Immigration and earnings inequality in America's new small-town destinations

Research on the relationship between immigrant population concentration and earnings inequality is divided between two perspectives. Supply-side arguments maintain that areas attracting large numbers of immigrants experience minimal wage growth at the bottom of the earnings distribution, which increases local levels of earnings inequality. Demand-side arguments contend that industrial restructuring reduces the pay of manual labor regardless of, and even prior to, the arrival of foreign-born workers. Adjudicating between these two perspectives is hindered by issues of potential endogeneity, which confound attempts to independently assess the effects of immigration on inequality or vice versa using OLS regression. We consider a third perspective called the reciprocal effects hypothesis which contends that immigrant concentration and earnings inequality emerge together through a mutually reinforcing feedback process. We explore this question in America's "new small-town destinations" using data from U.S. micropolitan statistical areas. We use three-stage least squares estimation to address the endogeneity problem and to test these three hypotheses. While we find support for both the supply- and demand-side perspectives, the results are best explained by the reciprocal effects hypothesis.