IMMIGRATION, INVESTMENT, AND REAL WAGES

When a country is the recipient of large-scale, politically motivated immigration - as has been the case for Israel in recent years - the in itial impact is to reduce real wages. Over the longer term, however, t he endogenous response of investment, together with increasing returns , may well actually increase real earnings. If immigration itself is n ot wholly exogenous, but respond to real wages, they may be multiple e quilibria, that is, optimism or pessimism about the success of the eco nomy at absorbing immigrants may constitute a self-fulfilling prophecy . Since World War II, a number of countries have experienced surges of politically motivated immigration. Examples include West Germany duri ng the early postwar years, which was the destination of millions of r efugees from the East; Portugal, faced during the mid-1970s with the r eturn of several hundred thousand citizens from its newly independent African colonies; and Israel, which absorbed a massive wave of immigra nts in the years following independence and has recently received a ne w surge of immigration from the former Soviet Union. Such waves of imm igration often present considerable short-run economic difficulties, l eading to some mix of upward pressure on unemployment and downward pre ssure on real wages. Nonetheless, over the longer run it is arguable t hat immigration not only brings considerable benefits, it may well ten d to raise real wages. The problem is one of getting through the trans ition. The purpose of this paper is to offer a simple model that is su ggestive of the mix of difficulties and opportunity presented by large -scale immigration. It shows why immigration may well have a negative effect on real wages in the short run but a positive effect in the lon g run. It also suggests the possibility that the outcome of waves of i mmigration is not predetermined: the question of whether the immigrant s are successfully absorbed may depend crucially on both policy and ex pectations.