RESEARCH PROPOSAL

Research Proposal “Examining the Relationship between Unemployment and Immigration”



Research Proposal “Examining the Relationship between Unemployment and Immigration”

Chapter 2: LITERATURE REVIEW

At the outset, economic theory took an interest in the economic impact of immigration on the labor market of the host country in an indirect way, linking this phenomenon to existing theories. It is only later, from the 1960s that trends of economic thought attempted to truly take into consideration international migrations in their theoretical paradigm (Sjaastad 1962). But the impact of immigration on the economy and the labor market of the host country have especially been addressed through empirical studies, which generally reach the conclusion that the effects of immigration on wages and employment are negligible.

The articles of Todaro (1969) and of Harris and Todaro (1970) are considered to be founding works for the analysis of migration flows in a context of underemployment, with the presence of rigidities of real wages. They show that migrations are likely to have a negative influence on the general level of employment, since workers may be encouraged to migrate to certain regions, because of higher wages, even if the unemployment rate is higher. Berry and Soligo (1969) study the effects of immigration on the welfare of a representative agent of the destination country (representativity is established through the notion of relative factor endowments. They take an interest in the implications of the flows of factors on the welfare of individuals in the host country, in a neoclassical analysis framework. Berry and Soligo conclude that the resident agent benefits from an influx of immigrants (or from any additional production factor) since his income increases. By analogy, like international commerce, immigration is supposed to be a source of “exchange gains”. Greenwood and McDowell (1986) established that the impact of immigration on the wages and the employment of indigenous workers depended on the elasticity's of labor force offer and demand as well as on immigration quotas.

In general, the more inelastic the functions of offer and demand, the more a given migratory inflow will cause domestic wages to fall. The more the domestic labor force offer is elastic and labor force demand is inelastic, the more substantial the displacement of domestic workers by immigrant workers. Borjas (1994) shows that if the markets function in a perfect way, the excess of production which is generated by immigration will not be completely absorbed by the earnings of the newcomers since a “surplus of immigration” appears. Owing to the existence of complementarily in relation to unskilled work, the entry of immigrant workers (assumed to be predominantly unskilled) theoretically enables growth in the profitability of capital, as well as, probably, the relative wages of skilled workers in comparison with unskilled ones. In this respect, according to Borjas (1994), taking into account reasonable values for the key parameters, the homogeneous employment and perfect competition hypothesis, the surplus of immigration in Europe would be around 0.1% of the GDP. Friedberg and Hunt (1995) show that “immigration reduces the price of factors ...