Immigration and Production Technology

Research on the labor market impact of immigration typically relies on a single-good model of production with separable capital. This article discusses theory and evidence that suggest that this standard model is too simple to capture the long-run labor market impact of immigration. A level of capital-skill complementarity supported in studies both involving and not involving immigration alone reduces the relative wage impact of immigration by 40% compared to simulations with separable capital. Other models in which the production structure responds to skill-mix changes, including models with endogenous choice of technique, directed technical change, or human capital spillovers, also imply that the long-run impact of immigration on wages is smaller than predicted by the standard model. This article discusses new research that tries to credibly evaluate such models using immigration-induced variation in the skill mix, an approach with further potential, and evidence that immigration impacts innovation and firm formation.