Labor Mobility, Entrepreneurship & Innovation: Evidence from Immigration Wait Lines
Abhinav Gupta, a Finance PhD candidate at NYU Stern, studies how labor mobility restrictions impact firm monopsony, entrepreneurship and overall innovation.
The past 50 years have seen an increase in incumbent firm profits and decrease in new firm formation giving rise to concerns on decreasing US business dynamism and innovation. A central question is why this has happened. Many observers have documented a decrease in labor mobility (the ability of workers to move across firms) over the same horizon and suggested a potential link between these two trends. However, it is difficult to find the causal impact of labor mobility on business dynamism.
In this paper I study this question by exploiting a natural experiment in US immigration system which suddenly increased Green Card related mobility restrictions for only Indian and Chinese employees in October 2005. Using matched employee-employer data from LinkedIn, I confirm that this shock reduced inter-firm employee mobility for Indian and Chinese employees. I rule out other explanations such as changes in employee composition, selection effects, or concurrent changes in India or China driving my results.
This sudden decrease in labor mobility increased incumbent firm value, with $28.7 billion in abnormal stock returns for firms with Indian and Chinese employees in the ten days following the announcement. The slowdown of internal promotions for Indian and Chinese employees suggests monopsony power as the primary channel increasing firm value.
The shock to immigrant mobility also had an adverse impact on entrepreneurship. Immigration related mobility restrictions disproportionately lowered the propensity of Indian and Chinese employees to join startups compared to incumbent firms. This distortion in labor supply to startups reduced new firm formation, with 12,000 fewer new firms founded in markets with more Indian and Chinese employees in the next five years. The distortion also decreased the funding and IPO of existing startups that had Indian and Chinese co-founders. I plan to further extend my results to study more innovation-based outcomes by connecting this data with patent filings.
My current results reinforce the differential impact of labor mobility on incumbents and startups, providing direct causal evidence of the impact of labor mobility on business dynamism. These results also have significant policy relevance as they help to understand the impact of the US Green Card regulations on aggregate economy-wide and innovation outcomes.
