The rate of substitution between different workers’ characteristics : a nested CES analysis

Abstract

This empirical analysis examines the causal relationship between native and immigrant workers in the Maltese islands based on the individual’s highest level of education and working experience. A pooled time series of the Maltese labour market is utilized through microdata which was obtained from the National Statistics Office and spans a time period between 2014 and 2020. Three empirical results are obtained, as estimates of the substitutability between (a) native and immigrant workers, (b) broad and narrow experience groups and (c) broad education groups are estimated through the Skill-Cell Model, which is derived from the nested CES production function. The conclusions that this study derives suggests that the null hypothesis can be rejected, thus implying that the elasticity of substitution between native and immigrant workers is imperfect. The same results are obtained when analysing the rate of substitution between broad and narrow experience groups and between broad education groups. These results are in line with the existing literature. The most important conclusion reached from this study is that there does not exist a perfect substitutability between native and immigrant workers. Therefore, the results obtained from this study have important policy implications, as the study concludes that the Maltese islands can welcome a number of immigrants without having any significant impact on the native wages. Even though it is found that a 1% increase in immigrants is likely to decrease the average weighted weekly wages by approximately 3.31%, it is noted that such a decrease is not significantly large. Finally, it is also suggested that the Maltese labour market should mainly attract immigrants with a high level of experience, as these will have a significantly small impact on the native wages while meeting the demand for the required labour in the Maltese labour market.