Spatial concentration of ethnic groups may theoretically have positive or negative effects on the economic performance of those groups. I examine the effects of the ethnic enclave size on labor market outcomes of immigrants. I account for ability-sorting into ethnic enclaves by exploiting a Danish spatial dispersal policy under which new refugees were randomly dispersed across locations, conditional on three observed individual attributes. First, I find 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, the paper proposes an explanation for the earnings gain of ethnic enclave members. Enclave members benefit from more access to ethnic networks because ethnic networks disseminate job information which increases the job-worker match quality and thereby the hourly wage rate.
Journal of Labor Economics, 2009, Vol 27, Issue 2, p. 281-314