The Effects of Immigration on the Economy: Lessons from the 1920s Border Closure

New NBER looks at the effect of immigration restrictions in the United States during the 1920's and finds that a) wages for us workers in areas receiving fewer immigrants did not rise. b) US workers responded by moving to (higher productivity presumably) urban areas replacing European immigrants and drove down native wages in urban areas c) farmers responded to higher labor cost by shifting towards more capital intensive agriculture. The writers suggests that the American experience during the 1920's implies that restrictions on immigration will result in sustainability such as automation and off-shoring before wages climb.

Effects A and B, areas getting fewer immigration did not see wages rise, and wages fell in urban areas as higher skilled labor moved in (which implies immigrants had been sedating wages)"....In the United States, the era of open immigration with Europe ended abruptly in the 1920s. A series of restrictive acts introduced immigration quotas that were particularly targeted at immigrants from Southern and Eastern Europe. The quotas effectively limited the annual number of immigrants admitted to the United States by more than 75 percent. Given the substantial reduction of immigrant labor, a simple model would predict that wages for the existing workforce would increase. Yet, we find that the occupation-based earnings of US-born workers in labor markets exposed to the quota policy fell after the border closure.We then document how the economy adjusted to the decline in immigrant workers to explain this puzzling result. Once the immigrant flow into US cities declined, US-born workers and unrestricted immigrants from Mexico and Canada started entering in larger numbers, replacing the immigrant workers at a nearly one-to-one rate. The new arrivals into cities were more skilled, on average, than the immigrants that they replaced, making them closer substitutes to the existing US-born workers...We find that workers who were unrestricted by the quota policy (i.e., US-born workers and immigrants from the Western Hemisphere, including Mexicans and Canadians) replaced the loss of immigrant labor in exposed urban areas nearly one-for-one after the border closure. These new arrivals were more skilled than the immigrants that they replaced, filling only 50 percent of low-skilled blue collar positions previously held by immigrants. The arrival of higher skilled artisans and tradesmen, who may have been closer substitutes for existing US-born workers than the immigrant workers they replaced, can help explain why the earnings of existing residents fell after the border closure...."

Effect C, shift to capital intensive agriculture, "... By contrast, in rural areas, the loss of immigrant workers encouraged land owners to invest in more farm capital and to shift away from labor-intensive crops, which in turn discouraged US-born workers from moving into affected rural areas. We emphasize that our estimates reveal the total effect of the immigration restriction policy for local labor markets after corresponding flows of labor and capital occurred. Thus, the “puzzle” of why the earnings of US-born workers fell in cities after the border closure, despite a decline in immigrant labor supply, can be understood as the combined effect of a decline in the (primarily low-skilled) immigrant workforce and a corresponding rise in (a more mixed-skill) US-born workforce....Table 8 provides suggestive evidence that farmers adapted to the loss of immigrant farm labor by shifting into more capital-intensive production, thereby reducing employment opportunities for domestic workers as well. We measure the share of cultivated land planted in labor-intensive (hay and corn) versus capital-intensive (wheat) cereals... We find that rural areas with more quota exposure were more likely to plant capital-intensive wheat and less likely to plant labor-intensive cereals after the policy. Farmers also shift away from the use of draft animals (horses and mules), which are direct substitutes for new gasoline-powered tractor technology. Consistent with a decline in the demand for farm labor, farm wages decline by around 3 percent after the border closure for a one percentage point shift in quota exposure. However, we see no effect of the shift away from laborintensive production on average farm values indicating that the quota system did not impede the profitability of farming....."

Ran Abramitzky, Philipp Ager, Leah Platt Boustan, Elior Cohen, Casper Hansen, "The Effects of Immigration on the Economy: Lessons from the 1920s Border Closure," National Bureau of Economic Research, December 2019, https://www.nber.org/papers/w26536

Implications, "... It is rare to find such drastic changes in immigration policy and so this historical episode has important lessons for contemporary policy. Substantially walling off the US economy to new immigration did open up some employment opportunities for US-born workers who moved to urban areas to take jobs previously held by immigrant workers. However, using immigration restriction to raise the earnings of US-born workers more broadly is unlikely to be effective given the many factors that can substitute for immigrant workers. In the early twentieth century, restricting immigration from Europe encouraged labor flows from Mexico and Canada into urban areas, and the investment in new capital in rural areas. Today, these sources of substitutability may be automation in the manufacturing sector or the off-shoring of high-skilled tasks like computer programming or legal services....."