How do regional labor markets adjust to immigration? A dynamic analysis for post-war Germany

Abstract This paper provides a comprehensive analysis of the dynamic labor market effects of one of the largest forced population movements in history, the mass inflow of eight million German expellees into West Germany after World War II. The expellee inflow was distributed very asymmetrically across two West German regions. We develop a dynamic equilibrium model that closely fits two decades of historical data on the regional unemployment differential and the regional migration rate. Both variables increase dramatically after the expellee inflow and decline only gradually over the next decade. The long-lasting adjustment process implies losses in the lifetime labor income of native workers that are not covered by conventional steady state analyses. Regional migration serves as an important adjustment margin for native workers to insure against local labor supply shocks.