Association for Public Policy Analysis & Management

U.S. worker and job reallocation rates have been declining, potentially as far back as the 1980's and definitively since the 2001 recession (Davis and Haltiwanger, 2014 NBER WP; Molloy et al., 2016 Brookings). Fluid labor markets help move workers up the productivity ladder, enabling them to enjoy better firm matches and increased earnings (Haltiwanger et al., 2015 NBER). Attempts to understand the decline in labor market fluidity have offered a variety of potential causes that largely do not apply to undocumented workers. Given undocumented workers’ relative immunity to these fluidity-reducing mechanisms, Hotchkiss and Quispe-Agnoli (2008 FRB Atlanta WP) present important evidence that they exhibit more fluidity than their legal counterparts. However, this paper elucidates a broader phenomenon implied by the notion that the same reasons that make undocumented workers fluid also cause them to enter the wage bargaining process with firms in a weaker position than their legal counterparts. The lower resultant wages paid to these workers represents a reduction in the average cost for firms exposed to them, which encourages these firms to post more vacancies. This vacancy effect can cause undocumented workers to generate labor market fluidity throughout the low-skilled labor market by increasing the likelihood that any worker receives a job offer.

To test these implications, I first present an analysis of U.S. metropolitan statistical areas (MSAs) using the Census Bureau’s American Community Survey and Quarterly Workforce Indicators. Using instrumental variable approaches, I find that a one standard deviation increase in the proportion of the low-skilled labor force that is undocumented increases separation and hiring rates by 1.5 percent each. In order to delve into how market level effects translate to specific sub-groups, I further analyze outcomes of legal workers who are most likely to be substitutable in production with undocumented immigrants using the basic monthly Current Population Survey files. I find that increasing proportions of undocumented workers generates an increase in the probability that a 15-39 year-old, low-skilled citizen working in similar occupations makes a job-to-job transition and a decrease in the probability that she is unemployed. Finally, I find that increasing proportions of undocumented immigrants in MSAs are associated with overall shifts towards higher median-wage occupations by this same substitute group. Taken together, this pattern is suggestive of movements up the job ladder by low-skilled legal workers in areas that feature increased presence of undocumented immigrants.

To give further context to these empirical results, I develop a search model featuring endogenous job destruction, on-the-job search, and a small proportion of workers with high separation rates and low outside options that diminish their bargaining position. An increase in the proportion of these undocumented workers increases labor market tightness, which feeds into an increase in employment for native workers through increased vacancy postings. Separations and hires increase because of an increase in job-to-job transitions, as the empirical results suggest. Strikingly, this all occurs with legal and undocumented workers serving as perfect substitutes in production in the low-skilled labor market.