Working Paper: CEPR ID: DP10429
Authors: Assaf Razin; Efraim Sadka; Benjarong Suwankiri
Abstract: We develop a dynamic political-economic theory of welfare state and immigration policies, featuring three distinct voting groups: skilled workers, unskilled workers, and old retirees. The essence of inter - and intra-generational redistribution of a typical welfare system is captured with a proportional tax on labor income to finance a transfer in a balanced-budget manner. We provide an analytical characterization of political-economic equilibrium policy rules consisting of the tax rate, the skill composition of migrants, and the total number of migrants. When none of these groups enjoy a majority (50 percent of the voters or more), political coalitions will form. With overlapping generations and policy-determined influx of immigrants, the formation of the political coalitions changes over time. These future changes are taken into account when policies are shaped. Naturally, a lower rate of population growth (that is, an aging population) increases the political clout of the old (the left group). But it also increases the burden on the young (particularly, the skilled).
Keywords: Welfare State; Migration; Political Coalitions; Strategic Voting; Skill Composition of Migration; Markov Perfect Political Equilibrium
JEL Codes: E10; F15; H10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic composition of the population and skill levels of migrants (J11) | formation of political coalitions among skilled workers, unskilled workers, and old retirees (J59) |
| lower rate of population growth (aging population) (J11) | political power of older voters (J26) |
| political power of older voters (J26) | welfare state policies (I38) |
| influx of skilled immigrants (J61) | welfare state (I38) |
| influx of skilled immigrants (J61) | destabilization of existing coalition between unskilled and older individuals (J79) |
| political equilibrium (D50) | tax rate and skill composition of migrants (F16) |