Latent Human Capital and the Immigrant Mobility Advantage: A General Equilibrium Analysis

Children of low‐income immigrants in the United States systematically out‐earn children of comparable natives. I develop a dynastic general‐equilibrium model to explain this 'immigrant mobility advantage' and quantify the macroeconomic costs of the institutional frictions underlying it. The central mechanism is a wedge between latent human capital and realized earnings: immigrants are positively selected on ability but face institutional frictions that decay at rate λ. Calibrated to U.S. data, the model fits key empirical patterns and reveals that immigrant frictions cost the U.S. economy 4.94% of GDP. This loss is split between a static labor‐misallocation loss (1.57 pp) and dynamic effects on intergenerational investment in human and physical capital (3.37 pp). I find that friction decay (assimilation) accounts for 87% of the second‐generation advantage, with positive selection contributing the remainder. Finally, the model identifies a 'sign‐flip' threshold at λ ≈ 0.25, beyond which frictions persist too strongly for the mobility advantage to appear. Calibrating λ across ten OECD destinations recovers a distribution of friction values that straddles this threshold, consistent with the heterogeneous mobility gaps documented in the empirical literature.