Do foreigners cushion native jobs? The case of European regions in the 1990s

This paper investigates whether foreigners cushion native labour during the phases of the economic cycle. The theoretical model, based on the work of Blanchard and Katz (Brookings Papers on Economic Activity 0(1): 1-75, 1992), assumes that foreigners supply labour with a higher wage elasticity than natives. The empirical analysis, based on an unbalanced panel of 161 European regions during 1988-97, shows that following a labour demand shock the variability of native employment growth is lower the higher the proportion of foreign citizens in the local labour force. These results suggest that foreigners absorb some of the effects of the shock, shielding natives from its full impact. The analysis also reveals that the main channel mediating this 'cushioning' effect is the inter-regional migration of foreign workers, followed (as a far distant second) by their higher/lower unemployment rates.