Description:
We incorporate positive labour supply elasticities on the intensive and extensive margins into a standard model looking at the impact of immigration on wages in the host country. When natives and migrants are perfect substitutes, we see that a higher labour supply elasticity on the extensive margin makes the negative wage elasticity from immigration into a smaller negative number, but a higher labour supply elasticity on the intensive margin, very likely, makes the wage elasticity from immigration into a larger negative number. When labour supply elasticities do not differ for immigrants and natives, the widely used estimate of the elasticity of substitution between the most disaggregated skill groups in a nested CES model will be biased upwards by ignoring labour supply effects. Simulations suggest that incorporating labour supply effects may reduce the predicted wage elasticity of immigration by half and that this effect is largest for parameter assumptions that would otherwise imply a relatively large negative wage elasticity from immigration