Substitution Between Immigrants, Natives, and Skill Groups

The wage impact of immigration depends crucially on the elasticity of substitution between similarly skilled immigrants and natives and the elasticity of substitution between high school dropouts and graduates. This paper revisits the estimation of these elasticities. The U.S. data indicate that equally skilled immigrants and natives are perfect substitutes. The value of the second elasticity depends on how one controls for changes in demand that have differentially affected high school dropouts and graduates. The groups are imperfect substitutes under standard trend assumptions, but even slight deviations from these assumptions can lead to an outright rejection of the CES framework.