How do Regulated and Unregulated Labor Markets Respond to Shocks? Evidence from Immigrants During the Great Recession

Abstract

We study wage adjustment during the recent crisis in Italy using a unique dataset on immigrant workers that includes those employed in formal and informal sector. We find that before the crisis immigrants' wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32%. The difference was particularly salient for workers in occupations where the minimum wage is likely to be binding, and in "simple" occupations where there is high substitutability between immigrant and native workers. Calibrating a simple partial equilibrium model of spillovers between formal and informal markets, we find that less than 10% of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5-4.5%-much lower than 16% decline that we observe in the data. (JEL E24, E26, J31, J61)

Not just a work permit: EU citizenship and the consumption behaviour of documented and undocumented immigrants

“…The reported ratios are between three and seven, suggesting that in order to attribute the entire estimated effect of EU enlargement on the total consumption to selection effects, the influence of unobservable factors would have to be between three to seven times greater than the one of the observable characteristics. These values are considered to be high (see, for example, Bellows and Miguel 2009, Guriev et al 2019, Nunn and Wantchekon 2011. Therefore, we conclude that our estimates cannot be attributed to unobserved heterogeneity.…”

Banks, Firms, and Jobs

“…One limitation of our data is the lack of information on wages, so that we can investigate only the quantity response to a financial shock, while we cannot say anything about price effects. However, very recent empirical evidence on Europe-and explicitly on Italy-shows that the prevailing labor cost reduction strategy that firms had adopted in response to the Great Recession has worked through the adjustment of quantities rather than prices (Fabiani et al, 2015;Bentolila et al, 2016;Hochfellner et al, 2016;Guriev et al, 2016), consistently with the presence of downward wage rigidities in regulated labor markets (see Devicienti et al, 2007, for a broader discussion about Italy).…”

A Matching Model of the Market for Migrant Smuggling Services

“…In that case, the migrant enjoys the intertemporal value of the successful migration (the discounted ‡ow of his future income in the destination country) denoted by Y , which depends on the economic conditions in the destination country, but also on policies implemented in this country to …ght against undocumented workers and migrants (Orrenius and Zavodny, 2015;Borjas and Cassidy, 2019;Guriev et al, 2019). However, with probability (1 ) the group of migrants is caught and sent back to their country of origin.…”

“…Auriol and Mesnard (2016) show that a combination of tight border controls with the sale of a large number of visas would be an optimal policy, as it would at the same time limit the number of irregular migrants and prevent excessive concentration of the smuggling market (at the cost of increasing drastically the number of legal migrants). Borjas and Cassidy (2019) show that the legal restrictions on the employment of undocumented workers in the United States of America entail a penalty on the wage of the irregular migrants in the hidden segment of the labor market; similarly, Guriev et al (2019) show that, in Italy, the e¤ectiveness of immigration policies is linked to labor market regulation (see also Orrenius and Zavodny, 2015).…”