Immigration and Wages: An Open Economy Model

Melbourne Institute Working Paper No. 07/07

Date: March 2007


Wang-Sheng Lee


This paper shows how some simple modifications to the classical Heckscher-Ohlin model in international trade can be made so that it can be used to analyse the impact of immigration on wages. In particular, this is accomplished by constructing a model in which countries have very different endowments of factors, reside in different diversification cones and specialise in production. In such a model, it is not necessary that factor prices are equalised across countries. Based on simulation results of this modified Heckscher-Ohlin model, it is found that the actual immigrant flow in the U.S. from 1979 to 1995 is unlikely to be a major contributor to the observed high-skill/low-skill wage gap increase over the period.

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