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Immigration Restrictions Offer a Natural Experiment to Test Spatial Equilibrium Theories

Sunday, March 19, 2017 7:44
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(Before It's News)

President Trump is helping a future generation of economists to publish natural experiment papers.  In a “natural experiment” research design (see QJE back in the 1990s), a sudden policy change provides exogenous variation that allows for a test of whether X causes Y.  For example, X may be a new government savings program and Y might be private savings.  So, if government expands Social Security, do people save less for their retirement.

With this preamble, let's turn to President Trump's new policy related to H1B visas.  This NY Times article discusses that many rural towns rely on immigrants to be their doctors.    If these immigrants are no longer allowed to work in the U.S, will small towns have no doctors?  The NY Times is worried about doctor shortages.

Spatial economics makes the prediction that rents and wages across space (think of wages and rents in San Francisco versus Detroit) adjust so that people are roughly indifferent between living in either area.  If doctors are now scarce in some rural Iowa place, then their wage will rise.  While a power couple might now want to live close to there, marginal analysis predicts that there will be some young doctor who will be willing to live in this area.

A key issue here is transportation costs.  Suppose that I'm a skilled general practitioner MD
and I locate my practice in a small town.  Suppose that there are 40,000 people living in a 40 mile radius of me.  Each of them can reach me in a 30 minute drive.   If 1% of them are sick at any point in time, then there will be plenty of demand for my services.

So, I predict that rural doctor domestic wages will rise if President Trump repeals H1B visas.  How much they rise will provide new clues about this displeasure that the skilled feel about living in small cities.  In this age of Amazon and Netflix and the Internet, this big city premium should be shrinking.  Heterogeneous tastes for city size will also keep this wage premium lower than it would need to be to attract me to live in one of these areas.

To an economist, the interesting question in the H1B visa case relates to heterogeneity in spatial preferences.  Suppose that Matt and  Rashid  (an Indian doctor) are equally good doctors but Matt demands a $35,000 annual earnings premium to be in rural Iowa while Rashid requires only a $22,000 premium (over what he would earn in Chicago) in order to lure him to rural Iowa  (keep in mind that I'm factoring out housing rents so nominal wages do not have to be higher in Iowa than in Chicago).

In this case, it is efficient for Rashid to take the Iowa job because he is “better assigned” to it.  If Rashid now cannot work in Iowa because of the new visa rules, then the people of Iowa will need to pay an extra $13,000 to attract Matt.  The  people of rural Iowa bear the incidence of this visa change.  I wonder if people understand this point?


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