Migration: A theoretical comparison on countries’ welfare

• Date: 01 June 2020
• Published date: 01 June 2020
• Author: Skerdilajda Zanaj,Jean Gabszewicz
• DOI: http://doi.org/10.1111/ijet.12238

Int J Econ Theory. 2020;16:167–183. wileyonlinelibrary.com/journal/ijet © 2019 IAET

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167

Received: 19 May 2017

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Accepted: 23 October 2017

DOI: 10.1111/ijet.12238

ORIGINAL ARTICLE

Migration: A theoretical comparison on

countries’welfare

Jean Gabszewicz

1

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Skerdilajda Zanaj

2

1

Center for Operations Research and

Econometrics, Université Catholique de

Louvain, Ottignies‐Louvain‐la‐Neuve,

Belgium

2

Centre for Research in Economics and

Management, University of Luxembourg,

Luxembourg City, Luxembourg

Correspondence

Skerdilajda Zanaj, CREA, University of

Luxembourg, 162A, avenue de la

Faiencerie, L‐1511, Luxembourg.

Email: skerdilajda.zanaj@uni.lu

Abstract

We compare the effects of migration on the production of

public goods, on income taxes, and on the welfare of

residents in the sending and receiving countries. Migra-

tion is driven by income differences between countries.

Alternative wage adjustment scenarios are considered:

fully flexible wages, upward rigidity, and unemployment.

We show that in all scenarios, emigration is detrimental

to welfare for the origin country. Migration improves

welfare for the destination country in the presence of

flexible wages and upward rigidity, but it has detrimental

effects in the presence of unemployment.

KEYWORDS

income tax, labor market rigidity, migration, public good

JEL CLASSIFICATION

F2; H2; H4

1

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INTRODUCTION

In this paper, we compare the effects of migration on the production of public goods, on income

taxes, and on the welfare of residents in the sending and receiving countries. We use a simple

standard model to compare the welfare levels reached before andafter migration in each country.

When economic circumstances are favorable, rich countries like to receive migrants from

poor regions. In recession, by contrast, when even in prosperous areas unemployment is

present, rich countries seem to be reluctant to welcome migrants, in particular, because they

occupy vacancies no longer available to their own residents. On one hand, such population

movements impact the economic welfare of residents in both countries, but this impact varies

[Correction added on 27 January 2020 after first online publication: The copyright line was amended.]

according to the economic circumstances characterizing the economic activity. Among these

characteristics, one plays a crucial role: the gross wage rate, and how it reacts to the pressure

from the excess supply (or demand) that migration generates in the labor market. The gross

wage rate also depends on technological productivity and on the existence of rigidities on the

labor market. On the other hand, the net wage rate depends on the level of income taxes levied

to finance public goods. Thus, migration affects the level of public goods supplied in the

destination and origin countries, and consequently, the income taxes that have to be levied to

finance the production of public goods.

The basic ingredients just mentioned constitute the building blocks of the model in which

we analyze the impact of migration on residents’welfare in the destination and the origin

countries. As stressed above, the economic environment matters in this analysis. How the

income tax is set by the governments and how the wage rate is determined generate several

different scenarios. We assume that the income tax in each country is set by the government in

order to maximize the residents’welfare via the production of a public good financed by the tax

proceeds. As for the labor market, we analyze several alternative scenarios. In the first one, it is

assumed that the gross wage adjusts in each country instantaneously at its equilibrium value. In

the destination country, a larger labor force is now available due to migration, so that, with a

wage rate at equilibrium before migration, instantaneous adjustment entails a smaller wage rate

after migration. In contrast, in the origin country, fewer workers are now available, and the

wage rate has to increase under instantaneous adjustment.

In the second scenario, we assume that the wage rate does not adapt instantaneously but

remains rigid. Two subcases must immediately be distinguished in this scenario. If at the ex

ante wage in the destination country there exist some unfilled vacancies, these vacancies can

then be filled by migrants arriving from the origin country. In contrast, when there is

unemployment, the arrival of migrants necessarily worsens labor market conditions. Then we

assume that this migration creates pressure to substitute some migrants for natives in their

existing jobs so that the pool of jobless people now includes both natives having lost their job

and migrants. To each of these scenarios, there corresponds a different impact of migration on

the welfare of residents, and it is precisely this impact that we analyze in the following sections.

In this analysis, we assume that the preferences of the agents over the private and public good

are represented by a quadratic utility function. We obtain some precise answers to our initial

question under this assumption. We examine when migration improves or alternatively worsens

the welfare of the residents both in the origin and destination countries under the three alternative

scenarios: instantaneous wage adjustment after migration, upward, and downward wage rigidity.

Our findings are as follows. In the first scenario, when the wage rate adjusts instantaneously

to its new equilibrium value after migration, we show that migration improves welfare in the

destination country. Migration generates at the ex post equilibrium an increase in the public

good produced and, accordingly, an increase in the income tax needed to finance this extra

public good production. Furthermore, due to the labor market flexibility assumption, the flow

of migrants yields a decrease in per capita income. These combined effects reflect, however, an

overall positive impact on natives’welfare level. As for the origin country, the effect on the

residents’welfare turns out to be the reverse of that observed in the destination country: the

impact is always detrimental to welfare.

The second scenario corresponds to the situation where the wage does not adjust

instantaneously to its equilibrium value. Under this hypothesis, we must distinguish whether or

not there are, before migration, some unfilled vacancies at the fixed existing wage rate. If there

are, then arriving migrants can fill these vacancies in the destination country. We show that, as

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GABSZEWICZ AND ZANAJ