Immigration with imperfect competition: a comment

Chao and Yu (2002) study immigration impact in a host country in the presence of imperfect competition. In their two sector model, when the monopolized non-traded service sector is skilled labor intensive, skilled labor immigration improves the welfare of the host country residents but unskilled immigration can be welfare-reducing. This paper considers immigration impact with monopolistic competition, which is another popular way of modeling imperfect competition. Using a simplest possible general equilibrium model of monopolistic competition with skilled and unskilled workers, it is shown that immigration of skilled workers can be welfare-reducing for the native skilled workers, although it does improve the welfare of the unskilled. Specifically, it depends on the ‘sigma', the elasticity of substitution between the varieties. On the other hand, immigration of unskilled workers improves the welfare of the skilled workers, while it does not affect the native unskilled workers. I would like to point out that immigration impact can be very different depending on the type of imperfect competition.