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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Aug 1, 2022

Labor Mobility, Entrepreneurship, & Firm Monopsony: Evidence from Immigration Wait-Lines


This paper examines how US immigration-induced labor mobility frictions affect entrepreneurship and firm monopsony. I exploit a natural experiment in the US immigration system that unexpectedly increased Green Card (GC) related job-switching frictions for Indian and Chinese immigrants 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, assortative matching, or concurrent changes in India or China driving my results. The shock disproportionately affected startups, lowering Indian and Chinese mobility to startups by twice as much as 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 with Indian and Chinese co-founders. The shock had the opposite impact on incumbent firms, with $28.7 billion in abnormal stock returns for public 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 an important channel for increased firm value. These results reinforce the differential impact of labor mobility on startups and incumbents, providing direct causal evidence of the impact of labor mobility on business dynamism.

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