The wage dispersion effects of international migration in the European Union

This paper investigates the impact of international migration on wages across workers using a search theoretic model of the labor market with an endogenous migration decision for workers. In a two country model with ex-ante identical workers, the presence of frictions in the labor market, and costs to workers to migrate, I show that substantial wage dispersion can be generated by only those factors. An empirical parameterization of the model replicates the observed migration and wage conditions in the European Union from 1998-2016. The application indicates that incorporating endogenous costly migration with labor market frictions has significant effects on expected wages. In contrast to existing work, which relies on the imperfect substitutability between skills, I find that skill heterogeneity dampens the wage dispersion generated. Ignoring either the migration decision or costs to migration, even within skills, results in misattribution of the wage effects of migration, and distorts welfare analysis resulting from any such study. Despite the tendency to focus on migration as a negative force for workers, the model in this paper finds that migration is not necessarily bad for workers' wages.