The macroeconomics of immigration, search and income inequality

This thesis comprises three chapters that analyze the impact of migration on welfare, inequality and macroeconomic stability in the presence of labor market frictions. Chapter 1 presents a dynamic two-country model with search frictions and endogenous labor migration to study the long-run implications of labor factor mobility on the economic performance and welfare of both source and host countries. In the model, the two countries differ in productivity, so that the high-TFP country (North) acts as the destination country for migration, while the low-TFP country (South) acts as the origin country. In this chapter, we prove that there always exists a unique steady-state equilibrium for the world economy, and find that a permanent increase in migration effort causes per capita income to rise in North and to fall in South. However, our simulations also show the existence of a job displacement effect in the host country that makes domestic employment fall in the longrun. In an extension of the baseline model, we test the long-run effects of a pro-employment protectionist policy of the destination country consisting in imposing a distortionary tax on the domestic firms hiring migrant workers. Our analysis shows that a positive tax rate on foreign employment can increase natives welfare, but only at the expense of losses in national production and employment. These results are robust across different degrees of substituability between migrant and native workers. Chapter 2 addresses the importance of the labor market structure when assessing the welfare and inequality effects of immigration. In particular, in this chapter we build and parameterize a general equilibrium model that allows to compare seven labor market specifications. These variants combine different assumptions concerning labor supply decisions, unemployment rates and wage levels, as well as different calibration strategies. Quantitatively, we find that the labor market specification matters. Modelling unemployment is instrumental to assessing the average welfare effects from immigration, while modelling labor force participation is instrumental to assessing its inequality effects. The specification choice is usually more important than the calibration of labor market elasticities, except for the choice of the elasticity of substitution between immigrants and natives. Chapter 3 analyzes the effects of immigration on natives welfare, labor market outcomes and fiscal redistribution in a selected group of 19 OECD countries. To this end, we build and simulate a search and matching model that allows for endogenous natives skill acquisition and intergenerational transfers. The obtained results are then compared with different variations of our benchmark model, allowing us to assess to what extent natives skill adjustment and age composition affect the impact of immigration. Our comparative statics analysis suggests that when natives adjust their skill in response to immigration, they successfully avoid, under most scenarios, any potential displacement effect in the labor market. Moreover, taking into account age composition plays a key role in assessing the fiscal impact of immigration, which turns out to be positive when we include retired workers that receive intergenerational transfers. Finally, we find that, under any scenario, our model yields more optimistic welfare effects than a standard search model that abstracts from skill decision and intergenerational redistribution. These welfare effects are found to be overall particularly positive when the migration flows comprise high-skilled workers.