Working Paper: NBER ID: w14784
Authors: Assaf Razin; Efraim Sadka; Benjarong Suwankiri
Abstract: We develop a dynamic politico-economic theory of welfare state, featuring three groups of voters: skilled workers, unskilled workers, and old retirees. The welfare-state is modeled by a proportional tax on labor income to finance a demogrant in a balanced-budget manner to capture the essence of inter-and intra-generational redistribution of a typical welfare system. Migrants arrive when young and their birth rate exceeds the native-born birth rate. We characterize political-economic equilibrium policy rules consisting of the tax rate, the skill composition of migrants, and the total number of migrants, in terms of demographic and labor productivity characteristics. We find that political coalitions will form among skilled and unskilled voters or among unskilled and old voters in order to block the other group from coming into power. As a consequence, the ideal polices of the unskilled voters always feature in any political economy equilibrium.
Keywords: migration; welfare state; political economy; demographics; redistribution
JEL Codes: E0; F2; H11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political coalitions among skilled and unskilled voters (D72) | Political economy equilibrium (D59) |
| Political coalitions among unskilled and old voters (D72) | Political economy equilibrium (D59) |
| Skill composition of migrants (J61) | Tax rate and welfare benefits (H29) |
| Total number of migrants (F22) | Tax rate and welfare benefits (H29) |
| Preferences of unskilled voters (D72) | Policy outcomes (D78) |
| Presence of migrants with different skill levels (J61) | Dynamics of tax policies and welfare provisions (H31) |
| Higher migration volumes (skilled migrants > native-born workers) (J61) | More generous welfare state (D69) |