ct substitutes. We moreover consider the imperfect adjustmentof capital stocks. Since it is likely that the bargaining power of workers andemployers varies in the di®erent segments of the labor market, we allow thewage-setting curve to di®er across education and experience groups.
We apply this framework empirically to Germany, which is the third
most popular destination for migrants in the world after the US and Russia(Freeman, 2006). With the fall of the Berlin wall, the net immigration rateclimbed in Western Germany from about zero at the beginning of the 1980sto about 6 per thousand at the beginning of the 1990s, compared to 3 perthousand in the ¯fteen member states of the then European Union (EU-15) and 4 per thousand in the US (World Bank, 2007). However, since thebeginning of this millennium, the net immigration rate has dropped to lessthan 3 per thousand in the course of Germany's economic downturn (Figure1).
Our empirical analysis is based on a 2 percent random sample drawn
from the German social security records (IABS) for the period from 1980 to2004. This data set allows us to identify the elasticities of the wage-settingcurve for education and experience groups and to estimate the elasticities ofsubstitution between di®erent types of labor in Western Germany.We ¯nd an average elasticity of the wage-setting curve of -0.15 at thenational level, which is somewhat higher than the elasticities found in theregional wage curve literature in other OECD countries (see Blanch°owerand Oswald, 1994a; Card, 1995; Nijkamp and Poot, 2005), but substantiallyhigher than that found at the regional level in Germany (Baltagi, Blien,and Wolf, 2007). However, the elasticities of the wage-setting curves °uc-tuate considerably across skill groups and experience groups. The elasticitybetween wages and unemployment is particularly large for highly educatedworkers and workers with little work experience.
We simulate the immigration impact on the German labor market in three
scenarios: The ¯rst scenario analyzes the e®ects of a 1 percent immigrationat the given skill and age structure of the foreign and native labor force.The second scenario examines the impact of the actual labor immigrationduring the total 1980-2004 period and the ¯nal scenario assesses the e®ectsof the main immigration shock on the German economy during the 1984-1993subperiod.At the given skill structure of the foreign workforce, a 1 percent increasein labor supply through the immigration of foreigners increases the unem-ployment rate by less than 0.1 percentage points in the short run, while itremains almost stable in the long run. Average wages decline by 0.1 per-cent in the short run, but remain una®ected after the adjustment of capitalstocks. While native workers tend to bene¯t from higher wages and lowerunemployment risks, wages of the foreign labor force decline by about 0.7percent and the unemployment rate increases by about 0.4 percentage pointsin the short run and by 0.1 percentage points in the long run.Accordingly, the increase in the foreign labor supply during the period
3
1980-2004 has increased native wages by 0.2 percent while the wages of for-eigners have fallen by 1.8 percent in the long run. The unemployment rateof natives declines slightly, while that of the foreign labor force increases by0.25 percentage points in the long run. At the aggregate level, the labormarket e®ects are almost n
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