General equilibrium effects of immigration in Germany: Search and matching approach

Abstract In this study we develop and calibrate a search and matching model of the German labour market and analyse the impact of a 25% increase in immigration observed in the period 2012–2016. Our model has two production sectors (tradable manufacturing and non-tradable services), two skill groups and two ethnic groups of workers (natives and immigrants). Moreover, we allow for the possibility of vertical skill mismatch of high skill workers, endogenous price setting in the non-tradable sector and fiscal redistribution policy. We find that immigrant workers are underrepresented in services compared to manufacturing, so there is only a moderate output increase in the production of services in response to immigration. This output increase is insufficient to cover the associated higher demand for services, which generates a higher price in this sector and stimulates job creation. Workers in services gain welfare but there is a negative effect on the real income of workers in manufacturing. Our results show that recent immigration to Germany, including refugees, has a moderate negative effect on the welfare of low skill workers in manufacturing (−1.2%), but all other worker groups are gaining from immigration, with high skill service employees gaining the most (+6.3%). The average effect of recent immigration after we account for changes in the fiscal budget is estimated at +3.0% but there is larger inequality in the post-immigration steady state.