Author: Christoph Albert
Immigrants usually spend part of their time, savings, and income in their country of origin and not where they currently live. This column uses US data to argue that the resulting difference in consumption patterns relative to natives has profound implications for the types of cities that immigrants are attracted to. It shows that immigrants redistribute economic activity towards large, expensive cities. These cities tend to be more productive, so immigrants have a positive effect on overall output.
There are fundamentally two views on where immigrants decide to live within host countries. On the one hand, it is well understood that immigrants tend to settle in cities or regions that are thriving. One reading of this evidence is that immigrants may be particularly important for ‘greasing the wheels’ of the labour market and for arbitraging away labour market opportunities across locations (e.g. Borjas 2001, Cadena and Kovak 2016). At the same time, this has also been the most important concern when trying to estimate the effect of immigration on labour market outcomes (e.g. Altonji and Card 1991, Borjas et al. 1997, Monras 2015). If the primary motive for immigrants choosing particular cities or regions is that they are thriving economically, this likely creates a spurious correlation between labour market outcomes and immigrant settlement patterns.
On the other hand, many authors have noticed that immigrants tend to move to where previous immigrants have settled. Immigrant networks are recognised as key for the migration experience (Munshi 2003). Former immigrants likely help newer ones both in migrating and in finding jobs and suitable neighbourhoods for their new life in the host country.
In recent research, we provide a new look at immigrant location choices that, as we argue, has profound implications on how we think about the consequences of immigration for host economies (Albert and Monras 2018). Immigrants tend to spend large fractions of their income in their home country. Many send remittances to their families, plan on returning home (at least eventually), or simply spend their leisure/vacation time with their families and old friends. This means that they care not only about the prices of the city or location where they live, but also about the prices in their home countries. We argue that this affects immigrants’ residential choices, which, in turn, has important consequences for the distribution of economic activity across locations.
The fact that immigrants also care about prices in their countries of origin means that, relative to natives, they have a comparative advantage for living in large, expensive, high nominal income cities. If, moreover, wages partly reflect the value of living in a location, immigrants will have lower wages than natives, particularly in these large, expensive, high nominal income cities. Our research provides ample evidence for this hypothesis.
Immigrants’ location and consumption patterns
In the first part of our paper, we use a number of different data sets to document four novel and very strong empirical regularities in the US. First, we report that in recent decades, immigrants, much more than natives, have concentrated in large, expensive cities that pay higher nominal wages. While the share of immigrants in the US is around 15%, many of the big cities have much higher immigrant shares. Immigrants make up more than 30% of the populations in Los Angeles, San Jose, New York, and San Francisco. These cities are also the most expensive cities in the US, and further, are those that pay higher nominal incomes and are the most productive.
Second, the gap in earnings between natives and immigrants is greatest in these cities. The gap in earnings is around 20% in LA and New York, the two largest cities. In fact, the native–immigrant wage gap strongly increases with city size and city price levels. We show that this relation cannot be explained by differences in human capital between natives and immigrants, by imperfect substitutability of natives and immigrants of similar skill levels, or by the influence of immigrant networks and how those shape labour market outcomes.
These relative location patterns and wage gap differences between natives and immigrants are stronger for immigrants coming from lower price index countries of origin, something that we also document extensively using a number of alternative strategies. First, we simply compare location patterns of immigrants from countries like Mexico – with large differences in prices and income with respect to the US – and Germany or the UK, which are both much more similar. Mexicans seem to concentrate much more in large cities than Germans or Brits, and the wage gap of Mexicans relative to US natives increases more with city size than the gaps in wages for Germans or Brits. Second, we use plausibly exogenous real exchange rate variations to document that when prices at origin are low, immigrants tend to concentrate into large and expensive cities where they also accept lower wages, than when prices at origin are high.
We argue that these relative location patterns and wage gaps can be explained by the fact that a part of immigrants’ consumption is linked to their country of origin. We also provide ample evidence for this mechanism by showing that immigrants consume as much as 12% less than similar looking natives locally. Part of this lower local consumption is related to the fact that immigrants tend to spend less on housing – this is, when comparing native and immigrant households with similar family sizes and incomes we see that immigrants spend considerably less on rents and are significantly less likely to be homeowners. We also document that immigrants tend to send significant fractions of their income back to their families and that return migration rates are high, especially in the first 10 or 20 years since arrival.
Immigrants’ contribution to the distribution of economic activity
The second part of our paper explores the importance of these location and consumption patterns for host economies. In order to do so, we build a spatial equilibrium model where immigrants and natives are identical except for the fact that immigrants also care about home country consumption. In the model, we allow for some degree of substitution between consuming locally or in the country of origin. If home country prices are low, immigrants have incentives to substitute some local consumption towards consumption in their countries of origin, which in turn affects their incentives for living in high relative to low nominal income locations.
From the model we obtain two key results.
- First, the fact that immigrants prefer to locate in large and expensive cities redistributes economic activity towards them. At the same time, because immigrants care less about local prices than natives, some natives that without immigration might have been attracted to large cities are priced out from them because of higher housing costs.
- The second key insight is that this redistribution of economic activity results in higher overall output. Large and expensive cities tend to be more productive than smaller ones. Thus, the fact that immigrant location choices move economic activity towards the most productive locations results in overall gains.
We quantify the importance of these two results by estimating the model using US data. For that, we rely heavily on immigrant heterogeneity. That is, we look for the parameter estimates that rationalise why immigrants of certain origins concentrate more in some locations than others. This allows us to back out the implied importance of the home country in consumption that is in-line with what we observe in the data. Immigrants’ locations and relative wages are consistent with expenditure shares in home country goods of around 10%. This suggests that our mechanism is not only statistically significant but also economically relevant.
We use the estimated model to quantify the importance of current levels of immigration in the US by comparing the data to the counterfactual distribution of economic activity that would have prevailed if immigrants decided on location choices without taking into account consumption in their countries of origin. This counterfactual exercise shows that immigration makes large and expensive cities in the US around 5% larger. Similarly, immigration has contributed substantially to nominal wage and house price disparities across space. Finally, this displacement of economic activity towards the most productive cities has increased total output in the US by as much as 0.3 percentage points.
In sum, we show that the fact that immigrants spend a considerable fraction of their income in their countries of origin – something that may well be the most fundamental difference between natives and immigrants from an economic stand point – has profound implications for their location choices and labour market experiences. In turn, we also show that these location choices also affect host economies in some fundamental ways. Immigrant location choices move economic activity from the least to the most productive cities, increasing overall output in the host economy.