DP13909 What is the Optimal Immigration Policy? Migration, Jobs and Welfare

Author(s): Joao Guerreiro, Sérgio Rebelo, Pedro Teles
Publication Date: August 2019
Date Revised: February 2020
Keyword(s): Immigration, optimal taxation, redistribution, Welfare state
JEL(s): F22, H21
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13909

We study the immigration policy that maximizes the welfare of the native population in an economy where the government designs an optimal redistributive welfare system and supplies public goods. We show that when immigrants can be excluded from the welfare system, free immigration is optimal. It is also optimal to use the tax system to encourage the immigration of high-skill workers and discourage that of low-skill workers. When immigrants and natives must be treated alike, it is optimal to ban low-skill immigration and have free immigration for high-skill workers. However, high-skill workers may choose not to immigrate when there are heavy taxes levied on all high-skill workers, natives and immi- grants alike. We use a calibrated version of the model to study how the optimal immigration policy responds to changes in the skill premia in the U.S. and abroad.