The Dynamics of Immigration and Wages

There is considerable debate in the literature about the effects of immigration on workers' labor market outcomes. This paper presents a new approach to the analysis of the relationship between immigration and wages based on a panel vector autoregression (VAR). The VAR analysis of a panel of US states shows that immigration does not have a significant effect on wages or internal migration. By contrast, wages do affect immigration: a 10 percent increase in wages causes up to a 20 percent increase in immigrant inflow. The effect is strongest for low-skill immigrants while it is small and insignificant for high-skill immigrants.