Working Paper: NBER ID: w15597
Authors: Assaf Razin; Efraim Sadka; Benjarong Suwankiri
Abstract: We develop a dynamic politico-economic theory of welfare state and immigration policies, 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 policies of the unskilled voters are featured more often in the political economy equilibria than any other groups regardless of the size of unskilled voters.
Keywords: Generosity of welfare state; Pay-as-you-go; Markov perfect political equilibrium; Strategic voting; Skill composition of migration
JEL Codes: F0; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of the unskilled voter base (K16) | policies enacted (E65) |
| skill composition of migrants (J61) | generosity of the welfare state (I38) |
| unskilled migrants (J61) | strain on the welfare system (I38) |
| dynamic voting behavior of young voters (D72) | future political power dynamics (D72) |