Employer Sanctions, Illegal Migration and Welfare

Despite border enforcement and penalties for firms that hire illegal migrants, the presence of illegal migrants in most economies still persists. This paper assumes a Ricardian economy and analyzes migration of illegal unskilled workers in a model of Cournot Duopoly where firms are producing homogenous and non-traded goods, and hiring illegal migrants. A two-stage simultaneous move game is set up: In stage 1, for a given technology and vigilance level, each individual firm will decide whether to hire illegal migrants. In stage 2, each firm will choose the Cournot output level. Using this structure, we demonstrate that hiring illegal migrants is not necessarily welfare-reducing for a given industry and furthermore the presence of illegal migrants creates more employment for domestic workers.