Regulating Labor Immigration: The Effects of Lifting Labor Market Testing

We study the effects of lifting labor market testing (LMT) requirements for non-EU workers in Finland utilizing regional variation in occupations exempted from labor market testing. We use individual and firm-level administrative data from 2011–2020 and hand-collected data on local changes in labor market testing rules since 2012. We estimate the effects using a staggered difference-in-differences design. We find that lifting the LMT requirement leads to an increase in the inflow of non-EU workers to treated occupation-regions. A further breakdown of this inflow shows that the effect is mainly driven by non-EU individuals already in Finland. In five years, treatment effect on the annual earnings of natives is -€647 (around 2%) at the occupation-region level and -€1,121 (around 4%) at the individual level. The observed earnings effects, especially at the occupation-region level, are driven by low-wage and service-oriented occupations. Despite the negative effects on earnings, we observe positive employment effects for some incumbent worker groups at the individual level. Conversely, at the occupation-region level, there is an increase in the number of job seekers in the exempted occupations. At the firm level, we observe an increase in the number of non-EU employees and suggestive evidence of firms expanding in general.