The net fiscal impact of immigration should include gains from trade

Immigration impacts both labor markets and public budgets for natives, but these effects are often examined separately. A new NBER working paper combines these channels in a general equilibrium model using data from 17 OECD countries between 2015 and 2019. The welfare effect of a one percentage point increase in immigrant inflows differs across countries depending on factors such as immigrants' skill mix, wage gaps with natives, resident unemployment, and tax progressivity.

In 14 of the 17 economies, native welfare increases when considering the skill composition of 2019-2024 arrivals. Both skill groups generally benefit in these cases, though through different mechanisms. Lower-skilled natives typically gain from higher pre-tax earnings due to job creation and complementarity with skilled immigrants.

Higher-skilled natives often see lower labor-tax burdens as the main gain. To fully understand the fiscal impact of immigration, it is crucial to model both labor-market and fiscal channels jointly. Each channel alone offers an incomplete picture of the gains and reasons behind them. While the authors argue that immigrants are equally productive yet underpaid, capturing their surplus is better explained by immigrants increasing market size.

This, particularly for the United States, leads to benefits like increased returns to scale, innovation, and attracting talent. Even if gains from trade are small, they still outweigh potential net fiscal costs.