

Friedberg (1998) “The Impact of Mass Migration on the Israeli Labor Market” if the distribution of immigrants across occupations in Israel is not exogenous OLS estimate is biased Use the occupational distribution in the former Soviet-Union as an Instrument for r j IV estimates indicate that immigration did not have an adverse impact on wages of natives Study the impact of immigration on wages of natives (cross sectional data) W is the log earnings OCC j is a set of J occupation dummies r j is the ratio of immigrant to native workers in each occupation Hypothesis: Immigrants’ presence in a certain occupation reduces specific occupational wage

“The Absorption of Highly Skilled Immigrants: Israel ” by Eckstein and Weiss (1998) Question 1: How does the wage growth of immigrants divide between: local experience, occupational transition and the “price” of imported human capital? Method and application Question 2: Convergence to Natives (Assimilation)? Definition and application Literature: Chiswick(1978), Borjas(1985, 1994, 2000) and LaLond and Topel(1997) Using repeated cross section data

Monthly Wages of Immigrants by Schooling and Years since Arrival, Males aged 25-55

Wages of Immigrants and Israelis by Work Experience in Israel, Males aged 25-55

Four Sources of Wage Growth for Immigrants Rising Prices of imported human capital Occupational upgrading Local accumulated human capital (experience – years since migration) Aggregate Wage growth

The Main Idea of Price change NATIVES IMMIGRANTS, T  infinity IMMIGRANTS, T = 0 SCHOOLING Ln W Slope Slope 0.03

Use formal human capital theory to support the above model Estimate the two equations jointly imposing cross equations restrictions and non-linear price change on imported human capital Use repeated income surveys from Estimate occupational transition regressions for natives and immigrants

Rates of Return for Natives and Immigrants (percent)

Predicted Proportion of Workers with 16+ Years of Schooling Employed in Occupation 1

Components of Annual Wage Growth of Immigrants During for the 1990 Cohort, Males, Age at Arrival > 25

Simulated Wage-Age Profiles in Occupation 1 for an Israeli and an Immigrant, with and without Cohort Effects, Schooling=16, Age at immigration=30*

Simulated Wage-Age Profiles in Occupation 3 for an Israeli and an Immigrant, with and without Cohort Effects, Schooling=16, Age at immigration=30*

Simulated Wage-Age Profiles Based on Regression without Occupation Dummies for an Israeli Worker and an Immigrant, with and without Cohort Effects (schooling=16, age at immigration=30)*

Summary Occupational distribution of immigrants converges to that of natives Prices of imported human capital do not converge Wages do not converge although growth is high during the first five years The same conclusion was obtained by Weiss, Sauer and Gotlibovsky (2000) using panel data

“Training and Occupational Choice of Highly Skilled Immigrants” by Cohen and Eckstein (2000) Using Panel data The transition pattern of post-schooling individuals, displaced workers and immigrants to the labor market has similar characteristics. Unemployment falls quickly as workers first find blue-collar jobs, followed by a gradual movement to white-collar occupations.

Actual Proportions in White Collar, Blue Collar and Unemployment

Participation in White Collar and Blue Collar Training

What is the impact of participation in training, job- search, occupational choice and language acquisition on the integration of immigrants in the labor market ? What is the impact of alternative motives for participation in training: 1.Increase the mean wage offer 2.Increase job offer probabilities 3.Provide direct utility The effect of training varies by the unobserved types of individuals (Heckman and Singer). The Main Questions

A Dynamic Choice Model Choice set: Work in a White-Collar job (WC) Work in a Blue-Collar job (BC) Training related to White-Collar jobs (WT) Training related to Blue-Collar jobs (BT) Unemployment (UE)

utilities: (WC) (BC) (BT) (WT) (UE) Wage Functions:

Transition Probabilities are limited by job-offer probabilities and training-offer probabilities: represents time varying occupation specific demand indicators t indicates time in Israel x it represents individual characteristics, such as occupation in the country of origin, knowledge of Hebrew, training status etc.

The Model 1. UE 2. UE BC 3. UE BC WC BT WT 20. UE BC WC BT WT Quarter Since Migration: Choices: ……. Study Hebrew

Solution Method The model is solved using backward recursion with a finite approximated value at the 20’th quarter We use Monte Carlo integration to numerically solve for the Value Functions and the probability of the choices jointly with the accepted wages Value Functions:

Estimation Method The model is estimated using simulated maximum likelihood (SML) (McFadden(1989)) Given data on choices and wage, the solution of the dynamic programming problem serves as input in the estimation procedure. All the parameters of the model enter to the likelihood through their effect on the choice probabilities and wages

Actual and ML Proportions in White Collar, Blue Collar and Unemployment

Actual and ML Proportions in White Collar Training

Actual and ML Proportions in Blue Collar Training

Estimated Wage Parameters

Results: Initial WC job offer probabilities of an average immigrant with no experience in Israel are very low: type 1, type 2 (quarterly) Training increases these job offer probabilities by 70% The impact of training on employment rates is mainly through its effect on job offer probabilities and not through the wage return to training.

Policy analysis by Counterfactual Simulations Structural estimation enables to simulate the effect of alternative policy interventions on the choice distribution and on the discounted expected utility (PV). Policy Choices: 1.Remove or add training opportunities 2.Subsidies employment in WC occupations

Counterfactuals Experiments on Training In parenthesis, percent of change compared to PV (first row)

Partition of the Gain From Training by Sources (In parenthesis % of change compared to No Training)

Conclusions It is important to distinguish between the different occupation related training programs – WC and BC Training affects mainly job-offer probabilities while the return on the wage rate is type specific and has minor affect on participation The impact of WC-related training is positive and much greater than the effect of BC-related training Much of the participating in training is due to utility gain relative to the alternative of being UE