Illegal Immigration Control and Wage Inequality

ABSTRACT This article investigates the effects of government regulation over illegal immigration on wage inequality through the general equilibrium approach. In the basic model of the short‐term analysis, increased control over illegal immigration will affect the skilled wage rate depending on the elasticity of substitution between capital and illegal immigrants in the urban informal sector, and will influence the domestic unskilled wage rate through both the formal‐sector skill‐intensity channel and the informal‐sector substitution channel between domestic unskilled labor and illegal immigrants. In the long‐term analysis, if the urban formal sector is more capital‐intensive than the urban informal sector, stricter immigration control will exacerbate wage inequality. In the two extended models, the results of the models may be similar to or different from those in the basic model.