University of HelsinkiAbstract. This paper constructs a political equilibrium in which firms and unions bargain over wages and workers and capitalists lobby the government for taxation, labor market regulation and
immigration policy. The main findings are the following. It is in the workers’ interests to ban firms’ direct recruitment from abroad. Otherwise, the ruling elite captures the surplus of the labor unions by threatening to allow such recruitment. There is an equilibrium level for both legal and illegal immigration and relative union bargaining power. Because unions lobby for illegal rather than legal immigration, the government tolerates a higher public-sector marginal cost for illegal than legal immigrants.
Professor Emeritus