Summary: This paper studies the effects of illegal immigration and the associated expansion of the underground economy on the allocation of resources, commodity prices, and wages of workers, both in the short run (when occupational mobility is restricted) and in the long run (when the skill-composition of the labor force is endogenous). The paper goes on to consider some of the fiscal implications of illegal immigration and the related expansion of underground activity. Effects of sanctions against employers hiring illegal aliens and measures to legalize the status of clandestine foreign workers are also examined.