Capital-Skill Complementarity and the Immigration Surplus

Abstract

We build a neo-classical growth model with overlapping dynasties and capital-skill complementarities to evaluate changes in immigration policy. Calibrating the model using U.S. data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital skill-complementarity, an increase in the number of skilled immigrants generates an immigration surplus---the overall welfare benefit accruing to the native population---that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker. (Copyright: Elsevier)