How Unauthorized Workers Differ from Permanent Residents: Labor Market Effects of the Minimum Wage on Immigrants
AbstractWhile there are thousands of studies on the labor market effects of the minimum wage, very few of them focus on its effects on immigrants, especially unauthorized immigrants. Lack of reliable data on unauthorized immigrants is a major issue. Sociologists have utilized Survey of Income and Program Participation (SIPP) data to estimate the number of unauthorized immigrants using a question in the SIPP about whether immigrants to the U.S. have obtained permanent residency. In this paper we adopt a similar methodology and assume that lower-educated immigrants without permanent residency are likely to be unauthorized, as distinguished from higher-educated immigrants without permanent residency such as F-1 students and H-1B workers. Based on preliminary analyses, we find that lower-wage permanent residents experience increases in employment when effective minimum wages increase. In contrast, immigrants without permanent residency seem to be less responsive in employment to minimum wage increases.
To explain our findings, we propose a three-sector segmented labor market model with two types of workers. In the destination country, one sector is covered by the minimum wage, while the other (illegal) sector is uncovered by the minimum wage. The two types of immigrants are permanent residents and unauthorized immigrants. We assume that covered sector can only hire permanent residents and that the minimum wage is binding. The uncovered sector can hire both permanent and unauthorized workers, with the wage being market-determined and in equilibrium lower than the minimum wage. Permanent residents who cannot find jobs in the covered sector look in the uncovered sector and can always find a job in equilibrium. The two types of immigrants make decisions to migrate to the destination country. or stay in their originating country, and therefore in equilibrium, the expected returns if they migrate are the same as the reservation wage in their originating country.