The effects of immigration in frictional labor markets: Theory and empirical evidence from EU countries

Immigrants are newcomers in a labor market. As a consequence, they lack host-country-specific labor market knowledge and other country-specific and not directly productive valuable assets affecting their relative bargaining position with employers. We introduce this simple observation into a search and matching model of the labor market and show that immigrants increase the employment prospects of competing natives. To test the predictions of our model, we exploit yearly variations between 1998 and 2004 in the share of immigrants within occupations in 13 European countries. We identify the impact of immigrants on natives׳ employment rate using an instrumental variable strategy based on historical settlement patterns across host countries and occupations by origin country. We find that natives׳ employment rate increases in occupations and sectors receiving more immigrants. Moreover, we show that this effect varies depending on immigrants׳ characteristics and on host country labor market institutions which affect relative reservation wages.