Job Market Paper

Gains from Foreign Employment in Japan: Regional and Sectoral Implications (joint with Yasuhiro Doi)

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Abstract: This paper examines the impact of immigrant workers on the regional economies of the host country. We focus on Japan, which has expanded the foreign employment in the total workforce over the last three decades in response to the shrinking domestic workforce. We develop a quantitative spatial model to evaluate the gains of foreign employment, i.e., the consequences of an inflow of foreign workers on aggregate welfare, local wages, employment, and production. Our model features three crucial aspects---occupation, region, and sector---that interact with each other to shape the local labor market and production responses to immigration shocks. We quantify the model using the newly available micro-level data on foreign workers and conduct counterfactual exercises to evaluate the past and future immigration policy reforms. We find that in regions where foreign workers tend to gravitate, there was a substantial negative impact on the wages of low-education domestic workers. At a nationwide level, there is a minimal gain of social welfare. We argue that these results suggest that the Japanese labor market is segmented spatially, particularly for low-education workers. We also highlight the importance of the sectoral dimension in understanding the impact of foreign workers. Specifically, the skewed occupational distribution of foreign workers has pronounced implications on sectors that are intensive in occupations with a larger proportion of foreign workers and sectoral input-output linkage plays a key role in determining the regional impacts.