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Sunday, September 18, 2005

More From Kotlikoff et Al

I've just dug out another one: The role of immigration in dealing with world’s demographic transition' by Fehr, H., Jokisch, S. & Kotlikoff, L.. This seems to be a prelude to the paper mentioned in my last post, and in some ways gives the theoretical underpinnings to the immigartion conclusions. I smell a rat.

"Can immigration alleviate these stresses? A priori, the answer is unclear. On the one hand, more immigrants increase the number of workers and, therefore, the taxable wage base. On the other hand, more immigrants increase total labor supply, reduce real wages, and, thereby, reduce the taxable wage base. On the other, other hand, immigrants arrive with some capital and can accumulate more capital as they age. This increases the relative scarcity of labor and, thus, the demand for labor, putting upward pressure on real wages. Hence, the precise net impact of expanded immigration on payroll and income tax revenues is unclear. Moreover, immigrants, like natives, require public goods and become eligible for government pension, health care benefits, and other transfer payments. Fiscally speaking, how much one ”earns” from a new immigrant depends on the immigrant'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."

Even relatively highly-skilled migrants! I find that hard to swallow. This is like saying that thickening your cohorts will bright people does very little. The problem has to be somewhere in the methodology. When I have time I will dig it out.

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