The importance of mobile Mexican labor

A novel empirical test reveals that natives living in cities with a substantial Mexican-born population are insulated from the effects of local labor demand shocks compared to those in cities with few Mexicans. The reallocation of the Mexican-born workforce among these cities reduced the incidence of local demand shocks on low-skilled natives’ employment outcomes by more than 40 percent.

That is from Brian C. Cadena and Brian K. Kovak.  Here is a related post from Modeled Behavior.  You can think of the mobile Mexican labor as providing risk insurance for low-skilled labor markets.  It is a further interesting question what this result implies for the aggregate impact of immigration on low-skilled wages, but I don’t see that there is a ready answer a priori, at least not based on the results of this paper.  The local geographic swings could be significant, while the aggregate impact could be either high or low.


The other side of the coin is that mobile Mexican-born labourers also reduce the upswing to low-skilled workers of a local market that heats up. They make the US more geographically egalitarian, if you'd like.

Right, which means that Americans from the left half of the bell curve, are denied the traditional wage premium for going through the trouble of moving to a boomtown. Thus, during the Sand State boom of the 2000s, American workers didn't get all that much benefit out of it because they got underbid by illegal immigrants. As I wrote in 2006:

What economist David Card doesn't grasp is that illegal immigration is denying Americans the traditional wage premium for undergoing the pain of moving to a boomtown. Journalist Richard Lowenstein can't see it either, as he writes: "Immigrants do help the economy; they are fuel for growth cities like Las Vegas …"

Imagine you are an American blue-collar worker in Cleveland, making $10 per hour. You know the local economy is stagnant, so you're thinking about relocating to fast-growing Las Vegas. But your mom would miss you; and you're not a teenager anymore so you don't make new friends as fast as you once did; and you really like the wooded Ohio countryside you grew up around and the fall colors and the deer hunting; and there's this girl that maybe you could get serious about, but her whole family is in Cleveland and she'd never leave.

So, you decide, you'll leave home behind if you can make 50 percent more in Las Vegas, adjusted for cost of living. That seems fair.

But, then you look through the Las Vegas want ads and discover you'd be lucky to make 10 or 20 percent more because the town is full of illegal aliens. They're moving from another country, so it's not much skin off their nose to move to Las Vegas rather than some place slower-growing.

Well, forget that, you say. I'll stay in Cleveland.

Unfortunately, too many economists forget that too. They can't—or won't—put themselves in other people's shoes and see how the world really works.

That doesn't seem to hurt them professionally. But it can hurt America.

Steve, there's this neat concept in economics called diminishing marginal utility (each additional dollar has less psychic bang for the buck) and its related concept of risk aversion (most people dislike unpredictable swings in consumption) ... so the insurance value of immigrants that this paper finds could quite large for natives spared local demand shocks (good or bad). Sure there are some risk loving natives who would have chased the wage premiums, but unless you have evidence (which having studied risk aversion carefully, I'd be amazed to see) I do not think you can argue that your hypothetical blue collar movers are that big a deal.

As for economists wresting with how the "world really works." I know the two economists who wrote this paper and they are very careful, thoughtful researchers. It is easy to go astray with anecdotes; data and careful identification of shocks are discipling devices...some distance can actually be a good thing for dispassionate analysis. It's not say they are right and you are wrong, but you might add something more systematic than your opinions and personal stories to the discussion. Or just address this paper on its merits and flaws not the whole morass of the topic. I'd be interested to hear your thoughts on that.

"natives spared local demand shocks (good or bad)."

If you were a native construction worker, why in the world would you want to be spared a good local demand shock for your labor?

people who are risk averse will trade some upside risk (good shocks) to avoid some downside risk (bad shock). low income workers who have little in savings are particularly vulnerable to income swings and likely benefit from the implicit insurance.

Uh, no, that's not how this works. What happens is this: You are born in Phoenix with a 90 IQ. You go into construction work. A huge building boom starts in Phoenix, and you wages go up a little, but then a giant number of illegal immigrants flood into town, driving up the cost of living and preventing you from cashing in substantially from the boom. Eventually, the bubble pops and a lot of the illegal immigrants leave town.

That's swell insurance!

In contrast, you are a 90 IQ native in North Dakota. A huge energy boom hits, but North Dakota is too cold and too far from the border too attract many illegal immigrants, so wages for Americans in North Dakota go way up (e.g., $24/hour for a cashier on the night shift in one NYT story). You blow some of your windfall earnings on good times but sock the rest away in the bank. Eventually the boom is over, but now you have saved up the down payment for a house, so you can afford to get married and have children.

What a tragedy that North Dakotans didn't get the kind of "insurance" that Arizonans got!

Data please. Your North Dakota sounds pretty far fetched to me on many dimensions. Again most people dislike unpredictable swings in income. Booms and busts are almost impossible to predict which leads to a lot of very painful readjustment when the bottom falls out. There are also 'a few' other differences between Phoenix and North Dakota ... immigrants are not the root of all our problems (quite the contrary).

How Oil Made Working-Class North Dakota a Whole Lot Richer

Employment in the drilling region jumped by 35 percent, and average pay leaped by half.


...The Bureau of Labor Statistics recently produced a breakdown of job growth during North Dakota's oil rush, and it's pretty remarkable. ... Average pay jumped by more than half, from $33,040 to $50,553.

Blue-collar men suddenly finding high-paying work in the fields is a big part of the story. But jobs and paychecks have surged across industries. Some of the fastest growth has been in professional and technical services, a category dominated by college educated workers. Earnings have grown the most in real estate, which, with rents rivaling Manhattan in the boom town of Williston, isn't that much of a surprise. But they've also jumped in working class sectors like transport (think trucking), construction, and even food services.

This is all Econ 101 stuff, but, suddenly, when the word "immigration" is mentioned, economists forget everything they learned about the Law of Supply and Demand.

Steve, I did not see anything in the article about the North Dakota oil workers self-insuring (saving) against the possibility that they are working in a bubble. Suppose growth in China falters, commodity prices drop ... well their wages would likely get cut back. If they did not save for that scenario, they will have to cut back on their spending and overall lifestyle ... which is painful. Less is worse than more is better (by diminishing marginal utility) and losses are especially painful (according to psychologists). Again, you could be right that the insurance value is not that important. I think that was TC's reference to the aggregate effects ... or the general equilibrium effects. But if you only see upside risk it's either trend growth (or unrealistic expectations) and not what they are looking at the paper.


You're being deceived by the term "insured" in this article. American construction workers in Phoenix during the Housing Bubble didn't receive _any_ insurance benefit from their wages being forced down by a flood of illegal aliens. The immigrants didn't pay into any insurance fund for native workers. All that happened to the native workers in Phoenix due to immigration was their pay was less and their cost of living was more. When the bubble was over, they didn't get any benefit.

It's the well-to-do -- the home builders, real estate developers, and subprime lenders -- who got insured that wages wouldn't go up much.

The Mexican-born workforce is not some static, inert material which remains in place indefinitely as it "insulates" the native labor force from "shock". What a ridiculous analogy.

Workers from Mexico don't move all the way to the US so they can "insulate" local labor from "demand shocks" -- they are people who have come here to make a better life for themselves and their families. With that in mind, it's clear that they too are stressed and strained by the difficulty of moving to a distant location to find a job, just as native workers are. And that stress and strain will have to be counterbalanced one way or another by the surrounding structure.

Is this study suggesting that somehow all of these foreign workers can bear this stress without support from the broader economy and society as a whole? Is the report suggesting that these foreign born workers are simply "insulation" which, once in place, requires little or no maintenance?

I haven't read the paper, so give this comment the low weight it deserves. But it seems to me that there's a kind of distribution on which all workers fall, of how likely they are to move to find better work. The most rooted people (say, people a few years from retirement, with mortgages and kids in school and sick parents nearby) will only move if there are no choices at all. The least rooted people (single men with no obligations) will quickly move to follow better jobs. And recent immigrants from Mexico tend to be in that later category, right? I mean, probably not if they're 45 and have their wife and kids living with them, but if they're 25 and single and following the market for drywall hangers, they're probably willing to pack up and leave as soon as the jobs go away.

And the benefit here to the rooted workers is that when jobs go away locally, so do the least rooted workers--they just move somewhere else to find a job. The cost to the rooted workers is that when jobs expand locally, some of them will be filled by single men moving across country to take a better job.

Since a very rooted person isn't willing to leave the community, the benefit (you don't have a good factory job, but at least you've got something) is probably pretty big. Whereas the loss isn't as big. Is this basically the result they're describing?

But, these economists are missing the opportunity costs to Americans.

British Tory cabinet minister David Willetts explained in his 2010 book "The Pinch" why London's huge boom in the last decade similarly didn't do much good for working class Brits not in London because of immigration:

Willetts nicely lays out one reason why the Blair-Brown Bubble in London did so little to alleviate unemployment among young Englishmen in blue collar cities like Liverpool. He writes: "Quite simply, high house prices were one factor sucking in immigrants."

Willetts observes, "The young man from Liverpool does not see why he should live in more cramped conditions than his family back in Liverpool occupy". In contrast, the immigrant crams into a house with many others from his country. "His willingness to be under-housed gives him a labour market advantage and it is greater if house prices are higher". In turn, sucking in immigrants creates a vicious cycle, driving up housing prices, which drives out more natives.

Moreover, remittances sent home from London to Liverpool buy a lot less in Liverpool than remittances sent home to a poor country:

"So it is not that our Liverpudlian is somehow a bad person compared to our Pole. It is that he or she cannot capture similar benefits for their family by under-housing themselves in London."

Willetts sums up:

"The crucial proposition therefore underlying the economics of immigration in Britain is as follows. The larger the proportion of earnings consumed by housing costs, the greater the benefits of under-housing and the greater the price advantage of immigrant labour. It was not despite the high cost of housing that immigrants came to the house price hotspots in Britain to make a living—it was because of them."

He goes on to add:

"People are not willing to accept under-housing for ever. It may be bearable if you are single and in your twenties or early thirties. … But it is much harder having a baby in circumstances like that."

In other words, much of the boom of the previous decade in places like Las Vegas, Phoenix, California's Inland Empire, and Florida, was a bubble driven in part by illegal immigration.

In other, other words, Ben Franklin had it right. Don't allow all those Germans in- they're unassimilable and they'll drive down wages.

It's funny how 21st Century American economists are so ignorant of the most astonishing conceptual breakthrough in the history of American economics -- namely Ben Franklin anticipating Thomas Malthus by 44 years -- that we just get this kind of lowbrow sniggering about Franklin's immigration restrictionism.

Low brow? Moi? Forsooth, sir- I say forsooth!

Honestly, we get it, Steve. The white man can't get a fair break in today's world.

Still waiting on Malthus, btw. You throwing your lot in with the Paul Ehrlich crowd now?

"The importance of mobile Mexican labor"

When INS shows up you have to scram, man.

Here's a question: Driving around Los Angeles, it's easy to notice that there's one glaring exception to the rule that Latinos hold most of the blue collar jobs in Southern California: film crews. When you pass a location shoot for a movie or TV show, the guys lifting things or fiddling with machinery are overwhelmingly white.

Awhile ago, I drove past a film crew in the Boston area shooting the next Robert Downey Jr. movie, The Judge. Now, Boston blue collar whites are notoriously unfriendly toward minorities wanting their jobs, so it's not surprising that the crew in Boston was highly white. But, at a glance, it didn't seem to be any whiter than the typical crew in Los Angeles.

Also, unlike Silicon Valley, whose tycoons, such as Mark Zuckerberg, constantly demand visas for foreign workers to drive down their employees' wages, Hollywood has never, as far as I can recall, made a big lobbying effort to get Congress to give them visas to alleviate the horrible Gaffer and Best Boy shortages.

These days, Hollywood's habit of paying sizable wages to blue collar Americans rather than try to replace them with cheap labor from abroad seems downright un-American. So, how does Hollywood survive?

And if Hollywood can somehow scratch by without foreign cheap labor, does that suggest that maybe Mark Zuckerberg could too? And maybe big California growers wouldn't be reduced to penury without visas for cheaper workers?

Tyler says: "You can think of the mobile Mexican labor as providing risk insurance for low-skilled labor markets"

Risk insurance for whom? Employees or employers? Obviously, the latter: employers get insured against having to pay 50% spikes in income, like in low immigration North Dakota between 2007-2011. The American workers get zilch from this "insurance."

There is a grad student at Colombia named Joan Monras who has a job market paper with a similar theme -- Mexican immigrants move between cities based on labor conditions, which attenuates the affect on native workers, especially in the long run. I saw the paper presented six months ago, so I am a currently a bit fuzzy on the details. I remember that he uses the currency crises in the mid 1990's as an instrument.

One "attenuating" effect is that many American workers get pushed out of their hometowns -- e.g., the vast exodus from Los Angeles by Americans who were born there.

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