Liat Ben-Uziel

This work examines the quantitative and the qualitative implications of reducing the supply of low-skilled foreign workers for wage differentials, the rates of return to capital, prices, consumption, investment and welfare. We analyze the change in policy by constructing a dynamic macroeconomic model to simulate the Israeli economy. The model contains two distinct industries: Industry 1 produces technological capital using physical capital and skilled labor. Industry 2 produces physical capital and the consumption good using the technological capital and unskilled labor. Our assumption is that all foreign workers belong to the unskilled workers group. Savings behavior and capital accumulation are determined by the behavior of a maximizing representative agent.

We use three different scenarios for our examination - an immediate reduction of 100,000, 200,000, and 300,000 foreign workers.

From simulations of the model we learn that:

·     Total capital in the economy will decrease, with physical capital decreasing more than the technological capital.

·     Per-capita capital will increase, and per-capita technological capital will increase more than per-capita physical capital.

·     Skilled workers' wages will decline while unskilled workers' wages will increase.
                The increase in unskilled workers` wage is three times higher then the decrease in the skilled workers' wage. Wage inequality will decline substantially.

·     Total economic output will decline, but per-capita output will increase.

·         The rates of return to capital will only change in the short term.

·     The new policy generates significant benefits for unskilled workers,
            only slightly harms the welfare of the owners of the physical capital, and seriously harms the welfare of the skilled and the owners of technology capital.