The Effect of Low‐Skilled Immigration on U.S. Prices: Evidence from CPI Data

I exploit the large variation across U.S. cities and through time in the relative size of the low‐skilled immigrant population to estimate the causal effect of immigration on prices of nontraded goods and services. Using an instrumental variables strategy, I find that, at current immigration levels, a 10 percent increase in the share of low‐skilled immigrants in the labor force decreases the price of immigrant‐intensive services, such as housekeeping and gardening, by 2 percent. Wage equations suggest that lower wages are a likely channel through which these effects take place. However, wage effects are significantly larger for low‐skilled immigrants than for low‐skilled natives, implying that the two are imperfect substitutes.