Working Paper: CEPR ID: DP10885
Authors: Assaf Razin; Efraim Sadka
Abstract: We develop a model of an economic union with income redistribution, facing upward supplies of immigrants of various skills and wealth. We compare the policy competition equilibrium of the model to the coordination equilibrium. The model predicts that the completion equilibrium will be with a more generous welfare state (higher taxes) with more low skilled immigrants than the coordination equilibrium. The explanation is based on fiscal externalities due to income differences in the native born and immigrant populations. We argue that this type of a difference between the U.S. and the EU - the degree of coordination among the member states ? contributes to our understanding of observed policy differences between these two otherwise similar unions: the generosity of the welfare state and the skill composition of migration.
Keywords: fiscal externality; generosity of the welfare state; skill composition of immigration
JEL Codes: F2; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy competition (L13) | welfare state generosity (I38) |
| welfare state generosity (I38) | higher taxes (H29) |
| higher taxes (H29) | greater influx of low-skilled immigrants (J69) |
| income disparities (I24) | fiscal externalities (H39) |
| fiscal externalities (H39) | policy decisions of states (H70) |
| competition (L13) | greater influx of low-skilled immigrants (J69) |
| coordinated equilibrium (D50) | higher proportion of high-skilled migrants (F22) |
| US's cohesive federal system (H77) | less generous welfare state (I39) |