Assessing the Impact of Restricting Skilled and Unskilled Migration: A General Equilibrium Approach

We augment the two-country DSGE model from Mandelman and Zlate (2012) with endogenous migration of both skilled and unskilled labor, and analyze the economic impact of restricting migration for each type of labor on the migrants’ source and host countries. We calibrate the model with data for Guatemala and the U.S. as the source and host countries respectively. Restricting unskilled immigration has a more severe contractionary impact on the host economy than restricting skilled migration—reducing aggregate output by approximately 1 percent and consumption by 0.6 percent compared to the steady state—, given that in the steady state a lot more unskilled migrants are needed in the production function. Restricting unskilled immigration impacts negatively skilled immigration flows, but not vice versa, and it has a significant overall impact on the source economy, with aggregate consumption and income declining (mostly due to a fall in remittances). Our findings also highlight a key policy trade-off for the host economy: while a restrictive immigration policy (especially for unskilled labor) could reduce wage inequality by compressing the skill premium—raising host-country unskilled wages by 8 percent while lowering skilled wages by 1 percent compared to the steady state—, and could increase output per capita, it comes at the cost of lower overall economic activity and aggregate consumption. Moreover, by increasing the wage gap for unskilled labor between host and source economies, it also raises incentives for immigration, despite the increased cost of migration.