When Immigration Goes Up, Prices Go Down

By Shankar Vedantam
Monday, October 15, 2007

Last week, a gallon of gas at an Exxon station in the tony suburb of Bethesda cost $2.99.

At an Exxon station in the less affluent suburb of Wheaton, a gallon cost $2.63 -- 36 cents less.

Both Exxon stations are located near a subway line that goes to downtown Washington. Both are in the same county: Montgomery.

Why would the same company charge you 14 percent more for an identical product in one location?

Because it can.

That's the simple answer. The free market relies on the willingness of consumers to punish businesses that overcharge. If you are willing to pay extra for the convenience of filling up your car at an expensive gas station on your way to work, rather than the cheaper one that is a little out of your way, why blame Exxon for taking your money?

But there is also a more interesting answer, which brings us to the subject on tap: The difference in gas prices may have to do with the fact that Wheaton has many more immigrants who are not yet fully assimilated into the economy than does Bethesda. Immigration, economist Saul Lach recently found, plays a powerful role in holding down prices. For every 1 percent increase in the ratio of immigrants to natives, prices go down by about 0.5 percent, according to Lach's new study about the effects of 200,000 Jews immigrating to Israel from the former Soviet Union in 1990.

Aviv Nevo, an economist at Northwestern University in Evanston, Ill., said immigrants to the United States -- and price-conscious consumers in general -- have the same effect: "The broad principle is immigrants change the mix of consumers and will likely change the relative prices of different products."

While sudden increases in immigration could drive up the cost of housing and retail items where production cannot be ramped up quickly, Nevo said merchants quickly realize there is more profit to be made by decreasing prices on everyday items: "You decrease the price by 10 percent but increase the amount you sell by 200 percent."

Lach's research has particular resonance given the contentious debate over immigration that has recently roiled the Washington area and the nation. Several jurisdictions in Virginia and a few in Maryland are attempting crackdowns on illegal immigrants. Arguments about immigration often revolve around cost. Poor and recent immigrants are said to crowd schools and stretch public services.

Prince William, Stafford and Loudoun counties, which have recently experienced dramatic changes in the ratio of immigrants, have led the local effort to deny services to undocumented foreigners. If Lach's thesis is correct, however, successful measures might have the opposite effect than the one desired -- as immigrants are pushed away, prices on everything from diapers to dairy items might go up. (Instead of paying more money for social services, residents will pay more money to Exxon.)

Lach's thesis -- that immigration acts as a brake on inflation -- is unusual in that it explores the effect immigrants have on the demand side of an economy, and not just as workers who lower the costs of child care, for example, by increasing the labor pool.

Lach said in a new paper published in the Journal of Political Economy that immigrants tend to do what Bethesda drivers do not do often enough: They go the extra mile to the cheaper gas station. Lach found that new immigrants spend much more time comparison-shopping than natives -- perhaps because their economic circumstances force them to look for the best deals, or because they have more discretionary time to compare prices, or because they have not yet developed brand loyalties.

Whatever the reason, they force markets to run more efficiently, and thereby make cheaper prices available for all. Lach's study was based on an analysis of 915 products at 1,837 retail stores in 52 cities, after the abrupt influx of 200,000 immigrants to Israel from countries in the former Soviet Union. The economist, who works at the Hebrew University of Jerusalem, collected 199,425 price quotes.

"Immigrants are more sensitive to prices and also are more inclined to search for lower prices," Lach said in an e-mail. "This prompts stores not to increase their prices as often or as steeply . . . or even to lower their prices in order to capture as many immigrant customers as possible. The population at large should benefit from this downward pressure on prices because stores cannot discriminate between natives and immigrants."

Joshua Angrist, an economist at MIT, said Lach's paper is interesting, but added that research also shows the poor sometimes pay more for things because retailers tend to avoid setting up shop in poor neighborhoods. Wealthy people also have more financial leverage for expensive purchases.

The downward effect on prices that Lach found was most evident for everyday items. Ironically, what the research suggests is that poor, new immigrants -- the folks who trigger the most concern among anti-immigration activists -- might impose the strongest brake on prices because they are hungriest for good deals. Once settled, immigrants apparently join the ranks of people who pay $2.99 for a gallon of gas that elsewhere costs $2.63.

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