The Role of Immigration in Dealing with the Developed World's Demographic Transition

Abstract

This paper and its companion study, Fehr, Jokisch, and Kotlikoff (2004), develop a three-region dynamic general equilibrium life-cycle model to analyze general and skill-specific immigration policy during the demographic transition. The three regions are the U.S., Japan, and the EU. Immigration is often offered as a solution to the remarkable again underway in the developed world. Absent an immediate and dramatic change in immigration, dependency ratios will roughly double over the next three decades placing fiscal institutions, in particular, and economies, in general, under enormous stress. Can immigration alleviate these stresses? The answer is unclear bacause a number of offsetting factors are at play. First, increased immigration raises the size of the labor force, but also lowers real wages. Hence, the increase in the taxable wage base due to immigration will be less than might otherwise be expected. Second, immigrants arrive with some capital and accumulate more capital as they age. This raises labor productivity and both payroll and income tax bases. Third, immigrants, like natives, require public goods and become eligible for government welfare, health care, and pension benefits. Fiscally speaking, how much one "earns" from a new immigrant depends on the immigant's skill level, which, in turn, determines the immigrant's level of earnings. The reason is that taxes and transfer payments are, in general, collected and distributed on a progressive basis. Consequently, high-skilled immigrants deliver a larger bang for the buck when it comes to paying net taxes (taxes paid net of transfer payments received). Our model confirms this point. Nonetheless, its findings, even with respect to high-skilled immigration, which we investigate in detail in this paper, are not pretty. It shows that a significant expansion of immigration, whether across all skill groups or among particular skill groups, will do remarkably little to alter the major capital shortage, tax hikes, and reductions in real wages that can be expected along the demographic transition.

Ageing, Pension Reform and Capital Flows: A Multi‐Country Simulation Model

“…Third, we follow Abel (2001, 2003), Altig et al . (2001) and Fehr et al . (2003, 2004) by including adjustment costs to capital in our analysis, which allows us to study the time pattern of the price of capital.…”

“…The above papers do not model PAYG pension systems, and accordingly do not address the important issue of pension reform with its associated changes in saving patterns which in turn have implications on international capital flows 2 . Issues related to pension reform are also addressed by INGENUE (2001) and Fehr et al . (2003, 2004).…”

“…First, we stress the ‘triangular’ relationship between population ageing, pension reform and international capital markets that is receiving increasing attention in the academic literature (see Börsch‐Supan et al . 2002, 2004; INGENUE 2001; and Fehr et al . 2003, 2004).…”

The Effect of Immigration on Public Finances

“…The generational accounting approach Oreopoulos, 1999, 2000;Lee and Miller, 2000;Fehr et al, 2004) attempts to project forward from the characteristics of current migrants to a more accurate assessment of the present discounted value of lifetime fiscal contributions. Doing so requires an accurate knowledge of future earnings paths, future return decisions and future paths of tax and welfare systems and to that extent the approach is unavoidably and arguably dangerously ambitious in the assumptions it needs to rely upon.…”

On the Political Economy of Deficit Bias and Immigration

“…Employing a generational accounting framework, Auerbach and Oreopoulos (1999) and Storesletten (2000) consider how immigration might ameliorate or exacerbate fiscal imbalances in the United States. Bonin et al (2000) perform similar calculations for Germany, Storesletten (2003) for Sweden and Fehr et al (2004) for the European Union, Japan and the US. The best feature of these papers is the well-articulated age structures of the populations being modelled, something that the overlapping generations structure on which they are based easily accommodates.…”