Migration Policy in a Small Open Economy with a Dual Labor Market

The paper uses a two-sector efficiency-wage model to analyze the consequences of immigration for a small open economy with a dual labor market. Immigrants are characterized by an (exogenous) return probability. Legal regulations impose preferential hiring of natives or "old" immigrants. As a result, there is sectoral segregation between natives and immigrants, leading to discrimination of the type equal pay for equal work, but unequal "work." In the short run (with sector-specific capital), immigration has a positive first-order impact on natives' welfare if migration policy favors segregation through high return rates or restrictive hiring practices ("guest-worker system"). In the long run, its effect is only determined by factor intensities (2 Y 2 model). Finally, the improved integration of migrants yields efficiency gains and improves aggregate welfare of all residents