Labor Supply Shocks, Native Wages, and the Adjustment of Local Employment*

TLDR

The study investigates how an exogenous immigration‑induced labor supply shock—created by a commuting policy that caused a sharp, unexpected influx of Czech workers along the German‑Czech border—affects local wages and employment of native workers. The authors exploit the commuting policy as a natural experiment, treating the sudden influx of Czech workers as an exogenous shock to local labor markets. The shock moderately lowers native wages and sharply reduces native employment, with larger wage effects for younger natives and stronger employment declines for older natives; the pattern is inconsistent with standard immigration models but can be explained by higher labor‑supply elasticity or wage rigidity for older workers, and the employment loss is driven mainly by reduced native inflows rather than outflows, suggesting outsiders shield insiders from competition.

Abstract

Abstract By exploiting a commuting policy that led to a sharp and unexpected inflow of Czech workers to areas along the German-Czech border, we examine the impact of an exogenous immigration-induced labor supply shock on local wages and employment of natives. On average, the supply shock leads to a moderate decline in local native wages and a sharp decline in local native employment. These average effects mask considerable heterogeneity across groups: while younger natives experience larger wage effects, employment responses are particularly pronounced for older natives. This pattern is inconsistent with standard models of immigration but can be accounted for by a model that allows for a larger labor supply elasticity or a higher degree of wage rigidity for older than for young workers. We further show that the employment response is almost entirely driven by diminished inflows of natives into work rather than outflows into other areas or nonemployment, suggesting that “outsiders” shield “insiders” from the increased competition.