Immigration, Endogenous Technology Choice and Welfare Analysis

Abstract

This paper analyzes the long run welfare effects of immigration in a model with endogenous technological change. Existing theoretical models predict that immigration would depress the wages while empirical findings show insignificant wage effects of immigration. In order to match the theory with empirical findings, I embed endogenous technological change in a model similar to Auerbauch and Kotlikoff (1987) and compare it with a baseline model where firms have constant production technology. First, I find that 2% increase in high-skilled immigrants in a model without endogenous technology choice high-skilled native wages would decrease by 10.4% while low-skilled native wages would go up by 7.4%. On the contrary, in a model with endogenous technology choice, high-skilled native wages will decline only by 1.3% and low-skilled native wages will increase only by 0.2%. Second, the model without endogenous technology choice would predict a negative welfare effect of high-skilled immigration on the high-skilled natives and a positive and bigger (74% higher) effect on the low-skilled natives. On the contrary, the model with endogenous technology choice predicts that high-skilled immigration will increase the welfare of both high-skilled and low skilled natives. Specifically, welfare effect of high-skilled immigration on skilled natives are 109% higher when endogenous technology is allowed as compared to the baseline model without endogenous technology choice. These results imply that if endogenous technology choice is not taken into account, the long run analysis of immigration on the welfare and the economy will be incomplete and even misleading.