Immigration and Production Technology

Research on the labor market impact of immigration typically relies on a single-good model of production with separable capital. This article discusses theory and evidence that suggest that this standard model is too simple to capture the labor market impact of immigration. A reasonable level of capital-skill complementarity, for which there is considerable support outside research on immigration, alone reduces the relative wage impact of immigration by 40 percent compared to simulations with skill-neutral capital. Other models in which the production structure responds to skill mix changes, including models with endogenous choice of technique, directed technical change, or human capital spillovers, can also imply the impact of immigration is considerably different than in the standard model. This article discusses new research which tries to credibly evaluate such models using immigration-induced variation in skill mix, an approach with further potential, and evidence that immigration impacts innovation and firm formation.