The (Non-Parochial) Welfare Economics Of Immigration

We study the effect of immigration on world welfare. The world consists of two areas, South and North, the former populated by low-skill workers, and the latter by both low and high skill workers. A trade union in the North keeps the wage of low-skill workers above the Walrasian wage, generating unemployment of low-skill workers. Citizens fund unemployment benefits through taxation. Immigration from South to North has two effects: a mixed native-foreign working-class lowers union power, and hence the union mark-up on the Walrasian wage; it also lowers the solidarity of the employed citizens with the unemployed (who now consist in part of non-natives) and thus the unemployment benefit. We calculate the optimal level of immigration, from the viewpoint of an observer who maximizes world welfare, according to several social welfare functions. The optimal level of immigration for a Rawlsian observer is significantly less than the open-borders equilibrium level.