Association for Public Policy Analysis & Management

As its population ages, the United States increasingly relies on foreign-born workers to sustain a robust workforce. The Census Bureau estimates that by 2030, immigration will overtake natural increase (births minus deaths) as the primary driver of population growth. Understanding how immigrants are absorbed into and change local economies thus remains vital to economic policy-making moving forward.

Textbook economic models tend to treat labor demand responses to immigration as homogeneous and represented by a single firm. Recent data advances—that allow us to study individual firm behavior—have dramatically expanded our insight into how labor demand responses in fact vary substantially across firms. This paper adds to such literature by explicitly studying the extensive margin of firm response (entry and exit). It provides evidence that immigrant inflows into U.S. local labor markets lead to increased firm presence, then seeks to understand the sources and consequences of this relationship. By pooling together two well-known case studies using synthetic control methods, it finds a causal effect of immigrant inflows on firm presence. A broader analysis using confidential data from the U.S. Census Bureau's Longitudinal Business Database (LBD) indicates that this relationship is primarily accounted for by new, single-establishment firms in industries that are final-goods-selling and that employ workers without college degrees in production. These new firms mediate more than 50 percent of immigrant-induced job creation and replace lower-productivity firms in the same industries, indicative of an increase in creative destruction. Supply-side factors—immigrant entrepreneurship and the attractiveness of immigrant workers, rather than immigrant consumer demand—drive these dynamics, which are captured in a model of the local economy where firms differ in how they use immigrant labor.

This paper makes several contributions to the literature on how immigration affects the demand side of local labor markets. The pooled case study analysis demonstrates that extensive margin firm responses to immigration—a proxy for the “long run”—takes at least six years to unfold, while the LBD analysis indicates that these responses are both economically large and immigrant-specific relative to general population growth. The mediation analyses imply that these extensive margin responses prevent immigrant inflows from generating significant displacement effects—particularly in the low-skilled labor market. In other words, a substantial portion of the long-run labor demand response to immigration appears to occur through net firm creation. That these new firms primarily sell final goods indicates that immigrant inflows likely increase consumer welfare through added variety. Nonetheless, this added variety is not driven solely by immigrant consumer demand, nor even solely by immigrant entrepreneurship. The attractiveness of immigrant employees appears to be central to heterogeneous responses by existing and prospective firms, and the resulting business turnover thus generates heterogeneous consequences for business owners. Higher productivity firms and firms that are more adaptable to an immigrant-heavy workforce enter, stay, and grow, while firms that are not adept at hiring immigrant employees are forced to exit the market.