DP12842-2 | Immigration and Spatial Equilibrium: the Role of Expenditures in the Country of Origin

Publication Date

02/12/2019

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Abstract

This paper investigates the spatial distribution of immigrants across US cities. We document that: a) immigrants concentrate in large, expensive cities, b) the earnings gap between natives and immigrants is higher in these cities, c) these patterns are stronger when price levels in the country of origin are lower, and d) immigrants consume less locally than natives. We develop a spatial equilibrium model in which immigrants spend 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, which gives them a comparative advantage for living in more productive cities, where they accept lower wages than natives. We rely on variation in the origin price level to estimate the model. Counterfactual simulations suggest that current levels of immigration have reduced economic activity in smaller, less productive cities, while they have expanded it in large, productive ones. This has increased total worker productivity by around 1% and aggregate native workers' welfare by around 0.35%.