1. Introduction

Twenty-three percent of New Zealand's population is foreign-born and forty percent of migrants have arrived in the past ten years. Despite the magnitude of these immigrant flows, the impact of immigration on the labour market opportunities of New Zealanders has yet to be investigated using microeconometric techniques. Longhi et al. (2005; 2008) identify a number of published studies that examine the impact of immigration on the labour market outcomes of non-immigrants in a number of countries and perform meta-analysis to summarise the results found in these studies. They concluded that an increase in the supply of immigrants has a significantly negative, but very small, impact on the employment and wages of non-immigrants. This is consistent with the findings in earlier literature reviews undertaken in Borjas (1994) and Friedberg and Hunt (1995). However, a few papers, in particular Borjas (2003), have argued that methodological weaknesses in the majority of these studies have resulted in a general understatement of the impact of immigration on non-migrant wages.^[1]

In this paper, we use data from the 1996, 2001 and 2006 New Zealand Census to examine how the supply of immigrants in particular skill-groups affects employment and wages for the New Zealand-born and earlier migrants. We begin by estimating a simple Constant Elasticity of Substitution (CES) production function, as in Card (2001) and Borjas (2003). This approach allows for substitutability between workers from different skill-groups, but implicitly assumes that, within skill-groups, migrants are perfect substitutes for non-migrants.^[2] However, as argued in recent papers by Ottaviano and Peri (2006), Manacorda et al. (2006) and Peri (2007), there are a number of reasons why migrants might actually be imperfect substitutes for non-migrants with the same skills. For example, if migrant networks are important for finding employment or if recent migrants do not have the language skills to be employed in the general labour market, migrants will likely work in different jobs than similarly skilled non-migrants.

Thus, as is done in these papers, we next extend our empirical model to allow for substitutability between immigrant and non-immigrant workers within skill-groups in a hierarchical CES production function. While this modelling approach is more flexible than the simple CES approach, it still has two key restrictions. First, the CES model assumes that a single parameter can summarise the substitutability between factors at any particular level of the production function (eg. between different skill-groups or between migrants and non-migrants), an assumption that constrains the pattern of wage impacts in response to a change in factor shares. For example, if an increase in low-skilled workers is estimated to reduce the wages paid to low-skilled workers (as theory suggests it should) then, mechanically, this change will be estimated to increase the wages paid to medium- and high-skilled workers.^[3] Second, the structure imposed by the CES production function does not allow for the substitutability of migrants and non-migrants across skill-groups, even though this may be important in reality.

Then, in our main contribution, we extend the previous literature by estimating a Generalised Leontief production function that allows: i) for a less restrictive relationship between changes in factors shares and changes in wages within a particular level of the production function; and ii) for substitution and complementarity between immigrant and non-immigrant workers both between and across skill-groups. This model combines the approach of Borjas (1987), which estimates within-area labour market competition among immigrants, minorities and the native population, with the approach taken in more recent papers, where individuals are assumed to compete within particular skill-groups.^[4]

We identify the impact of immigration on labour market outcomes using the 'area-analysis' approach, which exploits the fact that immigration is spatially concentrated, and thus a change in the local supply of migrants should have an impact on the labour market outcomes of workers in that area. A number of papers have argued that this spatial approach may not properly identify the economic impact of immigration, because immigration may affect all areas of the country, not just the ones that actually receive migrants (Borjas et al. 1996, 1997; Borjas 2003). This will occur if, over time, the supply of new migrants to local labour markets encourages outward migration of previously settled individuals, or causes a reallocation of resources across sectors and an associated adjustment of interregional trade (ie. a Heckscher-Ohlin effect). We address this concern both by examining, in a companion paper, Stillman and Maré (2007), the impact of immigration on the geographic mobility of the New Zealand-born and earlier migrants and by estimating labour market impacts at different levels of geographic aggregation. As discussed in Borjas (2003), if these endogenous processes are important for adjustment following an immigration shock, the impact of this shock will be larger in more closed labour markets (ie. larger geographical areas).

Besides the methodological contribution that this paper makes, it also extends the previous literature by examining the impact of immigration on labour market outcomes in a country that has a small open-economy, a large-scale and highly structured immigration system that focuses mainly on higher-skilled migrants, little low-skilled illegal immigration, and a highly mobile population both internally and internationally (Poot and Cochrane 2004; Maré and Choy 2001). Most international research focuses on countries, predominantly the United States, that have large domestic economies and high levels of low-skilled and illegal immigration, and these institutional differences may be particularly important in determining the impact that immigration has on host country labour markets (Angrist and Kugler 2003; Borjas 1999). A number of European countries (such as the United Kingdom) are considering switching or have begun to switch to highly structured skill-based immigration systems, as is used in New Zealand, making our findings particularly relevant for policymakers in these countries, as well as for those in Canada, which is institutionally quite similar to New Zealand.

Footnotes

^[1] It is worth noting that other papers, such as Ottaviano and Peri (2006) and Raphael and Ronconi (2008), argue conversely that methodological weaknesses in Borjas (2003) result in this paper overstating the impact of immigration.

^[2] Borjas (2003) allows for substitutability between workers with different amounts of education and work experience, while Card (2001) allows for substitutability between workers with different predicted occupations. We do both. Papers using this methodological approach estimate the impact of immigration on the labour market outcomes of non-migrants by using the estimated labour supply elasticity and elasticity of substitution between workers from different skill-groups to calculate how the addition of migrants, by changing the skill composition of the workforce, changes employment and wages for non-immigrants.

^[3] Similarly, if an increase in share of immigrants is estimated to reduce the wages paid to immigrants, then, mechanically, this change will be estimated to increase the wages paid to non-immigrants.

^[4] A recent paper by Islam (2009) also estimates a Generalised Leontief production function to examine national level competition between immigrants and the Canadian-born, but does not stratify the labour market by skill.