Immigration, Welfare and Inequality: How Much Does the Labor Market Specification Matter?

Macroeconomic models are increasingly used to quantify the welfare and inequality effects of immigration in the OECD countries. Existing studies differ in the way they formalize the labor market responses for immigrants and natives, which in turn govern the strength of the other transmission channels (e.g., public finances, price index, or total factor productivity). In this paper, we build a general equilibrium model that allows to gauge the role of the labor market specification. We parameterize the model for 20 selected OECD member states and compare several specifications involving different assumptions concerning labor supply decisions, unemployment rates and wage formation, as well as different calibration strategies. Endogenizing unemployment and participation generates slightly more optimistic results. However, these labor market mechanisms do not reverse the findings of models based on simpler assumptions and have little effects on cross-country differences in responses to immigration. The labor market specification is less important than the calibration of the elasticity of substitution between immigrants and natives.