The wage effect of immigration on European labor markets -

Abstract

In 2010, the beginning of the Arab Spring brought about instability to the Arab world and with it new waves of immigration towards Europe. This has sparked new debates across the old continent about the effects of immigration on the labor markets of the receiving countries, with the impact of immigration becoming a key concern for European policy makers. Of particular interest is the relationship between migrant and native workers, and the wage effect of immigration. This paper attempts to answer these questions by following a structural approach using data from 26 European countries from 2009 to 2013 in order to estimate the parameters of a transcendental logarithmic production function with three factors of production-Native workers, Migrant workers, and Capital- and therefore determine the Hicks Elasticity of Complementarity and the Elasticity of Factor Price. I find a complementary relationship between native labor and migrant labor as well as a substitute relationship between migrant labor and capital which seem to contradict textbook models. On the other hand, native labor and capital are found to be complementary. The calculated Elasticities of Factor Price allow us to quantify the marginal effect of immigration on the wages of the factor of productions. A 1percent increase in the amount of migrant workers is expected to increase the wages of native labor by 0.038percent, decrease the rental rate of capital by 0.017percent, and decrease the wages of migrant labor by 0.46percent. The wage effect of immigration on the wages of native labor and capital is very small but the size of the migratory waves might be big enough to make an impact, on the other hand migrant workers stand to lose the most from an influx of migrants.