Firm Heterogeneity and the Impact of Immigration: Evidence from German Establishments (Revised April 2025)

We document significant heterogeneity in immigrant share across employers in Germany, with large firms spending a higher share of their wage bill on immigrants than small firms. We show that fixed costs of hiring immigrants, partly policy-induced, are a likely explanation for the observed heterogeneity. We show analytically and quantitatively that ignoring this heterogeneity in the immigrant share leads to biased estimates of the welfare gains from immigration. To do so, we set up and estimate a model where firms with heterogeneous productivities choose their immigrant share given fixed costs to hire immigrants. When firms are heterogeneous in their immigrant shares, two new adjustment mechanisms arise. First, native workers reallocate across firms, which affects the competition effect between immigrants and natives in the labor market. Second, larger firms, which have a greater weight in consumers' consumption baskets, experience a stronger drop in production costs and prices. These mechanisms are quantitatively important in the aggregate. Our model without within-sector firm heterogeneity in the immigrant share underestimates native workers' welfare gains from immigration by approximately 50 percent.