Immigration Policy In The OECD: Why So Different?

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1 Immigration Policy In The OECD: Why So Different? Zachary Mahone and Filippo Rebessi August 25, 2013 Abstract Using cross country data from the OECD, we document that variation in immigration variables across member states is significantly larger than the variation of a wide range of economic indicators. We propose a benchmark model in which a social planner chooses immigration policy to maximize the utility of native-born agents. We study how restrictions in tax policy instruments interact with inequality among the native-born to generate dispersion in optimal immigration policies across countries. We extend the analysis to consider two specific policies: family reunification and an immigration tariff. Finally, we compare the optimal policy with a politico-economic equilibrium studied in the literature by Razin et al. (2011). Keywords: Immigration, Fiscal Policy, Redistribution, Taxation 1

2 Extended Abstract Yearly net migration to OECD countries has nearly tripled in the last 30 years 1. However, immigrant population and policy is hardly uniform across member states. For example, while the US foreign-born population is over-represented at the lower levels of education, immigrants in Canada tend to be over-represented among tertiary education achievers. At the same time, while in the US about 32% of immigrants obtaining permanent residence in 2003 did so through family reunification programs, this percentage was only around 2% for the UK 1. Why is immigration so different across fairly similar economies? Which immigration policy would a social planner choose in these countries? This paper answers these questions. First, we use the OECD s International Migration Outlook tables to document differences in immigrant populations across member countries. Second, we develop a static model in which an unrestricted social planner chooses the size and distribution of the immigrant population. Agents are heterogeneous in their skill level; following Katz and Murphy (1992), hours provided by heterogeneous workers are aggregated as complementary factors in total hours worked in the economy. Using data on labor, capital and output, we compare the differences between efficient immigration policies implied by the model to what we observe in the data. We then investigate how optimal immigration policy changes when the government is constrained to make transfers unconditional on nativity status or skill level, financed through linear taxes. The intuition behind why optimal policy might change is that the planner may not able to redistribute the net benefits of immigration from low income earners to high income earners. An influx of high-skilled immigrants requires this kind of redistribution in order to be accepted by high-skilled natives. Consequently, economies characterized by high initial dispersion of income across skills will tend to reject influxes of high-skilled immigrants, while more egalitarian economies won t. In support of this prediction, we find in the data a negative correlation between the pre-tax gini coefficient and the fraction of high-skilled immigrants. In the final sections we use our framework to consider two specific migration policies: family reunification and an immigration tariff. This work is related to the contributions of Borjas (2003), Borjas and Katz (2007) and Ottaviano and Peri (2006). These papers offer estimates of the impact of immigration on wages in the US economy. We complement their approach by characterizing the set of feasible immigration policies in the limiting case in which immigrants and natives are perfect substitutes. The key point we make is that, in order to evaluate current immigration policy, it is crucial to consider the interaction between the instruments that are available to redistribute the net gains of immigration and the policy s feasibility in terms of voluntary participation by agents. When looking at OECD data, we divide the population in two broad educational attainment groups, as it is standard in the literature 2 ; in the data, we define high skilled agents as those who have completed tertiary education according to the 1997 ISCED 3 classification. We measure the variation across member states of the ratio of immigrants to total population and of the difference in educational attainment of native population and immigrant population. We compare the coefficient of variation (c v 4 ) of these variables with the coefficient of variation of GDP per capita and other economic indicators. We find the following: 1 Source: OECD Migration Outlook See Katz and Murphy (1992), Krusell et al. (2000) and Caselli and Coleman (2006), for example 3 International Standard Classification of Education, Unesco 4 The coefficient of variation represents the standard deviation as a proportion of the arithmetic mean. It is widely used to compare distributions with different means 2

3 1. The c v of the ratio of immigrants to total population is about 3 times bigger than GNI per capita s c v 2. The c v of the difference in educational attainment is about 14 times bigger than GNI per capita s c v 3. When we focus on a subset of countries that control migration from source countries 5, the 2 previous facts are intact % High Skilled Difference Foreign-Born GNI Country Foreign Native HS F B Population Per Capita Born Born HS NB Ratio (%) PPP Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom USA c v = σ µ Table 1: Differences in Educational Attainment and Relative Size of Immigrant Population across OECD Countries, Year 2003/2004 We also consider alternative measures of economic activity, such as GDP per capita, GNI per worker and Capital Output Ratios (taken from Caselli (2007) and Klenow and Hsieh (2010)). Our findings are robust to these alternative measures. In the model we develop, economic immigration policy is specified as an augmentation in the proportion of skilled and unskilled workers (later extended to include the fraction of this augmentation devoted to family reunifications). The social planner is constrained to make native-born agents at least as well off as in the competitive equilibrium without immigration. Costs and benefits of an influx of immigrants are respectively due to the decreasing returns and the complementarities of the two labor inputs. Potentially, the optimal immigration policy depends on the welfare weights of the objective function 5 For most of the OECD countries in the sample, a significant part of entries is enabled by free mobility agreements. We adopt the definition of the OECD Secretariat of discretionary immigration and focus on the countries for which at least 50% of the 2006 inflow of permanent immigrants was classified as discretionary: Australia, Canada, New Zealand, UK, USA 3

4 of the planner. In our specification, the optimal policy is independent of the welfare weights when the social planner can use lump sump transfers. In other words, the optimal policy is to admit any immigrant that brings positive net benefits to total welfare. When we limit the planner to use a linear tax on labor income to finance a non-contingent transfer, we show that immigration policy depends on the initial competitive equilibrium allocation. An immigration influx with positive net benefits might be rejected in some economies and allowed in others. A question very close to ours is studied by Razin et al. (2011). They analyze the joint determination of redistributive public spending and immigration policy in a politico-economic equilibrium. Their approach is positive; one of their results is that immigration policy sharply changes as the decisive voter switches from one skill group to another: whatever group represents the majority will restrict the influx of competing workers. Our paper, on the other hand, is about what a government should do when choosing immigration and redistributive policies. Moreover, comparing the unrestricted and constrained efficient policies allows us to highlight the forces underlying the politico-economic equilibria in these types of models. With that insight we then ask what types of additional policies work to relax the constrained problem. References [1] Borjas, George. The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market. The Quarterly Journal of Economics (2003): [2] Borjas, George, and Katz, Lawrence F. The Evolution of the Mexican-Born Workforce in the United States. in Mexican Immigration to the United States. National Bureau of Economic Research Conference Report, Cambridge Ma (2007) [3] Caselli, Francesco. The Marginal Product of Capital. The Quarterly Journal of Economics (2007): [4] Caselli, Francesco and Coleman, Wilibur J. II. The World Technology Frontier American Economic Review 96-3 (2006): [5] Katz, Lawrence F., and Murphy, Kevin M. Changes in Relative Wages, : Supply and Demand Factors. The Quarterly Journal of Economics (1992): [6] Klenov, Pete and Hsieh, Chang-Tai. Development Accounting American Economic Journal: Macroeconomics 2 (2010): [7] Krusell, Per; Ohanian, Lee E.; Ros-Rull, Jose -Victor; and Violante, Giovanni L. Capital- Skill Complementarity and Inequality: A Macroeconomic Analysis. Econometrica, 68-5 (2000): [8] Ottaviano, Gianmarco, and Peri, Giovanni. Rethinking the Effect of Immigration on Wages. National Bureau of Economic Research, Working Paper (2006) [9] Razin, Assaf; Sadka, Efraim; and Suwankiri, Benjarong. Migration and the Welfare State. MIT Press

5 [10] International Migration Outlook OECD Publishing [11] International Migration Outlook OECD Publishing