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The substitutability of labor between immigrants and natives in the Canadian labor market: circa 1995

Abstract

This paper examines the substitutability or complementarity between Canadian-born and immigrant workers. These are examined by estimating a set of wage equations using a generalized Leontief production function. The paper finds that, in general, there is no displacement of Canadian-born workers by immigrants. Recent immigrants affect the native-born positively, while older immigrants are neither substitute nor complement for natives. However, the effects differ across industries. Overall, the evidence that immigrants harm the opportunities of native-born workers is scant.

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Notes

  1. See Bauer et al. (2000) for a survey of the perceptions of native-born regarding immigration in 12 Organisation for Economic Co-operation and Development countries.

  2. Firms also anticipate that they will be able to pay lower wages to immigrants because of their high search costs of looking for jobs.

  3. We consider the production function rather than the cost function to discern the underlying technology because, in this case, it is more reasonable to assume that the quantities rather than prices are fixed. In this paper, we are dealing with input categories that do not change very rapidly. Moreover, the number of immigrants allowed into Canada is restricted by an annual quota that is fixed in the previous year and is almost fully subscribed.

  4. Weak separability here means that the marginal rate of substitution between any two of the three inputs will be independent of the quantity of capital used in production. This is a necessary and sufficient condition for the production function to be of the form Q = h[f(N,R,O);K]. Grossman (1982), Borjas (1983), and Akbari and DeVoretz (1992) have concluded that capital and labor is separable for the kind of production relation we are dealing with. Borjas (1983) found that the assumption of strong separability between capital and labor is not rejected by the data. This finding is important because the difficulties in constructing a series of capital data even at the aggregate level are well known (Roy 1997).

  5. One can consider an alternative production function—the translog approximation to a production surface. There is an inconclusive debate as to which form of the production function would be more appropriate. While Akbari and DeVoretz (1992), Grossman (1982), and Grant and Hamermesh (1981) used the translog function, several other authors, e.g., Borjas (1983), Roy (1997), and Kahanec (2006), used the generalized Leontief function in the context of immigrants and native-born workers or in a similar context. The Leontief production function is empirically more tractable, as we have wage as the dependent variable and we obtain linear-in-parameter wage equations. For the translog model, we estimate the factor share equation, which requires the use of industry-specific output, wage, and proportion of the immigrant and Canadian-born employed by industry. Thus, the choice of the production technology also depends on the data at hand. The data used in this paper (census data) are suitable for the application of the Leontief production function. In practice, the choice between the two is arbitrary even with availability of appropriate data. As Borjas (1987) wrote “There is no priori reason to prefer one function over the other, since both are second-order approximations to any arbitrary production function.” See Borjas (1986, 1987) for more details on choice between translog and the generalized Leontief functional forms.

  6. However, the results are qualitatively similar if we include individuals of age 15–64.

  7. Like Borjas (2003, 2006), we also think that endogeneity is not really an issue in our case. There is also question of appropriateness of the IVs in such case in such as raised by Borjas. This has also been highlighted by Pischke and Velling (1997) and Dustmann et al. (2005). Immigration into Canada in different time periods is not homogeneous, raising the possibility of weak instruments. Studies that use IVs also did not find the results qualitatively different from their reduced form results.

  8. Akbari and DeVoretz (1992) used the 1981 census data and assume pre- and post-1971 immigrants as older and recent immigrants, respectively, at the time of the 1981 census. They obtained negative and larger estimates of elasticity (but statistically insignificant) between immigrants and native-born workers, while we find positive but smaller elasticity in terms of absolute value. Note that Akbari and DeVoretz (1992) used industry-level value addition to get the share equation derived from the translog production function. The use of industry-level data and matching it over the census data requires some unique identifier. Moreover, the industry-level data are aggregated and confidential. Therefore, one must be cautious while using industry-level output, employment, etc. to match with the census identifier.

  9. Borjas (1987) estimated the elasticity of complementarity using the same production technology (using the 1976 survey of Income and Education in the USA) and found that the cross-elasticity of earnings of white native-born men with respect to quantity of Asian immigrant men is −0.002. None of his elasticity estimates takes on a value exceeding |0.03|. Thus, if the immigrant group compete on native-born workers in the labor market, the numerical impact of this competition is trivial. Borjas also found, similar to ours, that immigrants’ main competitors in the labor market are other immigrants. Grossman (1982), using translog production functions and a different data set (1970 US census), obtained results similar to those obtained by Borjas.

  10. Akbari and De Vortez (1992) classify the industry according to concentration of native and foreign-born workers. They categorize industry in an arbitrary manner (they define a high concentration of foreign born industry as any three-digit Standard Industrial Classification industry group with a greater than 23% foreign-born share in the labor force), and they also recognize this. Our classification is based on Industry Canada and do not necessarily depend on the concentration of immigrants in a particular industry. Note that immigrants’ concentration in a particular industry is endogenous because they select certain types of jobs/industries (see Friedberg 2001). Akbari and De Vortez (1992) did not address this endogeneity issue, and thus their estimates by industry are likely to be bias. Our classification of industry (see Table 6 in Appendix) does not suffer from such bias because the Industry Canada classification is exogenous to immigrants. Roy (1997), on the other hand, estimated the job displacement effects by country of origin of immigrants disaggregated by major occupation groups (two-digit levels). Our classification of industry is therefore different than those of Akbari and De Vortez (1992) and Roy (1997).

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Acknowledgements

I thank Dietrich Fausten, Mark Harris, Kien Tran, Robert F. Lucas, Mobinul Huq, Christopher Worswick, Christopher Hajzler, Thandinkosi Ndhlela, Salma Begum, Aaron Nicholas, Stephen Miller, and the participants at the 2003 Canadian Economic Association Conference for very helpful comments and suggestions. I am grateful to the editor and five anonymous referees whose comments have greatly improved the paper. I am responsible for all remaining errors.

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Correspondence to Asadul Islam.

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Responsible editor: Klaus F. Zimmermann

Appendix

Appendix

Table 4 Symmetry constrained wage equations using OLS (dependent variable: annual wage Earnings)
Table 5 Symmetry constrained wage equations using the FIML (dependent variable: annual wage earnings)
Table 6 Employment status by industry and occupation in Canada
Table 7 Variable definition

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Islam, A. The substitutability of labor between immigrants and natives in the Canadian labor market: circa 1995. J Popul Econ 22, 199–217 (2009). https://doi.org/10.1007/s00148-008-0188-5

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Keywords

  • Immigration
  • Substitutability
  • Complementarity
  • Displacement

JEL Classification

  • C39
  • J61