Migration and the Welfare State: A Dynamic Political-Economy Theory

Assaf Razin, Efraim Sadka, Benjarong Suwankiri

NBER Working Paper No. 15597
Issued in December 2009, Revised in February 2012
NBER Program(s):International Finance and Macroeconomics

We develop a dynamic politico-economic theory of welfare state and immigration policies, featuring three groups of voters: skilled workers, unskilled workers, and old retirees. The welfare-state is modeled by a proportional tax on labor income to finance a demogrant in a balanced-budget manner to capture the essence of inter- and intra- generational redistribution of a typical welfare system. Migrants arrive when young and their birth rate exceeds the native-born birth rate. We characterize political-economic equilibrium policy rules consisting of the tax rate, the skill composition of migrants, and the total number of migrants, in terms of demographic and labor productivity characteristics. We find that political coalitions will form among skilled and unskilled voters or among unskilled and old voters in order to block the other group from coming into power. As a consequence, the ideal policies of the unskilled voters are featured more often in the political economy equilibria than any other groups regardless of the size of unskilled voters.

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Document Object Identifier (DOI): 10.3386/w15597

Published: Assaf Razin, Efraim Sadka, and Benjarong Suwankiri, MIGRATION AND THE WELFARE ST ATE: POLITICAL-ECONOMY , FORMATION POLICY MIT Press, October 2011.

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