Integrating the East: The Labour Market Effects of Immigration

The paper evaluates the potential gains from labour immigration for the European Union. After a review of the East-West migration problem and recent western migration policies, governmentally controlled labour immigration is studied in a framework with unions, unemployment and heterogenous workers. The model predicts a decline in wages with unskilled and skilled immigration if both types of workers are complements. Only skilled migration reduces unemployment, however. This disequilibrium framework is calibrated using German data and compared with an equilibrium framework to study migration gains and distributional effects. If labour markets are in equilibrium, unskilled immigration will provide larger gains than skilled immigration, but the gains will be small, and partly at the expense of the group of labour that experiences no competitive threat. In the face of unskilled unemployment, unskilled immigration can result in large migration losses while skilled immigration can provide substantial migration gains.