Immigration and Outsourcing: A General‐Equilibrium Analysis

Abstract This paper analyzes immigration and outsourcing in a general‐equilibrium model of international factor mobility. In our model, legal immigration of skilled labor is controlled through a quota, while outsourcing is determined both by the firms in response to market conditions and through policy‐imposed barriers. A loosening of the immigration quota reduces outsourcing, enriches capitalists, leads to losses for native workers, and raises national income. If the nation targets an exogenously determined immigration level, the second‐best outsourcing tax can be either positive or negative. If in addition to the immigration target there is a wage target arising out of income distribution concerns, an outsourcing subsidy is required. We extend the analysis to consider illegal immigration of unskilled labor. A higher legal immigration quota will lead to more (less) illegal immigration if skilled and unskilled labor are complements (substitutes) in production.