The labour demand response to supply shocks. The indirect effect of immigration

The economic literature is debating from long time on the identification of the impact of immigration on native wages and recent studies seem to validate the result of an average null effect. Nonetheless, the adjustment mechanisms of the labour market need to be further analysed. In particular, we want to study how firms respond to an increase in the foreign labour supply, focusing on the Italian case. We contribute to the ongoing debate by replicating the methodology of Dustmann and Glitz (2015) with RIL data – a firm-level panel dataset on Italian firms. The aim of the study is to measure to which extent the labour demand accommodates to a supply shock with an increase in the total production or with the adoption of more labour-intensive technologies. Our main result – obtained with an instrumental variable approach – shows that the second effect is dominant and greater than the one documented in previous studies for other countries. In line with the reference literature, the result holds in particular for the manufac- turing sector, while in sectors less-exposed to international competition we can suppose a greater effect on prices than on quantities.