Immigrant versus Natives? Displacement and Job Creation

The impact of immigration on native workers is driven by two countervailing forces: the degree of substitutability between natives and immigrants, and the increased demand for native workers as immigrants reduce the cost of production and output expands. The literature so far has focused on the former substitution effect, while ignoring the latter scale effect. This paper estimates both of these effects using labor force survey data from Malaysia (1990-2010), a country uniquely suited for understanding the impact of low-skilled immigration. The instrumental variable estimates imply that the elasticity of labor demand (3.4) is greater than the elasticity of substitution between natives and immigrants (2.5). On average the scale effect outweighs the substitution effect. For every ten additional immigrants, employment of native workers increases by 4.1 in a local labor market. These large reallocation effects are accompanied by negligible relative wage changes. At the national level, a 10 percent increase in immigrants, equivalent to 1 percent increase in labor force, has a small positive effect on native wages (0.14 percent). The impact of immigration is highly heterogeneous for natives with different levels of education, resulting in substantial changes in skill premiums and hence inequality. Immigrants on net displace natives with at most primary education; while primarily benefiting those with a little more education, lower secondary or completed secondary education