Working Paper: CEPR ID: DP18091
Authors: Andrea Ariu; Tobias Müller; Tuan Nguyen
Abstract: In this paper, we provide new explanations for the puzzling findings in the literature that migrants do not decrease natives' wages, and that skilled immigration can actually increase them. We develop a model with regional labor markets and heterogeneous firms in which workers of different skill levels are imperfect substitutes, but for a given skill level, natives and migrants are perfect substitutes within a firm. In this setting, a skilled labor supply shock due to immigration has two consequences. First, it induces skill-intensive firms and skill-abundant regions to expand. These across-firm and across-region reallocations reduce the within-firm and within-region substitution between skilled and unskilled workers, thus limiting relative wage adjustments. Second, the average native's wage can be partially sheltered from the negative effect of immigration depending on the geographical settlement patterns of immigrants. Both mechanisms make natives and migrants appear as imperfect substitutes at the aggregate level. Quantitatively, our simulations show that the negative impact of immigration on natives' wage is halved when the across-firm and across-region reallocation mechanisms are at work. Finally, both theory and simulations show that when these mechanisms are coupled with human-capital externalities that are skill-neutral at the firm level but skill-biased on aggregate, skilled immigration can increase absolute and relative skilled wages. Therefore, firm heterogeneity, local labor markets, and human-capital externalities are crucial for understanding the impact of immigration on natives' wages.
Keywords: immigration; firm heterogeneity; wages
JEL Codes: F22; J61; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| immigration (F22) | natives' wages (J31) |
| increase in skilled labor supply (J24) | expansion in skill-intensive firms and regions (J24) |
| expansion in skill-intensive firms and regions (J24) | reallocates labor and limits wage adjustments (F16) |
| geographical distribution of immigrants (J61) | wage outcomes (J31) |
| regions that receive more immigrants (J61) | production increases (E23) |
| production increases (E23) | mitigate wage declines for natives (F66) |
| skilled immigration with human capital externalities (J61) | increase both absolute and relative skilled wages (J39) |