In this study we develop and calibrate a search and matching model of the German labour

market and analyze the impact of recent immigration. Our model has two production sectors

(manufacturing and services), two skill groups and two ethnic groups of workers (natives

and immigrants). Moreover, we allow for the possibility of self-employment, endogenous

price and wage setting and fiscal redistribution policy. We find that search frictions are less

important for wages of the low skilled, especially in manufacturing, whereas wages of the high

skilled are more sensitive to their outside opportunities. Furthermore, employment chances

of immigrant workers are up to four times lower than employment chances of native workers,

especially in the high skill segment. Our results show that recent immigration to Germany,

including refugees, has a moderate negative effect on the welfare of low skill workers in

manufacturing (-0.6%), but all other worker groups are gaining from immigration, with high

skill service employees gaining the most (+4.3%). This is because the productivity of high

(low) skill workers is increasing (decreasing) and there is a higher demand for services. The

overall effect of recent immigration is estimated at +1.6%. Finally, we observe that productive

capacities of immigrant workers are underutilized in Germany and a policy implementing

equal employment opportunities can generate a welfare gain equal to +0.9% with all worker

groups (weakly) gaining due to the redistribution.