Discussion Paper Series Low Skilled Local Labor Demand Shocks and Labor Market Outcomes: Evidence from the Mexican Tequila Crisis

How does immigration affect natives local wages? A vast literature considers this, much of it focused on Mexican immigration to the United States. Prior work emphasizes the importance of instrumenting for immigrant destinations, the key role of experience-skill cells, and the potential for spillovers to national markets. I build on these, using the Mexican ’Tequila Crisis’ of the mid-1990s as an exogenous shock to immigration. Instrumentation thus includes both a time dimension for the shock period, plus a destination dimension as in prior work. The 1.5% immigration shock of the Tequila Crisis lowered the wages of young low skilled US natives by 1 to 1.5 percent. It also prompted interstate labor reallocation. The share of low skilled workers is estimated to decrease by 2 percentage points as a result of the shock. This explains why within five years, national markets adjust, leaving no evidence of differential spatial impact