Illegal migration, real minimum wage, and economic growth : simulation analysis and policy implications

Abstract

This dissertation applies numerical methods to quantitatively investigate the impact of illegal migration and real minimum wage on the growth and welfare of domestic economy, and thus analyzes some policy implications from such distortions, in the framework of dynamic general equilibrium models. First, we calibrate the Hazari-Sgro model to eight economies and find that, if illegal migrants and domestic labor are perfect substitutes, then there is a negative long-run relationship between domestic consumption and domestic wage rate. From the perspective of domestic consumption, the U.S. benefits the most and Japan the least from illegal migration. For the case of imperfect substitution, our calibration results show that, in a model economy, illegal migration raises the long-run domestic consumption only if the population of illegal migrants is 50% higher than that of domestic labor, which is opposite to the analytical prediction of Hazari and Sgro (2003). Second, we build a two-sector endogenous growth model with illegal migrants, and thus find that illegal migration has both negative growth effect and welfare effect on domestic economy. Importantly, we find that if the proportion of illegal migrants of total labor force is sufficiently high, then domestic economy could be in endogenous decay. Also, a developing country with a poor education sector is more likely to decay under illegal migration. The calibration results show that marginal welfare benefits of reducing the population of illegal migrants are diminishing, which sheds some light on the optimal enforcement expenditures required to reduce illegal migration. Last, a Solow type two-sector model is used to examine the impact of real minimum wage on domestic economy. By calibrating the model we demonstrate that if two economies have the same production structure and their wage rates are increased by the same percentage, then the economy with a higher capital-labor ratio is more likely to decay. In this setup, it is implied that a developed country is more likely to decay under real minimum wage restriction. We also show that trade policy of imposing a tariff on the capital goods allows the economy to attain full employment growth path in much less time than allowing it to attain full employment on its own. JEL Classification: F2; O4 Keywords: Illegal Migrants; Real Minimum Wage; Growth; Welfare; Calibration