Low-Skilled Immigration: Complementarity, Technology Adoption, and Output Mix Adjustments

Low-Skilled Immigration: Complementarity, Technology Adoption, and Output Mix Adjustments

A central debate in labor economics is whether low-skilled immigrants substitute for or complement native workers. Traditional competitive models predict that an influx of low-skilled immigrants must depress the wages of competing low-skilled natives. However, empirical studies often find very small or negligible wage impacts.

A major synthesis by Christian Dustmann and Uta Schönberg (June 2025, prepared for the Handbook of Labor Economics, Volume VI) reconciles this puzzle by highlighting alternative adjustment channels through which firms and economies absorb low-skilled labor supply shocks without wage declines: endogenous technology adoption and industry output mix adjustments.

Endogenous Technology Adoption as a Wage Buffer

Applying the task-based framework of Acemoglu and Restrepo (2018) to immigration, Dustmann and Schönberg show that firms do not operate with fixed production technologies. When low-skilled immigration makes labor cheap and abundant, firms are incentivized to adopt more labor-intensive (and less capital-intensive) production methods. This endogenous technological shift acts as a powerful buffer that mutes the downward wage pressure on low-skilled natives.

Key empirical evidence supporting this mechanism includes:

• The Bracero Exclusion Natural Experiment: Clemens, Lewis, and Postel (2018) studied the 1964 termination of the Bracero program, which excluded nearly 450,000 Mexican farm workers from the U.S. Contrary to competitive model predictions, the exclusion failed to raise the wages or employment of native farm workers. Instead, agricultural firms rapidly adjusted by adopting labor-saving capital and machinery.
• Directed Technical Change: San (2023) demonstrated that the termination of the Bracero agreements caused U.S. agricultural firms to direct their innovation and patenting activities specifically toward labor-saving harvesting technologies.
• U.S. Manufacturing Plants: Lewis (2011) showed that manufacturing plants in U.S. metropolitan areas with larger inflows of low-skilled immigrants adopted significantly less automated machinery per unit of output, choosing instead to utilize the abundant low-skilled labor.
• Historical and International Evidence: Hornbeck and Naidu (2014) found that the massive out-migration of black workers following the 1927 Mississippi Flood forced Southern agricultural firms to increase their capital intensity. Similarly, Imbert et al. (2022) documented that manufacturing firms in China became significantly more labor-intensive in response to rural-urban migration shocks.

Industry Structure and Output Mix Adjustments (Rybczynski Theorem)

A second major adjustment margin is the reallocation of output across industries. Under the classic international trade framework (the Heckscher-Ohlin model and the Rybczynski Theorem), a small open economy can absorb a low-skilled labor supply shock without any factor price (wage) changes. Instead, the economy simply expands the output of low-skill-intensive sectors and contracts the output of high-skill-intensive sectors, exporting the excess low-skill-intensive goods (factor price insensitivity).¹

While regional studies (e.g., Card and Lewis, 2007; Gonzalez and Ortega, 2011) initially found that most labor supply absorption occurred within rather than between broad industries (seemingly contradicting the Rybczynski Theorem), subsequent highly disaggregated research has vindicated the output mix channel:

• Firm-Level Output Realignment: Dustmann and Glitz (2015) conducted a highly detailed firm-level analysis of a low-skilled immigration shock in Germany. They showed that broad industry-level analyses misattribute output reallocations between heterogeneous firms within the same industry to "within-industry" technological adjustments.
• Role of Firm Entry/Exit: When reducing the level of aggregation from industries to individual firms, Dustmann and Glitz (2015) found that changes in the output mix, alongside the entry of new labor-intensive firms and the exit of capital-intensive ones, played a highly significant role in absorbing the immigrant labor supply shock.

Key Quotes

From Christian Dustmann and Uta Schönberg (2025):

"Switching to a more labor-intensive production technology, in turn, mutes the total aggregate wage effect of immigration... Endogenous technology adoption thereby provides one explanation for small total aggregate wage effects of immigration identified from the pure spatial approach, even if native labor supply is inelastic and the inverse labor demand elasticity is large."

"According to the Rybczynski Theorem, an immigration shock will have no impact on total aggregate wages... Instead, output in the labor-intensive sector will expand, while output in the capital-intensive sector will decline."