o⁄shoring, low-skilled immigration, logo introduction model calibration and estimation results...

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Introduction Model Calibration and estimation Results Conclusion

Offshoring, Low-skilled Immigration,and Labor Market Polarization1

Federico Mandelman Andrei Zlate

Federal Reserve Bank Federal Reserve Bankof Atlanta of Boston

Conference on International Trade and MacroeconomicInterdependence in the Age of Global Value Chains

September 2016, Vilnius, Lithuania

1The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the

Federal Reserve Banks of Atlanta and Boston, or of the Federal Reserve System.

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Roadmap

Bring together 4 empirical facts characterizing the US labor marketover the past three decades:

1 Employment polarization.

2 Asymmetric polarization for employment and wages.

3 The emergence of low-skill service jobs.

4 Rising immigrant employment in low-skill occupations.

Build 3-country stochastic growth model to rationalize these facts.

Estimate the model, analyze alternative trade and immigrationpolicy scenarios.

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Fact 1: Employment polarization

Employment became increasingly concentrated at the tails of theskill distribution, shrank in the medium-skill occupations (seeAcemoglu and Autor, 2011).

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Fact 2: Asymmetric polarization, empl. vs. wages

Wages rose robustly for the high-skilled, but performed poorly inmedium-skill occupations, same as employment;

However, low-skill wages did not match the strong increase inlow-skill employment.

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Fact 3: The emergence of low-skill service jobs

Employment gains at the low-end of the skill distribution weremostly due to service occupations (see Autor and Dorn, 2013);

These hire food service workers, home care aids, child care workers,recreation occupations, gardeners, janitors, etc.

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Fact 4: Immigration and low-skill occupations

Immigrant employment increased mostly in low-skill occupations,whose output is non-tradable:

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Key model ingredients

Three economies: Home, Foreign, South.

Endogenous trade in tasks between Home and Foreign, subject toa fixed cost.

“For centuries trade entailed an exchange of goods, now involves bitsof value added in many different locations, or trade in tasks"(Grossman & Rossi-Hansberg, 2008)

Endogenous migration of unskilled labor from South to Home,subject to a sunk emigration cost;

Endogenous training of native labor in Home and Foreign,subject to a sunk training cost.

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Results (1/2)

(1) Offshoring leads to employment polarization.

As offshoring costs decline, trade in tasks benefits the employmentand income of high-skill workers (whose tasks are sold globally), butharms the medium-skill workers (who only sell domestically);

Complementarity between goods and services boosts demand forlow-skill service occupations.

(2) Low-skilled immigration supports employment in servicesbut dampens wages.

Occupational services are not offshorable, but hire immigrant labor.Labor migration generates asymmetric polarization of employmentand wages.

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Results (2/2)

(3) Low-skill immigration encourages training by natives.

Low-skill immigration is procyclical like in the data;

Negative correlation between immigrant and native unskilledemployment.

(4) Reducing the barriers to trade and immigration iswelfare-improving.

With lower trade barriers, the economy becomes more productive asit specializes in its most effi cient tasks;

Low-skill immigration lowers the price of services and encouragesnatives to train, thus increasing productivity.

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Literature

Employment polarization:Routine-biased technological change (Acemoglu and Autor, 2011;Autor and Dorn, 2013; Jaimovich and Siu, 2012);Offshoring (Crino, 2010 REStud; Firpo et al., 2011; Goos et al.2011; Mandelman, 2016).

Offshoring and immigration:Effect of offshoring and immigration on U.S. native-born workers(Ottaviano, Peri and Wright, 2013 AER).

Immigration:Secular rise in immigration, concentration on low-skill jobs (Groggerand Hanson, 2008; Peri and Sparber, 2009);Immigration and native education (Hunt, 2012; Jackson, 2015).

Modelling trade and entry with fixed, sunk costs:Firm entry, endogenous exporting (Ghironi and Melitz, 2005 QJE);Endogenous immigration (Mandelman and Zlate, 2012 JME);Skill heterogeneity, endogenous training (Mandelman, 2016 JME);Endogenous offshoring, extensive margin (Zlate, 2016 JIE).

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Model overview

Two large economies (Home and Foreign), and a small one (South).

Home and Foreign have two sectors each:

1. The tradable sector hires skilled labor:

Households train endogenously;Training results in a continuum of heterogeneous occupations;Tasks, rather than the final good, are tradable.

2. The non-tradable/services sector hires unskilled labor:

In Home, unskilled labor is a composite of natives and immigrants.

South is the source of unskilled labor migrating to Home:

Households invest in emigration endogenously.

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Tradable sector and skill premium, Home (1/4)

The training of skilled workers:

Every period, households can either allocate “raw” labor to theservice sector, or invest in training workers for the tradable sector.

Training a new skilled worker requires sunk cost fj,t , and results in anew occupation with idiosyncratic productivity z revealed ex-post.

Draws z follow a Pareto distribution over the support interval [1,∞).

Thus, training creates a diversity of skilled occupations

Production of tasks:

Each occupation produces a tradable task:

nt(z) ≡ (XtεTt )zlt .

... where Xt is a permanent world technology shock, and εTt is anAR(1) country-specific technology shock.

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Composite good of tradable sector:

Is a composite of the heterogeneous tasks:

YT ,t =[∫

ξεΞ

nt(z, ξ)θ−1θ dξ

] θθ−1

.

Serves as numeraire, PT ,t ≡ 1.

Trade in tasks:

All occupations produce tasks for Home.

In addition, some occupations also sell to Foreign.

Selling to Foreign requires iceberg cost τt > 1 and fixed costfo,t =

wu,t(εTt Xt )

(Xt fo ).

Shocks to the iceberg trade cost reflect changes in trade barriers:τt = ετt τ .

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The skill premium:

Workers selling their tasks in Home obtain:

πD ,t(z) = wD ,t(z)nD ,t(z)− wu,t lt .

In addition, workers selling their tasks to Foreign also get:

πX ,t(z) =(wX ,t(z)τt

nX ,t(z)− fo,t)− wu,t lt .

Due to the fixed cost, only the most productive occupations selltasks to Foreign, whose productivity z is above a threshold:

zX ,t = inf{z :πX ,t(z) > 0}.

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Average productivity of skilled workers:

All occupations vs. exporting occupations:

~zD ≡[∫ ∞

1zθ−1dG (z)

] 1θ−1

and ~zX ,t ≡[

11 − G (zX ,t)

∫ ∞zX ,t

zθ−1dG (z)

] 1θ−1

.

Average skill premium from selling tasks domestically and abroad:

π̃D ,t = πD ,t(~zD ,t) and π̃X ,t = πX ,t(~zX ,t)

Number of occupations selling tasks domestically and abroad:

ND ,t and NX ,t .

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Non-tradable sector, Home

Output of non-tradable sector:

Output is:YN ,t = XtL

AN ,t .

where Xt is the permanent world technology shock;

and LAN ,t is a composite of native and immigrant unskilled labor:

LAN ,t =[αN (LN ,t)

σN−1σN + (1 − αN )

(Lsi,t)σN−1

σN

] σNσN−1

.

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Household, Home

Utility: Et∞∑s=tβs−tεbt

[1

1−γC1−γt − anX 1−γt

L1+γnt1+γn

].

Cons: Ct =

[(γc )

1ρc (CT ,t)

ρc−1ρc

+ (1− γc )1ρc (CN ,t)

ρc−1ρc

] ρcρc−1

.

Budget constraint:

wu,tLt + π̃tND ,t︸︷︷︸Labor income

+ Bt−1 = fj ,tNE ,t︸︷︷︸Inv. in training

+ PtCt + qtBt + Φ(Bt).

Average skill income premium: π̃t = (ND ,t π̃D ,t + NX ,t π̃X ,t)/ND ,t .

Law of motion for skilled workers: ND ,t = (1− δ)(ND ,t−1 + NE ,t−1).

FOC for training:

fj ,t︸︷︷︸Sunk training cost

= Et∞∑

s=t+1

[β (1− δ)]s−t(ζsζt

)π̃s︸︷︷︸

Skill premium

.

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South Economy

Household’s Decision Problem:

Utility: Et∞∑s=tβs−t

[1

1−γ (Cst )1−γ − asnX 1−γ

t(Lsu,t )

1+γn

1+γn

].

Budget constraint:

wi,tLsi,t︸︷︷︸

Imm. labor income

+ w su,t(Lsu,t − Lsi,t

)︸︷︷︸Dom. labor income

> fe,tLse,t︸︷︷︸

Inv. in migration

+ P st Cst .

Law of motion, stock of immigrant labor:

Lsi,t = (1 − δl )(Lsi,t−1 + Lse,t−1);

FOC for emigrant flow Lse,t :

fe,t︸︷︷︸Sunk emigration cost

=∞

Et∑

s=t+1

[β(1 − δl )]s−t(ζssζst

)(wi,t − w su,t)︸︷︷︸

Wage gain from emigration

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Calibration

Standard parameters for quarterly calibrationDiscount factor and CRRA coeff. β = 0.99, γ = 2 Sunk training cost fj= 1Frisch elasticity (H, F, S) (1/γn) = 0.75 Destruction rate of skilled jobs (DH 1990) δ = 0.025Weight on disutility from labor ah,fn = 3.9, asn= 8.6 Share of imports in consumption (S) γsc= 0.2Share of the trad good (H, F) γc= 0.75 Elast of subst trad vs. non-trad (S) ρsc= 1.5Elast subst trad, nontrad (H, F) ρc= 0.44 Elast subst. natives, immigrants (H) σN=∞

Key parameters Steady-state targets Data ModelSunk emigr. cost fe= 8.8 Jobs ratio, high/middle-skill, US 0.6 0.64Exit rate of immigrant labor δl= 0.05 Income ratio, high/middle-skill, US 1.73-2.87 1.70Fixed cost of offshoring (H, F) fo= 0.0155 Share of unskilled in U.S. native L 0.19 0.22Iceberg trade cost τ = 1.4 Wage ratio, Mex imm vs. residents 2.26 2.26Pareto shape parameter (H, F) k = 3.1 U.S. exports/GDP 0.13 0.14Elast subst home, foreign tasks (H, F) θ = 2.4 U.S./Mex GDP per capita 5.1 5.4

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Estimation

Estimated parameters and shocks:

fe , τ , τ∗, γn , γsn , an , asn ;

World technology shock has unit root: log Xt = logXt−1 + ηXt ;

Otherwise: log εı̂t = ρı̂ log εt−1 + ηı̂t , with 0 < ρı̂ < 1, η ∼ N(0, σı̂);

ı̂ = {T ,T ∗, s , b, b∗, τ, fe} denote technology shocks in Home,Foreign and South; demand shocks in Home and Foreign; shock tothe iceberg trade cost; and shock to the sunk emigration cost.

Estimation data (1983:Q1-2013:Q3, SA, log-diff):

(a) US, Mexico, rest-of-the-world GDP;

(b) U.S. border patrol hours from U.S. Dept.of Homeland Security,detrended, increase interpreted as higher sunk migration cost;

(c) U.S. employment by skill group: Non-Routine Cognitive(high-skilled), Routine Cognitive (medium-skilled), and Non-RoutineManual (unskilled), as in Jaimovich and Siu (2012).

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Estimation

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Defining key variables

A few definitions:

High-skill jobs (NX ,t ), medium skill jobs (NM ,t = ND ,t − NX ,t ),unskilled jobs in Home (LN ,t );

New skilled jobs (NE ,t , as a measure of "task upgrading");

Stock vs. flow of unskilled immigrant labor (Lsi,t vs. Lse,t );

Sunk cost of labor migration (fe,t );

Iceberg cost of trade/offshoring (τt ).

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1. Impulse responses

Temporary decline in the iceberg trade cost

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1. Impulse responses

Temporary decline in the sunk cost of labor migration

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2. Model fit: moments

Empirical vs. model-generated unconditional correlations

(a) DataVariable (growth) GDP US GDP Mex Border app.GDP US 1GDP Mexico 0.25 1Border app. 0.07 −0.17 1

(b) ModelVariable (growth) GDP Home GDP South Migrant flowsGDP US 1GDP Mexico 0.33 1Migrant flows 0.50 −0.38 1New skilled jobs 0.67 0.62−0.07

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2. Model fit: data vs. model predictions

Migrant flows estimated like in Hanson (2008):ln(Apprehensions)− 0.8 ln(BorderHours)

Iceberg trade cost proxied by index from the U.S. ITC, based on thegap between CIF and FOB import prices.

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2. Model fit: historical decomposition of empl.

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2. Model fit: historical decomposition of income

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2. Model fit: historical decomposition of migration

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3. Welfare

Welfare implications of cutting either the sunk cost of labormigration or the iceberg trade cost:

The model is solved using a second-order approximation around thedeterministic steady state.

The welfare net gain is obtained as the % of the expected stream ofconsumption that one should add to the benchmark model case, sothat households would be just as well-off as in the counterfactualscenario.

Robustness to varying the elasticity of substitution between nativesand immigrants, which was set at σN=∞ in benchmark case.

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3. Welfare (cont’d)

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Conclusions

3-country model with endogenous trade in tasks, endogenousimmigration of unskilled labor, endogenous training.

Main model implications:

Easier offshoring gives rise to employment and wage polarization;Unskilled immigration boosts low-skill employment but dampenslow-skill wages, prompts native workers to undertake training.

Reducing barriers to either immigration or trade affects employmentand wages on different segments of the skill spectrum;

However, both are welfare-improving for Home;Cheaper services and training should be considered when assessingthe welfare impact of immigration.

Thank you!

o⁄shoring, low-skilled immigration, logo introduction model calibration and estimation results...

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