Macroeconomic equilibrium with illegal immigration

Abstract

Illegal immigration (ILM) has been analyzed very little in the context of a macroeconomic framework. This paper introduces immigration of illegal unskilled workers into a simple model of an open economy with heterogeneous labor and, within this context, examines its macroeconomic and welfare consequences. The analysis shows that when skilled native wage setters and the policymakers behave as Nash players, ILM improves the position of the entire native labor force, i.e. both skilled and unskilled workers. Moreover, it reduces the inflationary bias associated with expansionary policies and thus has a positive overall impact on ‘social welfare’ in the economy. This result contrasts with several earlier studies that suggest that illegal immigration causes the position of at least some members of an economy to worsen. It also provides one possible macroeconomic explanation as to why illegal immigrants are currently tolerated in ‘inflation prone’ countries despite the fact that their presence sometimes causes social tensions. On the other hand, when native skilled workers and the policymakers behave cooperatively, ILM may in fact make the entire native workforce worse off. This result suggests that countries with ‘aggressive’ unions in skilled labor markets stand to gain from illegal immigration while countries with ‘soft’ unions may lose. Finally, it is shown that domestic labor market conditions determine the ‘optimum’ degree of government intervention in the illegal migrant labor market.