Labor Market Effects of Migration-Related Supply Shocks: Evidence from Internal Refugees in Colombia

Abstract

Massive migrations due to civil war have raised the number of unskilled workers in cities in developing countries. Not only does civil war negatively affect forced migrants, but it also appear to contribute to deteriorating labor market conditions for all low skilled workers in destination cities. The internal refugee-related supply shock reduces wages and employment quality for urban unskilled workers who compete for jobs with forced migrants. While the decision to leave their municipalities of origin is explained by conflict dynamics, the decision to relocate in a particular city can be associated with the economic conditions of these destinations. To address the possibility that these location decisions might positively correlated with demand conditions in destination cities, we use an instrumental variables strategy. The instrument estimates the share of displaced persons that arrive to a particular host city as a function of the massacres perpetrated by illegal armed groups in the counties of origin, weighted by distance to the city of destination. Our instrument appears to be correctly addressing the attenuation bias. Our results show that a 10 percent supply shock increases the likelihood of informal- sector employment by 5 percent; has no effect on wages in the formal sector; but reduces wages by 2.3 percent in the informal sector. Given the widespread problem of civilian displacement during civil wars in the developing world, and the robust relationship between poverty and civil wars, our results have broad implications for welfare and economic development.

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