Immigration Restrictions and Skill Premia

Although restrictive immigration policies are pervasive in developed countries, there is a tendency to allow skilled labor to migrate more freely than unskilled labor. In models where free trade in product markets implies factor price equalization, after adjusting for efficiency differences, as in Trefler (1993) and Kennan (2013), increased immigration flows affect wages by increasing the effective supply of labor in the world market. If restrictions on the migration of skilled labor are relaxed, while unskilled labor is not allowed to migrate, it may be that unskilled labor nevertheless benefits. The effective supply of skilled labor increases, and if skilled and unskilled labor are complements in production, this will increase the wage of unskilled workers, even though they do not move. On the other hand if different types of labor are substitutes, then allowing skilled workers to migrate tends to decrease the wages of unskilled workers who are not allowed to migrate. The paper attempts to quantify these effects, using a model in which skilled and unskilled labor are imperfect substitutes in production, while skilled workers are less strongly attached to their home locations (and therefore more likely to migrate). The model is based on Kennan (2013), the main modification being a nested CES technology in which labor is a composite of skilled and unskilled components, and output is produced by combining this composite with capital.