International migration in an equilibrium matching model

Abstract

This paper considers the effects of labor mobility in a specific factors model when unemployment arises for matching-theoretic reasons. Immigration raises the welfare of domestic workers even though the increasing labor supply decreases wages if firms create more jobs in response to inflows of immigrants. The determinants of the patterns of labor movements are considered in a two-country model. Unemployed workers decide whether to leave their country not only on the basis of the wage differential, but also in response to the difference in unemployment rates between the two countries. The two countries can diverge in equilibrium in the sense that one country exhibits a high wage but a high unemployment rate whereas the other exhibits a low wage but a low unemployment rate. It is possible to see movements of workers from a high-wage country to a low-wage country if the unemployment rate is higher in the former than in latter and wages are not high enough to compensate for the high level of unemployment in the high-wage country.