Reconciling National and Regional Estimates of the Effect of Immigration on U.S. Labor Markets: The Confounding Effects of Native Male Incarceration Trends

In this paper, we reconcile the disparity between regional and national level estimates of the effect of immigration on native earnings. The reconciliation derives from the fact that existing national level studies fail to adequately control for changes in other determinants of the wage structure that correspond closely with the skill distribution of immigrant shocks. We focus specifically on the effect of accounting for incarceration trends. Over the past thirty years, an increasing proportion of low skilled native workers have served time in prison, a development that has arguably harmed their employment prospects. We show that the fraction of a given education-experience group that is immigrant is strongly correlated with the fraction of native born workers in the demographic group that is institutionalized. Holding constant incarceration trends considerably diminishes the estimated magnitude of the reduced-form relationship between native labor market outcomes and the fraction in their skill cell that is immigrant.An alternative interpretation of these findings offered by Borjas, Grogger, and Hansen (2006) is that immigration-induced wage declines have pushed more men into criminal activity which, in turn, has increased the incarceration rate. The authors present a model whereby the reduced form effect of immigration on incarceration reflects the product of (1) the effect of immigration on wages and (2) the elasticity of labor demand in the crime sector. The latter elasticity gauges the extent to which the local crime market is able to absorb additional offenders as the quality of legitimate work opportunities (as measured by wages) diminishes. While national level correlations presented by the authors are consistent with this interpretation, we show that the state level results are not. Despite a sizable and statistically significant negative reduced-form effect of immigrant penetration on wages in state-level panel regressions, there is no statistically significant relationship between state-level immigrant shocks and state-level incarceration rates - i.e., despite an identifiable dose to state-level wages, there is no incarceration response. Estimates of the elasticity of demand in the criminal sector using both the original state-level estimates presented in Borjas, Grogger, and Hansen (2006) as well as our replication and simple alternative specification of these regressions are essentially zero. Thus, we conclude that immigration has had no impact on criminal activity among natives operating through labor market competition.