Effects of immigration in frictional labor markets: theory and empirical evidence from EU countries

Immigrants are new comers in a labor market. As a consequence, they lack of social networks and other country specific and not directly productive valuable assets affecting their relative bargaining position against employers. We introduce this simple observation into a matching model of the labor market and show that immigrants increase employment prospects of competing natives. To test the predictions of our model, we exploit yearly vari- ations between 1998 and 2004 in the share of immigrants within occupations of 12 European countries. We identify the causal impact of immigrants on natives' employment rate using an instrumental variable strategy based on historical settlement patterns across host countries and occupations by origin countries. We find that natives' employment rate increases in oc- cupations and sectors receiving more immigrants. Moreover, we highlight the heterogeneity of this impact across groups of immigrants and host countries along dimensions that affect immigrants-natives relative reservation wages.