The effect of mass influx on labor markets: Portuguese 1974 evidence revisited

The study of how labor supply shocks, especially immigration, affect labor market conditions has been a long-lasting concern in empirical labor economics. The textbook model of a competitive labor market suggests that high levels of immigration should lower the wage of competing workers. Despite the common sense intuition behind the theory, existing empirical literature offers contradictory evidence.

This article provides a reappraisal of the evidence from the influx that has been unique in the recent European history, the flood of more than half million returnees from Mozambique and Angola to Portugal in the mid-1970s. The main finding of this article is that the influx had a significant adverse effect on the Portuguese aggregate labor productivity and wages. The empirical analysis suggests that in the short run, the 15 percent increase in the labor force decreased labor productivity by about 26 percent, the long run effect being even larger. In low-skilled professions (in agriculture and construction), the average wage impact of the returnees in Portuguese regions was -12 to -30 percent during the 1974-1977 period.

However, due to the Portuguese peculiar economic and institutional structures in the 1970s and the 1980s, the lessons from this case study has limited applicability for example on the immigration policies in today’s Europe. Moreover, the returnees were fairly well-educated and native Portuguese speakers, which made them reasonable substitutes for average non-returnee workers. This is in contrast to the characteristics of migrants and refugees in the current migration crisis in Europe. Notwithstanding, the results support the predictions of the standard textbook model for competitive labor markets; an increase in the number of workers lowered average labor productivity and wages.

Click here to go to the paper by Erik Mäkelä.__