We analyze an immigration reform in Denmark that tightened refugee immigrants’eligibility criteria for permanent residency to incentivize their labor market attachment and acquisition of local language skills. Contrary to what the reform intended, the overall employment of those affected decreased while their average language proficiency remained largely unchanged. This was caused by a disincentive effect, where individuals with low pre-reform labor market performance reduced their labor supply. Our findings suggest that stricter permanent residency rules, rather than incentivizing refugees’ skill investment, may decrease the efforts of those who believe they cannot meet the new requirements.

Most studies on the labor market effects of immigration use repeated cross-sectional data to estimate the effects of immigration on regions. This paper shows that such regional effects are composites of effects that address fundamental questions in the immigration debate but remain unidentified with repeated cross-sectional data. We provide a unifying empirical framework that decomposes the regional effects of immigration into their underlying components and show how these are identifiable from data that track workers over time. Our empirical application illustrates that such analysis yields a far more informative picture of immigration's effects on wages, employment, and occupational upgrading.