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 labour 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 labour demand model to account for the linguistic background of native and immigrant workers. We provide 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.