Migration, Unemployment, and Skill Downgrading

• DOI: http://doi.org/10.1111/sjoe.12104
• Author: Joan Muysken,Thomas Ziesemer,Ehsan Vallizadeh
• Published date: 01 April 2015
• Date: 01 April 2015

Scand. J. of Economics 117(2), 403–451, 2015

DOI: 10.1111/sjoe.12104

Migration, Unemployment, and Skill

Downgrading*

Joan Muysken

Maastricht University, NL-6200 MD Maastricht, The Netherlands

j.muysken@maastrichtuniversity.nl

Ehsan Vallizadeh†

Institute for Employment Research (IAB), DE-90478 Nuremberg, Germany

ehsan.vallizadeh@iab.de

Thomas Ziesemer‡

Maastricht University, NL-6200 MD Maastricht, The Netherlands

t.ziesemer@maastrichtuniversity.nl

Abstract

In this paper, we analyze the labor market impacts of immigration under flexible and rigid

labor market regimes. A general equilibrium framework is developed, accounting for skill

heterogeneity and labor market frictions, where unemployed medium-skilled manufacturing

workers are downgraded into low-skilled service jobs, while low-skilled service workers

might end up unemployed. The analytical analysis shows that medium-skill immigration de-

creases low-skilled unemployment under the flexible regime, indicating a complementarity

effect, while the rigid regime induces a substitution effect, leading to low-skilled unemploy-

ment. Moreover, it leads to wage polarization. In a numerical analysis, the economic effects

of different migration scenarios are quantified.

Keywords: Medium-skilled migration; skill downgrading; specific factors model; unemploy-

ment; wage and price setting

JEL classification:F22; J51; J52; J61; J64

I. Introduction

The migration pattern in Europe has significantly changed over the last

decades, driven by the integration of national markets into global markets,

as well as by the soaring demand for better educated, high-skilled workers

due to intensified international competition. In general, the overall stock of

†Also Maastricht University.

‡Also UNU-MERIT.

*We are grateful to Herbert Br¨

ucker, Klaus Prettner, and two anonymous referees for valu-

able comments and discussions; to Stella Capuano for providing data on immigration and

education; and to participants at NAKE Research Day 2011 in Utrecht, at 17th SMYE in

Mannheim, and at EALE 2012 in Bonn.

CThe editors of The Scandinavian Journal of Economics 2015.

404 Migration, unemployment, and skill downgrading

immigrants with higher educational attainments has increased significantly.

For instance, the East–West immigration patterns in the course of the en-

largement of the European Union (EU) in the past decades have seen a

substantial increase in the supply of medium-skilled immigrants (i.e., with

upper secondary education).1

However, looking at the labor market outcomes of immigrants, one con-

siderable friction becomes evident. Immigrants face a substantial risk of

job–skill mismatches. Several recent studies have found that immigrants

with higher educational levels, especially those who moved in the course

of the Eastern EU enlargement, have been relegated to jobs that require

a lower educational/skill attainment – indicating a skill downgrading in

occupations.2In an empirical cross-country analysis, Brynin and Longhi

(2009) find that the incidence of skill downgrading is more pronounced

among workers with intermediate skills.

In summary, on the one hand, these observations emphasize an

immigration-induced shift in the labor supply of better educated work-

ers over the last decade. On the other hand, the immigration-driven rise in

skill downgrading offers a rationale for potential displacement effects of

the least-skilled native workers.3The objective of this paper is to revisit

the labor market effects of immigration by assessing the impact of immi-

gration on skill downgrading and unemployment in a general equilibrium

framework.

Intuitively, higher skill downgrading due to the immigration of better-

educated workers should induce a substitution effect for the least-skilled

workers, thus displacing them from the labor market. However, as we

elaborate below, the labor market institutions play an important role in

determining the impact of immigration on low-skilled unemployed work-

ers. Particularly, under a flexible labor market regime, an immigration-

induced rise in skill downgrading generates a decline in the low-skilled

1This refers to the entry of eight Central Eastern European countries (CEECs) and two

Mediterranean countries into the EU in May 2004. See Kahanec and Zimmermann (2010)

for a survey of recent migration patterns in the EU, and see Blanchflower et al. (2007) for

recent patterns in the UK.

2See Drinkwater et al. (2009) and Dustmann et al. (2009) for recent evidence in the UK. For

example, Dustmann et al. (2013) empirically assess the immigration effect along the wage

distribution. Although the newly arrived immigrants to the UK have, on average, higher

educational attainments, the authors find that they are located at the lower end of the wage

distribution – showing evidence of a skill downgrading effect. For cross-country evidence,

see OECD (2007).

3Several recent studies have shown that, in general, attitudes towards immigration are het-

erogeneous across native populations and depend on the labor market situations, welfare

considerations, and non-economic factors (e.g., Mayda, 2006; Dustmann and Preston, 2007;

Dustmann et al., 2008; Facchini and Mayda, 2008). See also Boeri and Br¨

ucker (2005) for

a discussion of concerns regarding “welfare shopping”.

CThe editors of The Scandinavian Journal of Economics 2015.

J. Muysken, E. Vallizadeh, and T. Ziesemer 405

unemployment rate – indicating a complementarity effect. The reason for

this is that in a flexible labor market regime, the reservation wage of un-

employed workers is usually low and much more responsive to economic

shocks, compared to a more rigid labor market.

As a consequence of skill downgrading, the immigration of medium-

skilled workers can generate an expansionary effect of low-paid service

jobs, which, in turn, induces a wage polarization effect (i.e., a decline of

medium-skilled wages relative to low- and high-skilled wages), a similar

effect to technology advances. To our knowledge, this is a new insight that

has not been addressed in the literature. Whereas high-skilled migration

is widely accepted and low-skilled migration is mostly reduced by current

policies, medium-skilled migration is discussed very little in politics and

academia.

To offer an integrated explanation of the above observations and to in-

clude the medium-skilled migration in the analysis, we develop a two-sector

(“manufacturing” and “services”) model with heterogeneous workers.4We

assume that low-skilled workers are employed in the services sector whereas

medium-skilled workers are employed mainly in the manufacturing sector.

Finally, a common and perfectly mobile factor, such as high-skilled labor,

is employed in both sectors. In line with the institutional labor market

setting in many European countries, we assume a standard collective bar-

gaining approach: a right-to-manage bargaining model. We also assume that

medium-skilled workers who do not find a job in the manufacturing sector

have the outside option to take a low-paid job in the services sector, while

low-skilled workers, who find no service jobs, end up unemployed.5We

capture the nature of flexibility of the labor market by endogenizing the

unemployment benefits of displaced low-skilled workers. Our model en-

ables us to address different adjustment channels, such as shifts in relative

labor demand, considering the “substitution effect” between different input

factors, as well as shifts in the labor supply, taking the “crowding-out”

effect under different labor market regimes into account.

Finally, we examine numerically the general equilibrium effects of an

infra-marginal increase (i.e., a discontinuous jump) in the labor force due

4It is worth mentioning that a more general framework would also consider within-sector

firm heterogeneity, which permits us to account for the within-sector occupation wage gap

(see Helpman et al., 2014). Our intention is, however, to address another recently observed

phenomenon reflecting wage inequality between the occupations (or between skill groups),

the so-called polarization effect, which might partly be induced by labor supply shocks.

5Note that in doing so we ignore the importance of individual job-search behavior, such

as on-the-job search for medium-skilled workers, which reflects the trade-off between being

unemployed or staying in low-paid service jobs and searching for job opportunities in the

manufacturing sector.

CThe editors of The Scandinavian Journal of Economics 2015.