International Tax and Public Finance 12, 2005, pp. 375-393, CESifo Working Paper No. 1265, August 2004, NBER Working Paper No. 10798, September 2004.
This paper discusses how an industrialized country could defend the living standard of its unskilled workersagainst the wage competition from immigrants. It shows that fixing social replacement incomes implies migrationinto unemployment. Defending wages with replacement incomes brings about first order efficiency losses thatapproximate the budget cost of the government. By contrast, wage subsidies involve much smaller welfare losses.While the exclusion of migrants from a national wage replacement program does not avoid the distortions in labormigration, the (temporary) exclusion of migrants from a national wage subsidy program makes it possible to reachthe first best migration pattern despite the preservation of the welfare state.
migration, unemployment, welfare
F15, F22, I38, H5, J61