Recent literature on U.S. labor markets identifies two important changes in national labor supplies. One is rising educational attainment of the labor force, among both new entrants and existing workers (Johnson, 1997). A second is rising immigration of individuals with low education levels relative to U.S. natives (Borjas, 1999). Both of these labor-supply shifts have varied across regions. For instance, immigration “gateway” states such as California have attracted a large share of new immigrants, and the increase in the relative supply of more educated workers appears to have been strongest in the Northeast.
How do regions absorb differential changes in relative labor supplies? We delineate four adjustment mechanisms: changes in regional relative factor prices, interregional migration of labor and/or capital, changes in the regional output mix, and changes in underlying production technology. While the first mechanism may occur in either closed or open economies, the other three generally depend on regional openness to factor, trade, or technology flows. In this paper, we examine the mechanisms through which U.S. states absorb changes in relative labor supplies, with an emphasis on how economic openness conditions regional labor-market adjustment.
Literature on regional adjustment to labor-supply shocks focuses almost exclusively on wage adjustment in a closed-economy setting. An important strand of this literature assesses the impact of immigration on native wages in U.S. regions. The standard approach is to regress the change in native wages on the change in the stock of immigrants across U.S. metropolitan areas. Most studies find that immigration has, at most, a small negative impact on local native wages. Adjustment mechanisms besides wage changes are generally ignored, except in a small literature on whether native migration responds to immigrant inflows. Evidence on this second adjustment mechanism is mixed. Filer (1992) and Borjas, Freeman, and Katz (1997) find that immigrant inflows to a region contribute to native outmigration, while Card (1997) finds that they do not.
To our knowledge, no study has examined the role of the third adjustment mechanism, changes in regional output mix, in regional absorption of labor supply changes. By the logic of the Rybczynski Theorem (1955), a core result of Heckscher-Ohlin (HO) trade theory, a region may absorb a factor-supply shock without factor-price changes by shifting production towards sectors that employ relatively intensively factors whose supplies are expanding. Openness to trade is essential for this mechanism to work, as it implies changes in regional outputs can be absorbed by changes in regional exports and imports.
There is a large literature on the fourth adjustment mechanism, technological change, but most of this research focuses on whether national shifts in production technology have been biased towards skilled workers and thus may have contributed to national increases in the relative demand for and wages of skilled labor (Bound and Johnson, 1992; Katz and Murphy, 1992; Berman, Bound, and Griliches, 1994; Autor, Katz, and Krueger, 1998). We know of no work on the impact of such skill-biased technical change (SBTC) on regional labor markets. For a single region, national SBTC represents a change in effective labor supplies which, depending on other regional shocks, may either offset or exacerbate raw regional labor-supply changes.
To understand how U.S. states absorb differential labor-supply shocks, we perform two empirical exercises. Both use a new data set we construct on real state value added by industry and state labor employment by industry for four education categories: high-school dropouts, high-school graduates, those with some college, and college graduates and beyond. The data cover 14 large U.S. states and 40 sectors, spanning all civilian industries, in 1980 and 1990.
Download
PDF Ebook Labor-Market Adjustment in Open Economies: Evidence from U.S. States
