Aging, Factor Returns, and Immigration Policy
| DOI | http://doi.org/10.1111/j.1467-9485.2011.00560.x |
| Author | Oliver Lorz,Lena Calahorrano |
| Published date | 01 November 2011 |
| Date | 01 November 2011 |
AGING, FACTOR RETURNS, AND
IMMIGRATION POLICY
Lena Calahorrano* and Oliver Lorz*
ABSTRACT
Immigration has various economic and non-economic effects on the destination
country’s inhabitants. In this paper, we focus on the impact of immigration on
factor returns and analyze how aging affects immigration policy, employing a
dynamic political-economy model of representative democracy. Aging, that is, a
decline in the growth rate of the native population, has an expansionary effect
on immigration in this framework. This immigration effect may even overcom-
pensate the initial contraction of the labor force. We show that the immigration
rate in the representative democracy equilibrium exceeds the immigration rate
that would maximize welfare of current and future generations, and we also dis-
cuss the influence of social security on immigration policy.
II
NTRODUCTION
Virtually all industrialized countries are facing a decline in birth rates and an
increase in life expectancy resulting in a substantial aging of the native popu-
lation. Immigration is often seen as one key instrument to counteract this
development (see, e.g., UNPD, 2001). Against this background, our paper
analyzes how countries adjust their immigration policy in the wake of demo-
graphic change. Our point of departure is a standard overlapping generations
economy with two generations, young and old. Immigration affects factor
incomes of both generations differently, as the capital income of the old gen-
eration increases whereas the labor income of the young generation declines if
immigrant workers expand the domestic labor pool. Consequently, old and
young have different interests with regard to the desired level of immigration.
Although capital movements and trade may dampen the influence of immigra-
tion on factor prices, neither capital nor goods are perfectly mobile interna-
tionally, and there is indeed empirical evidence showing that immigration
reduces wages or employment among native workers in the destination coun-
tries (see, e.g., Angrist and Kugler, 2003; Borjas, 2003).
To determine the equilibrium policy, we consider a dynamic model of repre-
sentative democracy. The government sets the immigration level in each period
to maximize aggregate welfare of both currently living generations, weighting
each generation proportionally to its share in the population. Such an
*RWTH Aachen University
Scottish Journal of Political Economy, Vol. 58,No. 5, November 2011
©2011 The Authors. Scottish Journal of Political Economy ©2011 Scottish Economic Society. Published by Blackwell
Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148,U SA
589
approach to modeling policy outcomes in representative democracy, which can
be derived from probabilistic voting models, has become common by now.
1
As
a result of its effects on factor accumulation, immigration not only influences
current welfare but also has consequences for later periods. Therefore, immi-
gration policy constitutes a sequential game between subsequent governments.
We derive the Markov-perfect equilibrium of this game and analyze how a
decline in the rate of population growth influences equilibrium immigration. In
addition to the effects on factor incomes mentioned before, we also allow for
non-monetary costs of immigration, which capture the often observed reluc-
tance of the native population to admit foreigners as immigrants.
In our model, a Markov-perfect equilibrium exists, in which the number of
immigrants relative to the domestic workforce is stationary. The equilibrium
immigration rate is positive as long as the population is sufficiently old and
the non-monetary costs of immigration are low. With regard to the effects of
aging on immigration policy, we can show that the government admits more
immigrants if the growth rate of the native population declines. This results
from the increase in the relative size of the old generation, which benefits
from immigration, in the electorate. As a result of this expansionary effect of
aging on immigration, the relationship between aging, factor intensities, and
factor prices is not as clear-cut as in a standard growth model without immi-
gration. Instead, the influence of the growth rate of the native population on
the total size of the labor force and on the capital intensity may be non-
monotonic.
Our paper builds on a few related approaches dealing with the political
economy of immigration policy. Benhabib (1996) examines immigration policy
in a median-voter model with heterogeneous wealth endowments. Mazza and
van Winden (1996) analyze redistribution and immigration policies under rep-
resentative democracy with workers and capital owners. Unlike our paper, the
models of Benhabib (1996) and Mazza and van Winden (1996) are entirely
static and, therefore, do not account for intertemporal effects of immigration
policy we focus on. Dolmas and Huffman (2004), Ortega (2005, 2010), and
Mayr (2007) consider immigration policies in dynamic median-voter models
with heterogeneous skills or wealth endowments. In these papers, allowing
more immigration may have immediate consequences for factor prices and
may also influence political majorities in future periods.
Sand and Razin (2007) deal with the influence of aging on immigration and
social security policies. They set up a median-voter model assuming two over-
lapping generations and immigrants having more children than the native
population. Immigration alters the population shares of both generations in
the subsequent period, which may have consequences for the identity of the
median voter (old or young). Sand and Razin (2007) show that several equi-
librium types may emerge in this setting, depending on the growth rate of the
native and of the immigrant population. Earlier related papers that rely on
1
For textbook treatments, see, for example, Persson and Tabellini (2000, ch. 3) or Mueller
(2003, ch. 12).
590 LENA CALAHORRANO AND OLIVER LORZ
Scottish Journal of Political Economy
©2011 The Authors. Scottish Journal of Political Economy ©2011 Scottish Economic Society
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