RESEARCH PAPER NO. 859

THE IMPACT OF IMMIGRATION ON THE WAGE DIFFERENTIAL IN AUSTRALIA

BY

HSIAO-CHUAN CHANG

NOVEMBER 2002

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

This paper investigates a significant current issue in Australia, the impact of immigration on the wage differential between skilled and unskilled labour, using simulation analysis from a dynamic intertemporal general equilibrium model.

The results show that immigration cannot explain variations of the wage differential in Australia during the past ten years. In most of the years investigated, immigration only explains a small part of the change in the wage differential. There is also no evidence that immigration exerts significant downward pressure on the unskilled wage.

A comparison of four policy options demonstrates that accepting an increased number of skilled immigrants per year at a certain rate will decrease the wage differential in both the short and long run. Cutting the number of skilled immigrants per year at a certain rate will increase the wage differential in the long run and decrease the wage differential in the short run. An effective policy to change the skilled-unskilled wage differential requires a mixture of a set of instruments aimed at other economic issues such as international trade, productivity growth and education.