ISOLATING THE CONSUMPTION EFFECT OF IMMIGRATION ON FIRM EXPANSION AARON MEDLIN GIHOON HONG ABSTRACT This paper investigates how local firms respond to immigrant consumption at the extensive margin. We use an innovative approach to isolate the consumption channel by using only non-labor force participating immigrant inflows from the American Community Surveys from 2002 to 2011. As would be expected, we find that non-labor force participating immigrant inflows are highly correlated with establishment entry level and negatively so with exits indicating a strong influence on firm expansion from immigrant consumption. (F22, F66) I. INTRODUCTION What is often left out of the public debate on immigration is that immigrants are just as much consumers as migrant workers. Immigrants after all buy homes, buy cars, clothes, groceries, and generally consume just like natives. While prior research on immigration has primarily focused on the impact on native wages in the labor market, little attention has been paid to the benefits from the increased consumption immigrants bring, and more specifically, how that consumption contributes to the growth of firms. Building on extant literature, this paper endeavors to isolate the consumption channel of immigration through changes in the entry and exit levels of business establishments in cities across the United States. Basic supply and demand predicts a rapid increase in labor supply holding demand constant will lower wages. But the fact that the consensus of the literature finds the effect of immigration on native wages to be negligible (Borjas, 2013; Peri and Sparber, 2011), suggests there is more to the story. Some interesting explanations have been put forth to explain this finding. For example, Card (1990) posited the impact on the labor supply might be offset by native outflows in response, known as the native displacement hypothesis, but Card (2001) himself found no significant relationship between native outflows and immigrant inflows. Borjas (2006) seemingly confirmed Card’s hypothesis, but an analysis by Peri and Sparber (2011) find his empirical approach suffered from specification bias. Hong and McLaren (2015) further disputes the native displacement by finding that immigration leads to an increase in native employment. The increased economic opportunity caused by immigrants is attractive to natives and contributes to a “virtuous cycle” of growth. A better model is the general equilibrium approach. A static wage rate can be explained by a compensatory shift in labor demand with labor supply. Even in the event of a large influx of immigrants such as during the Mariel Boatlift, Card (1990) found no evidence of a wage decrease. Re-examining the seminal experiment, Bodvarsson, Lewer, and Van den Berg (2008) concluded that the rightward shift on the labor supply curve was met with an equal shift in the demand curve effectively neutralizing any labor substitution effects from immigration and leaving wages the same. More recently, Hong and McLaren (2015) provide evidence of positive wage gains and employment from immigration in the non-traded goods sector. The authors interpret these findings to be consistent with a greater increase in labor demand. What the