Skilled immigration, firms, and policy

Abstract

We develop a two-sector dynamic general equilibrium model with skilled immigration that focuses on the role of firms. The model is consistent with data on firm demand for foreign labor and firm size in the United States. Monopolistically competitive firms in the skill-intensive sector differ in productivity and a subset of relatively larger firms hire foreign workers subject to skilled immigration policies that are similar to the United States: Firms face hiring costs and there is an immigration cap that binds if the aggregate demand for foreign workers exceeds a quota. A binding immigration cap reduces firms’ demand for foreign skilled workers and, quantitatively, accounts for 16.82% of the hiring distortion in the decentralized equilibrium when compared to the first-best allocation. We evaluate the effects of different immigration cap changes and quantify the welfare implications for domestic households.