Christoph Albert (CEMFI) (webinar)

“Immigration and Spatial Equilibrium: The Role of Expenditures in the Country of Origin”

Abstract: We document that immigrants in the US strongly concentrate in expensive cities, their earnings relative to natives are lower in these cities, and both these patterns are stronger for immigrants originating from countries with lower price levels. To explain these empirical regularities, we propose a novel mechanism: a part of immigrants’ income is used for consumption in their origin country, which implies that they are less affected by local price levels than natives. We incorporate this consumption channel as a driver of immigrants’ location choices in a quantitative spatial equilibrium model and show that it performs well at predicting population changes across US cities during the 1990s. Counterfactual simulations suggest that due to the consumption channel, immigration has led to large population gains in expensive cities, from which some natives were crowded out. Based on our framework, we develop a new instrument for immigrant shocks and use it to test the predictions on native internal relocation responses. Finally, we employ the model to evaluate the impact of immigration on aggregate productivity, which we find to increase as the population distribution is shifted towards more productive cities.