Occupational barriers and the productivity penalty from lack of legal status

•Identification of the productivity penalty is crucial to estimate the net economic gains from legalization.•Our paper presents a model-based strategy to identify the productivity penalty associated with lack of legal status.•We estimate that the productivity penalty associated with lack of legal status in the United States is upward of 12% and affects roughly one third of undocumented workers.•Thus, legalization of undocumented workers not only improves their wages, but also increases GDP.•We estimate legalization would increase U.S. GDP by a minimum of 0.96%. Wage gaps between documented and undocumented workers reflect employer exploitation, endogenous occupational sorting and productivity losses associated with lack of legal status. Our paper presents a model-based strategy to identify the productivity penalty associated with lack of legal status, which is crucial to estimate the net economic gains from legalization. In the model, heterogeneous workers choose occupations and undocumented workers are subject to employer discrimination and experience productivity loss in occupations characterized by tasks that require legal status. The theoretical analysis provides guidance on how to identify occupational barriers and delivers an easy-to-compute lower bound for the undocumented productivity penalty. Applying this strategy to individual-level data that imputes undocumented status, we estimate that the productivity penalty associated with lack of legal status in the United States is upward of 12% and affects roughly one third of undocumented workers, which in turn account for over 5% of US employment. Thus, legalization of undocumented workers would not only improve their wages, but also increase GDP by a minimum of 0.96% per year.