Immigration and prices

This paper examines the behavior of prices following the unexpected arrival of a large number of immigrants from the former Soviet Union (FSU) to Israel during 1990. I use store-level price data on 915 consumer price index products to show that the increase in aggregate demand prompted by the arrival of the FSU immigration significantly reduced prices during 1990. When one controls for native population size and city and month effects, a one-percentage-point increase in the ratio of immigrants to natives in a city decreases prices by 0.5 percentage point on average. It is argued that this negative immigration effect is consistent with FSU immigrants - the new consumers - having higher price elasticities and lower search costs than the native population. Thus immigration can have a moderating effect on inflation through its direct effect on product markets, and not only by increasing the supply of labor.