Restricted immigration in a two-sector economy

This paper will analyze income redistribution and fiscal effects caused by immigration in a two-sector economy, where one sector is closed and where foreign and domestic labor are homogeneous. The setup of this model is guided by the stylized fact that today's immigrants in the European Union are distributed highly unequal across sectors, with a clear concentration in low-income sectors. Unlike many previous studies, we do not interpret this segmentation by means of differential skills because we focus on tomorrow's potential immigrants from former communist countries in northeastern Europe, which exhibit education levels similar to those of western European workers. Contrary to results from one-sector models, some pure wage earners may also win from immigration as a result of changing relative prices. Therefore, the political support for immigration depends not only on the capital ownership distribution, but also on relative immigration sector size and relative sector productivity. Furthermore, the necessary tax rate to finance the transfer system may decrease as a result of immigration. (JEL F22, D33).