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Foreign labor and regional labor markets: aggregate and disaggregate impact on growth and wages in Danish regions

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Abstract

Foreign labor has become a central issue in Western Europe. This paper tests whether (1) inflows of foreign labor affect regional growth, and thereby whether employment opportunities for Danish workers are affected; (2) inflows of foreign labor lower real wage growth. We find that foreign labor has non-negative effects on the job opportunities for Danish workers in regional labor markets, whereas the evidence of a regional wage growth effect is mixed. We also present disaggregated results focusing on regional heterogeneity of business structures, skill levels and backgrounds of foreign labor. The results are interpreted within a specific Danish labor market context and the associated regional outcomes. This adds to previous findings and emphasizes the importance of labor market institutions for the effect of foreign labor on regional employment growth.

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Notes

  1. A similar situation is dealt with in the literature on regional competition for jobs among residents and national non-residents, see, e.g., Fahr and Sunde (2006). Carrasco et al. (2008) report that the foreign population of Spain increased from 1 % out of the total population in 1990 to about 8 % in 2005. Wagner (2009) documents a similar development for the case of Austria. See Angrist and Kugler (2003) for corresponding figures for other Western European countries.

  2. According to Ekberg et al. (2010) such potential wage moderating effects of foreign labor should apply after several generations in Sweden.

  3. The importance of mobile competences through foreign labor for regional development is stressed by Hammond and Thompson (2010).

  4. Western background includes origins from the Nordic countries, EU countries, Andorra, Liechtenstein, Monaco, San Marino, Switzerland, the Vatican, Canada, USA, Australia and New Zealand.

  5. If the data had been on employment by location of residence, one would have faced the problem that commuting produces a difference between actual employment growth within a region and employment growth as measured by location.

  6. Schmidt and Jensen (2012) note that immigrants and descendants are likely to be similar in terms of culture, race and religion. They also note that this means that they are likely to be in similar social networks as suggested by the empirical regularity of “homophily,” which means that workers with similar characteristics tend to share social networks, Jackson (2008). They also present evidence in support of this.

  7. Two municipalities have similar responsibilities as the counties in Denmark, which is why they are here considered regions.

  8. We do, however, have some data that allow us to explore the differences within the Western and non-Western category, and we do so in our analysis of Danish municipalities in Sect. 4.

  9. If our analysis had focused on the employment of immigrants, it is likely that it would have been harder to identify substitution and scale effects due to the influences of changes in immigration policies. The main objective here is to identify the presence of substitution and scale effects in a regional context and not to estimate the effects of changes in immigration policies.

  10. While the literature usually focuses on wage levels (e.g., Carrasco et al. 2008) some researchers also focus on wage growth (e.g. Dustmann et al. 2008).

  11. The same problem is present with the real wage Eq. (2). Foreign workers may want to go where real wage growth is high, again leading to a spatial sorting issue.

  12. We use population shares due to the lack of consistent employment data prior to 1997.

  13. The wage data used to estimate Eq. (2) are obtained from regionally defined wage statistics from the Danish Employer organization. These are corrected using a regional GDP deflator. All other variables have been obtained from the Danish Statistical Bureau’s official database (www.statistikbanken.dk) or a database of the Danish Ministry of the Interior (www.noegletal.dk).

  14. The spatial properties of the Danish regional employment growth data have previously been analyzed in Jensen and Schmidt (2011). In particular, they show that once panel-specific effects and time dummies have been included, regional employment growth exhibits no cross-section dependence. The same is true for the regional wage data.

  15. The idea of the strategy is to determine whether foreign labor has a significant effect different from zero at a 5 % level in the first step. Given that the effect is non-zero, the next step then determines whether foreign labor has positive effects or negative effects for native workers as determined by the relative strength of the substitution and scale effect. Testing the null hypothesis \(\beta _1 =1\) indicates, whether the effect is non-neutral.

  16. Recall from Eq. (1) that the estimates are for the effect on total employment growth. To arrive at the change on native workers, it is necessary to subtract 1 from the coefficient estimate, see Eq. (1’).

  17. They report a correlation coefficient of 0.80 for Danish regional data.

  18. For the estimations in Table 3, we compute \(F\) statistics to test for the hypothesis that both coefficients to the two types of foreign labor are zero. This is always rejected for all specification of regional employment growth, but not for the IV specification of the regional real wage growth. We cannot, accordingly, reject that the effect is zero. Thus, we conclude that there is little evidence of a real wage effect of foreign labor.

  19. To allow for cross-equation testing, we have also estimated a system of eight equations using the defined instruments (not reported).

  20. The skill levels are measured by type of occupation as defined in Table 7 in the Appendix. Occupational type is, therefore, used as a measure of the human capital and skill level of the employment. It does not follow formal education systems, as foreign labor may have arrived with educational backgrounds that are difficult to harmonize to the Danish education system.

  21. First stages are given in the online appendix in Table A5.

  22. Also, the models (a1)–(a20) in the appendix are estimated using annual data.

  23. EU refers to the old EU-12 plus Austria and Norway in the Angrist and Kugler study.

  24. For an elaborate discussion of this see Beaman (2012:p.155).

  25. The measure was originally proposed by Neumann and Topel (1991).

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Authors and Affiliations

  1. Department of Border Region Studies, University of Southern Denmark, Alsion 2, 6400 , Sønderborg, Denmark

    Torben Dall Schmidt

  2. Department of Business and Economics, University of Southern Denmark, Campusvej 55, 5230 , Odense M, Denmark

    Peter Sandholt Jensen

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  1. Torben Dall Schmidt
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  2. Peter Sandholt Jensen
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Correspondence to Torben Dall Schmidt.

Additional information

We would like to thank Sergio Destefanis, Annekatrin Niebuhr, Vania Sena and Jens Fyhn Lykke Sørensen for helpful suggestions and discussions. We would also like to thank two anonymous referees for helpful comments and suggestions. We thank Lene Holbæk and Simon Kleinschmidt Salling for editorial assistance.

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Appendix

Appendix

Regional labor market structure is measured by the labor market participation rate and the employment frequency. These variables capture the extent to which regional labor market resources are exhausted. Regionally defined human capital may also influence the regional growth potential and the productivity levels of the average worker in a region (e.g. Borjas 2003, 2006a; Ottaviano and Peri 2006; Borjas et al. 2008). We, therefore, include two measures of human capital: (1) the share of population with high education and (2) the share of the population with vocational education. We also include two variables measuring regional economic structure. These variables are related to the regional productivity levels in different business segments, as differences in the productivity at sector level may be decisive for growth potentials in both employment and wages. The population of a region may capture size effects related to the importance of labor and product market sizes. These variables are also likely to capture important aspects of agglomeration as discussed by, for example, Fujita et al. (2000) and Russek (2010). The level of urbanization could similarly be of importance for labor demand and wage formation due to urbanization economics; see, e.g., Combes (2000). Furthermore, economic shocks may influence regional employment and wage growth. We control for national shocks in the estimated models by including fixed time effects, that is, year dummies, but regional specific shocks could potentially also be important. We, therefore, calculate a regional-shock measure based on a method used in Robson (2009) allowing for regional-specific shocks depending on regional business structures.Footnote 25

Table 7 Control variables and mnemonics
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Schmidt, T.D., Jensen, P.S. Foreign labor and regional labor markets: aggregate and disaggregate impact on growth and wages in Danish regions. Ann Reg Sci 50, 809–840 (2013). https://doi.org/10.1007/s00168-012-0517-1

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