Industrialized economies now expect large-scale migration of poor and unskilled labour from Eastern Europe and the Third World into Western Europe. Standard competitive models indicate that governments should only intervene in the distribution of gains from the free movement of such labour, but with minimum wages in receiving countries, their governments may do better to intervene directly, minimize the migrant flow, and avoid unemployment. In Discussion Paper No. 727, Anette Gehrig, Research Affiliate Christoph M Schmidt and Programme Director Klaus F Zimmermann consider a country with fixed endowments of native factors of production, a combination of capital, skilled labour and unskilled labour in the production of a single good, a single union for all native workers, and perfect substitutability between migrant and unskilled native workers. Immigration leads to an outward shift of the labour supply schedule. The union unilaterally sets wages on both markets and employers then set employment levels. Additional immigration reduces the proportion of employment held by natives to the detriment of the unskilled; the union forgoes their wages if it can increase skilled wages. They find that immigration has potentially beneficial allocative effects, regardless of whether skilled and unskilled labour are complements or substitutes.

Gehrig, Schmidt and Zimmermann propose reducing the additional costs of migration to the transfer system by creating special tax or benefit rates for immigrants. Immigration is not sustainable indefinitely, so there is an optimal level of migration, at the point where the marginal allocative gain from further immigration is just outweighed by the marginal cost of admitting additional migrants. Whether the government must actively regulate the migrant inflow will depend on the supply of migrants, but the authors argue that migration policy could be used as a covert anti-union policy, and immigration that must be accepted for political reasons may be exploited to improve the allocative outcome.

Mass Migration, Unions and Fiscal Migration Policy
Anette Gehrig, Christoph M Schmidt and Klaus F Zimmermann

Discussion Paper No. 727, October 1992 (HR)