The Global Welfare Economics of Immigration

Abstract

We study the effect of immigration on global welfare. The world is modeled as consisting of two regions, South and North, the former populated by low-skill workers, and the latter by both low- and high-skill workers. Production in the North uses both labor inputs in a complementary way. A trade union in the North keeps the wage of low-skill workers above the Walrasian wage, generating unemployment of low-skill workers. Northern citizens fund unemployment benefits for workers through taxation. Immigration from South to North has two effects in the North: a mixed native-foreign working-class lowers union power, because of reduced solidarity among low-skill workers, and hence it lowers the mark-up on the Walrasian wage that the union is able to negotiate. It also lowers the solidarity between employed citizens and the unemployed (as the latter, now, consist in part of non-natives) and thus the unemployment benefit, set by a democratic process, falls. We calculate the optimal levels of immigration, from the viewpoint of an observer who maximizes global welfare, according to an egalitarian and a utilitarian social welfare function. We compare these levels to the open-borders-equilibrium level. We find that the optimal level of immigration for the cosmopolitan egalitarian is significantly less than the open-borders equilibrium level, while the optimal level for a global utilitiarian is significantly greater than the open-borders level.