Essays In Skilled Immigration Policy

This dissertation studies the impact of skilled immigration and skilled immigration policy changes in the U.S. Chapter 1 studies the macroeconomic general equilibrium effects of skilled immigration policy changes by explicitly taking into account the role of firm demand for foreign skilled labor. To this end, I develop a two-sector dynamic stochastic general equilibrium model with monopolistically competitive firms and heterogeneous workers. Unlike most previous studies that view immigration as a supply-induced shock, the paper models skilled labor immigration as an endogenous response to an increase in firm labor demand in the receiving economy. The model is calibrated to mimic the U.S. economy with its current immigration policy: Firms face hiring costs and there is an occasionally binding cap on the foreign skilled workers that can be hired each period. The results indicate that a less restrictive skilled immigration policy via an immigration cap increase leads to heterogeneous effects on skilled and unskilled workers --- unskilled domestic workers gain but skilled domestic workers lose. However, the magnitude of the welfare impacts depends on the state of the economy at the time of the cap change and also on the structure of the labor market (presence of search frictions). This paper also evaluates the welfare and efficiency gain from moving toward an alternate skilled immigration policy with a market-driven allocation of permits for hiring skilled foreign workers. Such a policy increases welfare and brings the economy's allocation closer to the social planner's first-best allocation. Chapter 2 studies the interaction between skilled immigration policy changes in the U.S. and the offshoring decision of domestic firms in the skilled services sector. Given the substitutability between immigrant and offshore workers (Ottaviano et al. (2013), Olney and Pozzoli (2018), Ottaviano et al. (2018)) and frictions imposed by the current skilled immigration policy, firms have an incentive to incur additional costs and hire labor offshore. To study this channel and the associated welfare impacts on skilled and unskilled domestic households, we build a two-country model with skilled immigration, offshore labor hiring, and trade in intermediate inputs. Monopolistically competitive firms in the domestic skill-intensive intermediate goods sector produce output using domestic and immigrant skilled labor, and skilled labor hired offshore. Firms optimally hire immigrant skilled workers subject to a policy imposed cap, a sunk hiring cost, and an exogenous probability of return to the foreign economy. In the calibrated model, firms adjust their production towards higher offshore labor hired following a stricter domestic immigration policy . We show that it is important to account for the role of offshoring when evaluating the welfare impacts of skilled immigration policy changes on domestic households --- by ignoring firm adjustments in offshore labor hired, we would overestimate the wage (and welfare) gain to domestic skilled households after an immigration cap reduction. We also show that the welfare impacts depend on the profit distribution across households and the presence of labor market frictions. This paper has two main contributions. First, as Ottaviano et al. (2018) note, much of the literature has focused on offshoring in the manufacturing sector and ignored an analysis of immigration and offshoring in the services sector. Given the growing importance of skill-intensive services trade, our paper takes a step in this direction. Second, unlike much of the literature, the paper studies the interaction between immigration and offshoring in a dynamic general equilibrium model with a realistic skilled immigration policy setup. Chapter 3 estimates key parameters in a search and matching model with skilled immigration using Bayesian estimation techniques using U.S. quarterly data from 1995 to 2017. Results indicate that the bargaining power of native skilled workers is higher than the bargaining power of foreign-born skilled workers. The estimation results also indicate deviations from the Hosios condition. This has potential implications for how the economy responds to immigration policy changes. The future goal is to employ the estimated model to study the impact of skilled immigration policy reform.