On the potential interaction between labour market institutions and immigration policies

Purpose – We analyse the effect of unemployment and labour institutions such as employment protection legislation, coverage of unemployment benefits, minimum wages, union power and tax wedge on migration flows. We allow for interactions of these institutions with migration entry laws, as both affect equilibrium wages and employment in destination countries, influencing mobility decisions of immigrants. Design/methodology/approach – We use data on migration flows for a sample of 15 OECD countries over the period 1980-2006. The relationship between flows and labour institutions is analysed using OLS techniques and including destination and origin-by-year fixed effects. The coefficients of interest are identified through within country variation. We test the robustness of our results to different specifications using, among others, dynamic models for panel data. Findings – We find strong and negative effects of unemployment, employment protection and migration policy on flows. The negative effect of migration policy on flows is larger in countries with high than in countries with low employment protection. We find positive effects for minimum wages, unemployment benefits and union power. We show heterogeneous effects depending on the group of countries of origin and destination. Research limitations/implications – While the identification strategy allows us to estimate the effects of interest, our baseline estimates may suffer from endogeneity problems in terms of omitted variable bias and reverse causality. Our sensitivity checks provide mixed results and show that baseline estimates are not always robust to different specifications. Further work is needed to better address the problem of endogeneity. Originality/value – The paper adds to the previous literature on the determinants of immigration flows by explicitly considering the labour market environment in destination countries. Our results provide insights into potential interaction effects and coordination of reforms in labour markets and immigration policies.