In this paper, we provide new explanations for the puzzling findings that migrants do not decrease natives' wages and that skilled immigration can 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 induces skill-intensive firms to expand. These across-firm reallocations reduce the within-firm substitution between skilled and unskilled workers, thus limiting relative wage adjustments. When this mechanism is coupled with human capital externalities that are skill-neutral at the firm level but skill-biased on aggregate, the same skilled immigration shock can increase absolute and relative skilled wages. These two mechanisms are quantitatively important: the negative impact of immigration on natives' wages is reduced by at least one-third when the across-firm reallocation mechanism is at work, and human-capital externalities can revert the sign of this relation.
(co-authors: Andrea Ariu, Tuan Nguyen)
