Migration and imperfect labour markets: Theory and cross-country evidence from Denmark, Germany and the UK

Herbert Brücker, Andreas Hauptmann, Elke J. Jahn and Richard Upward

Concerns that immigrants take jobs from natives and reduce their wages are widespread in most European countries. The recent financial crisis and resulting recession has further raised sentiments against immigration. At the same time, the impact of immigration on labour markets is also subject to controversy in the academic literature. While many studies find no discernible effects on natives' wages and employment opportunities, other studies argue that the impact may be substantial. 

In this Nottingham School of Economics working paper, in the European Economic Review, Richard Upward and co-authors contribute to this literature by taking a fresh look at the effects of immigration on employment and wages using a theoretical and empirical framework that considers so-called “imperfect” labour markets. Such labour markets are characterized by the presence of institutions. That is, systems of laws, bargaining rules, unemployment benefits and labour market programs that shape the behaviour of workers and employers. These institutions differ considerably across countries. For this reason a cross-country approach is applied to analyse whether, and to what extent, the labour market effects of immigration vary between countries depending on their institutional settings. The authors use micro data from Denmark, Germany and the UK to estimate the wage and employment effects of immigration in those countries. While migration to Germany surged following the fall of the Iron Curtain, migration to Denmark and the UK has also accelerated substantially since the turn of the century, partly as a consequence of the European Union's Eastern enlargement. The findings suggest that labour market institutions do play an important role in determining the wage and employment effects of immigration. In Germany, where immigrants concentrate in labour market segments with low wage flexibility, immigration has only minor wage effects, but a large impact on the unemployment rate. In contrast, in the UK and Denmark larger wage and smaller unemployment effects appear. Differences in the degree of wage flexibility in combination with the structure of labour supply can explain these differences.

European Economic Review, “Migration and Imperfect Labour Markets: Theory and cross-country evidence from Denmark, Germany and the UK” by Herbert Brücker, Andreas Hauptmann, Elke J. Jahn and Richard Upward.

http://dx.doi.org/10.1016/j.euroecorev.2013.11.007

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