Immigration and Wages in General Equilibrium: A Theoretical Perspective

Abstract

We propose a variant of the Ricardo-Viner model featuring three skill levels to analyze skill-based selection in immigration policies. We analyze both wage and welfare effects of alternative types of immigration scenarios. The model incorporates various adjustment mechanisms that may be responsible for why host country wage effects of immigration may in some cases be low, and large in others, as suggested by the empirical literature. A crucial thrust of the paper is to take into account the general equilibrium repercussions from an endogenous price adjustment for both tradable and nontradable goods. We identify conditions under which goods price effects dominate the effects of factor complementarity, potentially leading to welfare losses.