The productivity effect of migrants: Wage cost advantages and heterogeneous firms

Empirical evidence for the US shows that migrants increase the productivity of regions. To explain the impact of migrants on the average firm productivity we construct a general equilibrium model with monopolistic competition a la Melitz (2003). We consider heterogeneous firms with different productivity levels and imperfect substitutability between migrants and natives. This gives rise to wage differences between natives and migrants. As a consequence, firms with a higher share of migrants realize wage cost advantages. The heterogeneous distribution of migrants in our model fosters regional disparities. In equilibrium, it depends on the migrant share which kind of firms survives in the market. The only firms to stay in the market are those which are highly productive or able to compensate a lower productivity level through wage cost advantages. We show that a higher migrant share may explain a higher average productivity in a region. The welfare effects for natives are ambiguous.