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

This paper develops a three-region dynamic general-equilibrium life-cycle model to analyze general and skill-specific immigration policy in the U.S., Japan, and the E.U. Immigration is often offered as a solution to the remarkable demographic transition underway in the developed world. However, the precise net impact of expanded immigration is quite unclear. Additional immigrants pay taxes, but they also require public goods and become eligible for social security programs. Since taxes and transfer payments are collected and distributed on a progressive basis, high-skilled immigrants deliver a larger bang for the buck when it comes to paying net taxes. Our model confirms this point. Nonetheless, its findings 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.