Abstract

We build a micro-founded theory of international migration, in which heterogeneous individuals endogenously sort into domestic and foreign labor markets and match with productivity-differentiated firms. Multiple economic consequences of migration policies are factored in, including wage and employment effects, entry and exit of firms, market size, international trade and fiscal implications. In a numerical experiment we find that imposing a prohibitive migration cost from Mexico to the US increases the real wages of 33% of US residents - those below the median wage, whereas 59% are worse off. The main driving force hinges on the pattern of selection of Mexican workers. Losses induced by Mexican immigration for the below-median US workers are confined and can be fully compensated by implementing a redistributive policy that is financed through a lump sum tax on Mexican immigrants of less than a dollar per day.

Authors: Michal Burzynski (LISER), Pawel Gola (University of Cambridge)