Abstract

Joint work with Michael Amior

We argue that immigration can strengthen the monopsony power of firms. If migrants have low reservation wages, firms can profit from “cheap” migrant labor by offering lower wages, at the cost of foregoing native workers with higher reservations. This monopsonistic trade-off can generate large negative effects on native employment that exceed those in competitive models, and which are concentrated among low-paying firms. We validate these predictions using firm-level evidence from a large immigration wave in Germany, and we corroborate our findings using more aggregated data from the US. These adverse effects are not inevitable, and may be ameliorated through policies which constrain monopsony power.