October 3, 2019 3:33PM

The Economics of Ethnic Enclaves

Ethnic enclaves are communities with high concentrations of one ethnic group usually resulting from immigration patterns. Many scholars believe that ethnic enclaves slow immigrant assimilation into American society, a phenomenon known as the “enclave thesis.” Recent academic literature on the enclave thesis has yielded mixed results, but there are also severe research design problems due to data limitations, a lack of definitional consensus, and seemingly insurmountable endogeneity. This post will analyze key findings within the ethnic enclave literature.

Background and Definitions

Concerns about ethnic enclaves, specifically their impact on assimilation and increased crime rates, run deep. Dan Cadman of the Center for Immigration Studies is concerned that they spread crime. Reihan Salam of the Manhattan Institute wrote that “an ongoing [immigration] influx will tend to reinforce ethnic enclaves and endogamous marriage, both of which impede assimilation.” Salam devoted a few pages of his book Melting Pot or Civil War? to the pernicious effects that ethnic enclaves have on assimilation, ultimately concluding: “But is this any reason to be alarmed? The answer is yes.” Salam’s exhortation to panic was outdone by Andrew McCarthy, who thinks that Muslim enclaves are going to overwhelm European legal institutions and impose Sharia law in the wider society.

Beyond the writings of pundits, there is expansive academic literature on the effects of ethnic enclaves. One of the biggest disputes within the literature is the definition – what exactly is an ethnic enclave? Some studies define enclaves as those communities in which immigrants cluster in residential housing, like Borjas (1995) and Sanders and Nee (1989). Other studies define enclaves as segregated workplaces comprising a specific ethnic group, like Alejandro and Portes (1989). We note where these distinctions matter below.

The ethnic enclave literature also suffers from data limitations. Lower skilled immigrants tend to cluster in enclaves while higher-skilled immigrants find work outside the enclaves. Separating an immigrant’s workplace and personal residence is crucial to statistically account for all members of an ethnic enclave. Many studies control for this factor, but there are other factors such as immigrants’ legal status and the educational quality and regulatory restrictions within the enclave that are rarely controlled for. Although we must be wary of overcontrolling, proper statistical analysis must have enough controls to identify and separate the effects of enclaves from other endogenous variables.

Lastly, many of these studies have exploited recent immigrant arrivals in Western Europe. There have been considerably fewer studies evaluating the effects of recent immigrant inflows into U.S. ethnic enclaves. For various legal, cultural, and economic reasons, Europe’s immigration experience is very different from that of the United States.

Major Findings

Many studies exploit the exogenous placement of refugees by governments as quasi-natural experiments to study how the assimilation rates of those placed in ethnic enclaves compare to those who do not settle in ethnic enclaves. Since government agencies make the settlement decisions for refugees, endogeneity is less of a concern. A recent study by the National Academy of Sciences by Linna Martén, Jens Hainmueller, and Dominik Hangartner (2019) analyzed the marginal effect of increased ethnic clustering on employment outcomes by using Switzerland’s dispersal placement program for recently arrived refugees. The program assigns refugees to specific regions in the country. This program allowed researchers to compare labor market outcomes between the government-placed refugees and non-refugee immigrants who chose to settle in ethnic enclaves. The study found that settling in an ethnic enclave increased the probability of employment in Switzerland. These effects were observed with respect to the number of co-nationals, ethnicity, and language concentration in said enclaves, indicating robust short- and medium-term results.

Sweden used a similar placement strategy for refugees. Economists Per-Anders Edin, Peter Fredriksson, and Olof Åslund (2003) discovered that a one standard deviation increase in an area’s co-ethnic population caused a 13 percent bump in earnings for low-skilled immigrants of the same ethnicity placed in the area by the government. Another study of an exogenous refugee-placement program in Denmark reached three conclusions: first, there is “strong evidence that refugees with unfavorable unobserved characteristics self‐select into ethnic enclaves. Second, a relative standard deviation increase in the ethnic enclave size increases annual earnings by 18 percent on average, irrespective of skill level. Third, further findings are consistent with the explanation that ethnic networks disseminate job information, which increases the job‐worker match quality and thereby the hourly wage rate.”

Some studies, however, suggest opposite employment effects, particularly for low-skilled immigrants in ethnic enclaves. For example, George Borjas (2000) measured the impact residential segregation has on “economic assimilation,” or the convergence of immigrant wages with their native-born counterparts. Borjas found that increased residential segregation led to adverse wage effects for both newly arrived and least-educated immigrants. He also observed that increased residential sorting into ethnic enclaves lowers the likelihood an immigrant will become English-proficient but increases the likelihood they will further their education. Borjas attributes these negative results to the lack of diversity within ethnic neighborhoods after 1965, suggesting that the increased homogeneity among immigrants is depressing labor market opportunities and assimilation practices.

The National Institutes of Health found that higher ethnic concentrations in enclaves yield negative employment effects for immigrants in the United States. Hispanic immigrants living in an enclave face an almost 11 percent reduction in earnings relative to Hispanics who live elsewhere, a figure which translates to an approximate $1.37 hourly wage reduction. The authors caution, however, that their small sample size may prevent their results from representing all ethnic groups.

Another study by economists Roberto Pedace and Stephanie Rohn Kumar (2012) evaluated the effects of increased ethnic concentrations on wages and employment propensities for several ethnic groups in the United States, including Mexicans, Central Americans, Cubans, Chinese, and Indians. For Mexican, Puerto Rican, and Cuban males, the overall wage effects of living in an ethnic enclave were negative and statistically significant. For higher educated Korean and Indian immigrants, however, the opposite was true. In addition, economists Barry Chiswick and Paul Miller (2005) found that the costs of increased competition (supply) inside an ethnic enclave offset the potential economic gains from larger ethnic networks in California.

Entrepreneurship inside ethnic enclaves also affects whether their members receive net positive or negative economic impacts. Per-Anders Edin, Peter Fredriksson, Olof Åslund (2003) conclude that higher rates of ethnic self-employment put upward pressure on wages. Alejandro Portes (1987) describes the importance of Cuban-owned banking services that extended funds to recent immigrants with little collateral. These services immensely contributed to the entrepreneurial vibrancy of Miami, especially in the wake of the Mariel Boatlift. Additionally, economist Maude Toussaint-Comeau found that as the size of the ethnic network increases (an indicator of the enclave’s quality), so does the probability that immigrants are self-employed.

A major qualification in the above-cited literature is that increasing an enclave’s educational quality significantly improves employment outcomes and rates of cultural assimilation, such as English language acquisition. For instance, Anna Daam (2014) found that in Denmark, co-ethnics with higher skills and employment rates matter far more than the nominal size of the ethnic enclave. In other words, improving the human capital within and around the ethnic enclave has a far greater effect on immigrant economic success than whether or not immigrants live in ethnic enclaves. The Institute of Labor Economics surveyed the literature and observed that improved quality measures, like education and income, are more important than the scale of an enclave. Economists David M. Cutler, Edward L. Glaeser, Jacob L. Vigdor (2007) also found that an immigrant’s education is more important than his residence in an ethnic enclave. Another study indicates that increased legalization status for immigrants increases immigrant wages and the likelihood they will become naturalized citizens.


Enclaves are often formed naturally, and they lower the costs of gathering information for newly arrived immigrants. These immigrants benefit economically and culturally, and these benefits are often perceived as outweighing the potential costs of enclave life. Since ethnic enclaves will not disappear, making them better is the easiest approach to encourage faster and better assimilation.

Granting illegal immigrants legal status would encourage many to contribute in new ways to the formal market economy and improve their skills and income over the long run. Also, research has shown that legalizing illegal immigrants incentivizes many to move from higher immigrant populations to lower immigrant populations – a potentially important development that can lead to more assimilation.

The literature on ethnic enclaves produces many consistent findings. Many of these findings could aid in the creation of immigration policies that better affect immigrant assimilation. Most importantly, immigrants residing in enclaves are more likely to be employed and employed with higher wages when the average education and entrepreneurial levels of said ethnic enclaves are higher. Adopting policies to increase entrepreneurship by relaxing regulatory burdens, like occupational licensing and minimum wage, will give many immigrants the opportunity to more easily establish new businesses. Ethnic enclaves assist in assimilating immigrants into the American economy, and policies focused on maximizing entrepreneurial activity will most improve the enclave’s quality.

Michael N. Peterson helped research and write this blog post.