DP12842 | Immigrants' Residential Choices and Their Consequences

Publication Date

04/04/2018

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

This paper investigates the causes and effects of the spatial distribution of immigrants across US cities. We document that: a) immigrants concentrate in large, high-wage, expensive cities, b) the earnings gap between immigrants and natives is higher in larger, more expensive cities, and c) immigrants consume less locally than natives. In order to explain these findings, we develop a quantitative spatial equilibrium model in which immigrants consume a fraction of their income in their countries of origin. Thus, immigrants care not only about local prices, but also about price levels in their home countries. This gives them a comparative advantage relative to natives for living in high-wage, high-price, high-productivity cities, where they also accept lower wages than natives. These incentives are stronger for immigrants coming from lower-price index countries of origin. We rely on immigrant heterogeneity to estimate the model. With the estimated model, we show that current levels of immigration have reduced economic activity in smaller, less productive cities by around 5 percent, while they have expanded it in large, productive cities by around 6 percent. This has increased total aggregate output per worker by around 0.3 percent. We also discuss the welfare implications of these results.