Impact of refugees on wages and economic growth in a model with inflation

Ana Rita Gomes, Oscar Afonso, and Paulo B. Vasconcelos


This article examines the effect of inflows of Ukrainian refugees on the labor market in Poland. The Ukrainian refugee influx increased the supply of unskilled labor in the Polish labor market.  

The authors develop a model that takes into account the skills heterogeneity between natives and refugees, the degree of substitutability between natives and refugees with the same skill level, the impact of technological knowledge on demand and productivity of different types of labor, the impact of fiscal policy (subsidies) on the direction and progress of technological knowledge, and the effects of monetary policy (reduction in interest rates) on the production of intermediate goods and research and development (R&D) activities. 

Main results: 

  • An increase in unskilled labor shrinks the technological-knowledge-absorption effect, that is, the ability of skilled workers to assimilate and utilize advanced technological knowledge more effectively than unskilled workers. This in turn decreases R&D activities that improve the quality of intermediate goods used together with skilled labor. As a result, the relative productivity of intermediate goods produced with unskilled labor increases, decreasing the relative prices of final goods produced with low technology, and increasing the share of final goods produced with low technology 
  • Changes in the relative prices of final goods produced with different technologies causes an increase in the technological-knowledge-bias, that is the extent to which technological knowledge is biased towards skilled or unskilled workers (represented in the model as the ratio of the technological knowledge stocks of skilled workers to unskilled workers). The increase in the supply of unskilled labor causes a decrease in its relative wage, leading to a slight increase in the skills premium. Together, these mechanisms lead to a slight decrease in the economic growth rate. 
  • Fiscal policies in the form of subsidies to encourage R&D activities, can strengthen production, levels of technological knowledge, and wage levels associated with subsidized workers. Fiscal policies have a stronger effect on growth when applied to unskilled workers.  
  • Monetary policy, introduced by the central bank through a reduction in the nominal interest rate, influences R&D activity through liquidity constraints. In this way, monetary policy can encourage R&D activities by facilitating credit to firms. 

The authors conclude that the influx of refugees tends to create greater inequality, in terms of worker’s competitiveness and technological-knowledge-bias. Consequently, wage inequality between skilled and unskilled workers increases. To mitigate these effects, the authors propose fiscal policies that subsidize unskilled workers to promote competitiveness and growth.