136 THE REVIEW OF ECONOMICS AND STATISTICS FIGURE 1.--LABOR MARKET EQUILIBRIUM:THE HECKSCHER-OHLIN MODEL of two products is made on each elastic part;accordingly, different relative wages prevail on each elastic part.On the RS RS' RSo downward-sloping portions,the country makes only one (WsNWu) product.Output-mix changes are not possible along these portions,and so immigrants must price themselves into employment by changing wages.Point Eo designates the (Wg/Wu)" initial labor-market equilibrium,with relative labor supply RS.and relative wages (w,/w)..Two immigration shocks are shown.The sufficiently small immigration shock shifts Eo RS to RS'.Relative wages do not change,as immigrants (Ws/Wu)o RD trigger Rybczynski output-mix effects with no product-price changes.The sufficiently large shock shifts RS to RS",and the country now produces a new set of products.As a result, the unskilled wage falls relative to the skilled wage (to (Qs/Qu) (w/w)");with fixed produce prices,this relative-wage Skilled labor is subscripted"s"and unskilled labor"n".The RS schedule is national relative supply, decline will be a real-wage decline as well.7 and the RD schedule is national relative demand. The HO model has different predictions about the link between skills and immigration-policy preferences.If indi- indirectly through the endowments'role in selecting the viduals think FPI holds,then there should be no link from product mix). skills to preferences.In this case,people evaluate immigra- Immigration's wage effects depend on the initial product tion based on other considerations.If individuals think that mix,on the size of the immigration shock,and on whether immigration triggers both output-mix and wage effects then the country is large or small (that is,on whether its product unskilled (skilled)workers nationwide should prefer poli- mix does or does not have any influence on world product cies that lower(raise)immigration inflows. prices).Consider the standard case in which the initial output mix is sufficiently diversified so that wages depend on just world prices and technology. B.The Factor-Proportions Analysis Model In this case,with sufficiently small shocks,the country Like the HO model,this model also assumes a national absorbs immigrants by changing its output mix as predicted labor market.The fundamental difference between the two by the Rybczynski theorem:the same products are pro- is that this model assumes a single aggregate output sector. duced,but output tends to increase (decrease)in the non- Under this assumption,there can be no output-mix changes skill-intensive (skill-intensive)sectors.Whether wages to help absorb immigrants.Accordingly,any immigration change depends on whether the country is big or small:if inflow affects national wages by the same logic described the country is small,world prices do not change,and thus above.Lower relative wages for unskilled workers induce there are no wage effects.Leamer and Levinsohn(1995) firms to hire relatively more of these workers.The greater call this insensitivity of national wages to changes in na- the immigrant inflow,the greater the resultant wage tional factor supplies the factor price insensitivity (FPI) changes.In the labor literature,studies using this framework theorem.If the country is large,wages do change:the include Borjas et al.(1996,1997),and these studies calcu- relative price of non skill-intensive products declines,which late immigration-induced shifts in national factor propor- tends to lower(raise)wages for unskilled (skilled)workers. tions and then infer the resulting national wage changes. With sufficiently large immigration shocks,national Figure 2 displays the national labor market for the factor- wages do change.Large-enough shocks induce the country proportions analysis world.Here,the relative labor demand to make a different set of products,which entails a different schedule slopes downward everywhere,with no portions set of world prices and technology parameters and thus where FPI holds.Initial relative labor supply is again given different wages.This absorption of large shocks via changes in both output mix and wages holds whether the country is 7 Three comments are necessary on figure 1.First,the relative-supply big or small:in either case,wage inequality rises.In the schedule is vertical under the assumption that all workers are sufficiently literature on U.S.immigration,Hanson and Slaughter willing to work that they price themselves into employment regardless of (2001)find immigration-related changes of output mix the going relative wage.Second,along the national demand schedule the country's output mix progresses according to sector factor intensities.The among U.S.states. likely output mixes are as follows.Along the leftmost branch of RD,the Figure 1 displays the national labor market for the case of country makes only the most non-skill-intensive product.Along the first a small HO country with three products.The distinguishing flat,it makes this product and the"middle"intensity product,switching to only the middle product along the middle downward-sloping branch.The feature is the shape of relative labor demand.It has two country picks up the most skill-intensive product as well along the second perfectly elastic portions,each of which corresponds to a flat;finally,along the rightmost branch,it makes only the skill-intensive range of endowments for which FPI holds.The national product.Third,underlying the downward-sloping portions of RD is the assumption of flexible production technologies with factor substitutability. output mix varies along the demand schedule.A different set With Leontief technology,these portions would be vertical. This content downloaded from 202.120.14.193 on Mon,15 Feb 2016 10:04:26 UTC All use subject to JSTOR Terms and Conditions136 THE REVIEW OF ECONOMICS AND STATISTICS FIGURE 1.-LABOR MARKET EQUIBRIUM: THE HECKSCHER-OHLIN MODEL (Ws/Wu) RS" RS' RSo (WS/WU)' Eo (Ws/Wu)O RD (Qs/Qu) Skilled labor is subscripted "s" atid unskilled labor "u". The RS schedule is nationial relative supply, and the RD schedule is national relative demand. indirectly through the endowments' role in selecting the product mix). Immigration's wage effects depend on the initial product mix, on the size of the immigration shock, and on whether the country is large or small (that is, on whether its product mix does or does not have any influence on world product prices). Consider the standard case in which the initial output mix is sufficiently diversified so that wages depend on just world prices and technology. In this case, with sufficiently small shocks, the countly absorbs immigrants by changing its output mix as predicted by the Rybczynski theorem: the same products are pro￾duced, but output tends to increase (decrease) in the non￾skill-intensive (sk:ill-intensive) sectors. Whether wages change depends on whether the country is big or small: if the country is small, world prices do not change, and thus there are no wage effects. Leamer and Levinsohn (1995) call this insensitivity of national wages to changes in na￾tional factor supplies the factor price insensitivity (FPI) theorem. If the country is large, wages do change: the relative price of non skill-intensive products declines, which tends to lower (raise) wages for unskilled (skilled) workers. With sufficiently large immigration shocks, national wages do change. Large-enough shocks induce the country to make a different set of products, which entails a different set of world prices and technology parameters and thus different wages. This absorption of large shocks via changes in both output mix and wages holds whether the country is big or small: in either case, wage inequality rises. In the literature on U.S. immigration, Hanson and Slaughter (2001) find immigration-related changes of output mix among U.S. states. Figure 1 displays the national labor market for the case of a small HO country with three products. The distinguishing feature is the shape of relative labor demand. It has two perfectly elastic portions, each of which corresponds to a range of endowments for which FPI holds. The national output mix varies along the demand schedule. A different set of two products is made on each elastic part; accordingly, different relative wages prevail on each elastic part. On the downward-sloping portions, the country makes only one product. Output-mix changes are not possible along these portions, and so immigrants must price themselves into employment by changing wages. Point Eo designates the initial labor-market equilibrium, with relative labor supply RS,, and relative wages (w/lwu),. Two immigration shocks are shown. The sufficiently small immigration shock shifts RS, to RS'. Relative wages do not change, as immigrants trigger Rybczynski output-mix effects with no product-price changes. The sufficiently large shock shifts RS0 to RS', and the country now produces a new set of products. As a result, the unskilled wage falls relative to the skilled wage (to (w5/wj)"); with fixed produce prices, this relative-wage decline will be a real-wage decline as well.7 The HO model has different predictions about the link between skills and immigration-policy preferences. If indi￾viduals think FPI holds, then there should be no link from skills to preferences. In this case, people evaluate immigra￾tion based on other considerations. If individuals think that immigration triggers both output-mix and wage effects then unskilled (skilled) workers nationwide should prefer poli￾cies that lower (raise) immigration inflows. B. The Factor-Proportions Analysis Model Like the HO model, this model also assumes a national labor market. The fundamental difference between the two is that this model assumes a single aggregate output sector. Under this assumption, there can be no output-mix changes to help absorb immigrants. Accordingly, any immigration inflow affects national wages by the same logic described above. Lower relative wages for unskilled workers induce firms to hire relatively more of these workers. The greater the immigrant inflow, the greater the resultant wage changes. In the labor literature, studies using this framework include Borjas et al. (1996, 1997), and these studies calcu￾late immigration-induced shifts in national factor propor￾tions and then infer the resulting national wage changes. Figure 2 displays the national labor market for the factor￾proportions analysis world. Here, the relative labor demand schedule slopes downward everywhere, with no portions where FPI holds. Initial relative labor supply is again given 7 Three comments are necessary on figure 1. First, the relative-supply schedule is vertical under the assumption that all workers are sufficiently willing to work that they price themselves into employment regardless of the going relative wage. Second, along the national demand schedule the country's output mix progresses according to sector factor intensities. The likely output mixes are as follows. Along the leftmost branch of RD, the country makes only the most non-skill-intensive product. Along the first flat, it makes this product and the "middle" intensity product, switching to only the middle product along the middle downward-sloping branch. The country picks up the most skill-intensive product as well along the second flat; finally, along the rightmost branch, it makes only the skill-intensive product. Third, underlying the downward-sloping portions of RD is the assumption of flexible production technologies with factor substitutability. With Leontief technology, these portions would be vertical. This content downloaded from 202.120.14.193 on Mon, 15 Feb 2016 10:04:26 UTC All use subject to JSTOR Terms and Conditions