The paper analyses the impact of foreign workers on the Italian labour market. We address the issue of whether immigrants from less developed countries are complementary or substitutes to domestic workers. We construct a data set on immigrant workers from the Administrative Social Security Archive which starts in 1986, before the general amnesty of 1990-91, when a large share of illegal immigrants were granted working permits, and end in 1995. A two-stage procedure devised by Moulton is applied to yearly cross-sections of wages by industry and region. Our results show that the inflow of immigrants raises the wages of native manual workers (i.e. it has a complementary effect), and this effect is larger in small firms and in the north of the country. We postulate that the positive impact on native wages is due to the existence of labour constraints on the side of firms. Firms are unable to expand their output because they cannot find native workers who are willing to undertake certain (typically low-skilled) jobs. Immigrants help to fill this gap. This view is reinforced by the fact that over a 'crucial threshold' of the share of foreign work (7.7-12 percent) additional inflows in the labour market of foreign work have a negative effect on native wages (i.e. they compete with natives). Copyright Fondazione Giacomo Brodolini and Blackwell Publishers Ltd 1999.