Migration and Imperfect Labor Markets: Theory and Cross-country Evidence from Denmark, Germany and the UK

a NORFACE MIGRATION Discussion Paper (No. 2012-20) by Herbert Brücker (University of Bamberg, IAB Nürnberg, and IZA Bonn), Elke J. Jahn (IAB Nürnberg, Arhus University, and IZA Bonn) and Richard Upward (University of Nottingham)

Abstract

We investigate the labour market effects of immigration in Denmark, Germany and the UK, three countries which are characterised by considerable differences in labour market institutions and welfare states.

Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labour supply shocks, and, hence, the labour market effects of immigration.

We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly.

We find that wage flexibility is substantially higher in the UK compared to Germany and, in particular, Denmark.

As a consequence, immigration has a much larger effect on the unemployment rate in Germany and Denmark, while the wage effects are larger in the UK. Moreover, the elasticity of substitution between natives and foreign workers is high in the UK and particularly low in Germany.

Thus, the pre-existing foreign labour force suffers more from further immigration in Germany than in the UK.

Full report (PDF 42pp)

JEL codes: F22, J31, J61

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