Migration and Wage-Setting: Reassessing the Labor Market Effects of Migration

This paper employs a wage-setting approach to analyze the labor market effects of immigration into Germany. The wage-setting framework relies on the assumption that wages tend to decline with rising unemployment, albeit imperfectly. This enables us to consider labor market rigidities, which are particularly relevant in Germany and other European countries. We find that the elasticity of the wage-setting curve is particularly high for young and well-educated workers. Moreover, we find evidence that natives and foreigners are imperfect substitutes in the labor market. As a consequence, natives tend to benefit from immigration while foreigners tend to lose: a 1 percent increase in the German labor force through immigration increases native wages by about 0.3 percent and reduces their unemployment rate by 0.1 percent, while the wages of the foreign workforce decline by 2.4 percent and their unemployment increases by 0.9 percentage points.