The conventional wisdom of welfare economics is that the free flow of goods and factors of production (including labour) tends to enhance the efficiency of the allocation of resources within and across countries. Migration, which typically shifts labour from economies with low productivity to economies with high productivity, should accordingly raise global output. However, in practice, there tends to be widespread resistance to guest workers or migrants in the receiving country. In Discussion Paper No. 1091, Research Fellow Assaf Razin and Efraim Sadka highlight, by means of a stylized model, two economic considerations which may explain the reason behind such resistance.

First, if wages are rigid (due to unionism, search costs, or efficiency wage contracts), labour migration may well reduce the share of the native-born population (skilled labour, unskilled labour and capital) in the migration-induced domestic income. Furthermore, while with flexible wages the gain from migration is minuscule, with wage rigidity, migration may cause substantial losses to the native-born population. Also, with wage rigidity, migration induces investment misallocation between human and physical capital which exacerbates the losses. Second, low-income migrants typically increase the economic costs that are associated with (non-lump-sum) income redistribution policies (thereby imposing an additional burden on a modern welfare state that attracts immigration). In the face of immigration, a typical welfare state may find that it is impossible to redistribute income to the native-born population in a way which will make all domestic sectors better off.

Resisting Migration: Wage Rigidity and Income Distribution
Assaf Razin and Efraim Sadka

Discussion Paper No. 1091, January 1995 (IM)