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esponse from the labor demand side of the market. It is also conceivablethat, with an open economy, the impact of immigration may increaseresident wages if the expansion of local industry pursuing a comparativeadvantage also allows those firms to exploit economies of scale (Romer1996; Brezis and Krugman 1996) or if strong complementarities betweenimmigrants and residents are at work (Ottaviano and Peri 2005).Figure 11. Open Economy Model150This mechanism is depicted in Figure 11, which we label the “OpenEconomy” model. Before the arrival of the immigrants, the market is inequilibrium at W 0and R 0. An exogenous inflow of immigrants then shiftsthe labor supply curve from S 0to S 1temporarily driving the wage down toW 1. The relatively low wages attract new firms to the city. This responseshifts the labor demand curve from D 0to D 1, thereby restoring the wage toits initial level. Borjas, Freeman, and Katz (1997) suggest that these shiftsin industrial structure play a quantitatively important role in the adjustmentof city wages to immigration shocks. If economies of scale exist, then thedemand for labor might shift out even further as the region’s firms exploittheir competitive advantage vis à vis competitors in other regions. Thenwages might rise to W 2and, if so, the employment of native residentswould increase from R 0to R 2.