International labor migration and domestic labor supply

Prominent among the variety of issues raised by the immigration of labor are its effects on domestic wage rates and labor supply. In contrast to the existing literature, this paper constructs a dynamic, general equilibrium framework to study the relationship between international labor migration and domestic labor supply. The general equilibrium nature of the model enables us to endogenize the pattern of labor migration. The effect of labor migration on domestic wage rates and labor supply is shown to depend on the pattern of labor migration. If the substitution effect dominates the income effect in labor supply, the domestic supply of labor necessarily decreases in response to an inflow of migrants. This happens even if immigrants, through their savings behavior, cause an increase in the domestic capital-labor ratio and wage rate. Similarly, if the dominant effect is the income effect, the immigration of labor necessarily increases the domestic supply of labor.I wish to thank Oded Galor, Harl Ryder, Kalpana Kochhar and two referees for valuable comments. The opinions expressed in this paper are my own and do not necessarily reflect the views of Joel Popkin and Company.