What drives the substitutability between native and foreign workers? Evidence about the role of language∗

This paper investigates the role of language in determining the substitutability between foreign and native workers. Our identification strategy exploits the linguistic diversity of Switzerland, a country with three main official languages (German, French and Italian) shared by bordering countries. This makes the Swiss labor market very peculiar, since both immigrants and natives may (or may not) share the language spoken in the area of residence. We modify the standard nested-cell labor demand model (as in Ottaviano and Peri, 2012) to account for the linguistic background of native and immigrant workers. We provide direct evidence about the central role of language in determining the extent of the imperfect substitutability between native and foreign workers, and their differential specialization in communication intensive jobs. Finally, we compute the total wage change caused by the recent migration inflows. In the long run, the average percentage wage change is small and not significant for both natives and foreigns, even though highly educated workers experience some negative wage effects.