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A simulation analysis of the longer-term effects of immigration on per capita income in an aging population

Fitzgerald and Riley, 2010; Denton and Spencer, 2000; Kahanec and Zimmerman, 2008;
Lee and Mason, 2011; Masson and Tryon, 1990), the fiscal positions of governments
(Auerbach and Oreopoulos, 2000; Bonin, Raffelhuschen, Walliser et al., 2000; Dustmann,
Frattini, Halls et al., 2010; Lee and Miller, 2000; Rowthorn, 2008; Storesletten, 2000), and
more particularly to the sustainability of publicly-financed pension and health care pro-
grams (Alonso, 2009; Anderson and Hussey, 2000; Scherbov, Sanderson, Mamolo et al.,
2014). Others have been concerned with possible undesirable effects of immigration on the
incomes and employment of the domestic population (Borjas, 2003; Brücker and Jahn,
2009; Card, 2009, 2012; Dustmann, Fabbri and Preston, 2005, 2013; Friedberg and Hunt,
1995; Jean and Jiménez, 2010; Longhi et al., 2005; Okkerse, 2008; Ottaviano and Peri,
2007; Peri, 2012; Ruhs and Vargas-Silva, 2014) and on the distribution of government
transfer payments as between immigrants and non-immigrants (Blanchflower and Shad-
forth, 2009; Kerr and Kerr, 2011).
Much of the economic literature on immigration and aging has been concerned with
shorter or medium-term effects. Our paper on the other hand is concerned with the longer
term, in particular the longer-term effects of immigration on a host country’s national in-
come per capita. Immigrants of working age increase the size of the labour force and add
to the national product. But they and their dependents add also to the overall population,
viewed as consumers, and thus affect both the numerator and denominator in the per capita
calculation. Moreover, once in the country, immigrants have dependent children, age, and
eventually themselves become elderly dependents. The effects on the host country’s aver-
age income level, especially longer-term effects, may not be at all obvious without taking
into account the demographic dynamics of immigration and its interaction with the host
country’s population.
We construct a theoretical model for a country with an aging population and assume an
infinite supply of potential immigrants. The country, which we call Alpha, is fictitious and
generic. We model its income generating process in as simple a fashion as possible for our
purposes, calibrate the model, and use it in a series of simulation experiments in which we
consider alternative immigration strategies and related issues of productivity, fertility rates,
mortality reductions, and labour force participation rates of the older population. We use
actual data as a basis for calibration but emphasize that the model is theoretical; it does not
represent any actual country but in broad terms shares the demographic characteristics of
many industrialized countries.

2. Methods

2.1 The Setting

The mythical country of Alpha is our “laboratory”. For simplicity, the population of Alpha
is divided into five broad age groups, corresponding to intervals of 20 years: Children
(0–19), Young Adults (20–39), Middle Aged (40–59), Seniors (60–79), and Aged (80–99);
there are no survivors beyond 99. It is convenient to refer to each age group and each cor-
responding time interval as a generation. All Children are born to the generation of Young
Adult women; the fertility rate for that group is thus identical to the total fertility rate. La-
bour force participation is confined to the Young Adult, Middle Aged, and (in much lesser
degree) Senior age groups; Children and the Aged have no participation.
Time in Alpha is measured in generations indexed by t. The population at t = 0 has an
important characteristic, a “bulge” in the age distribution inherited from an earlier period
of very high fertility — a “baby boom”. The “baby boom” occurred roughly two genera-
tions earlier (at t = −2) and was followed by a “baby bust” — a sharp reduction in fertility

International Journal of Population Studies | 2015, Volume 1, Issue 1 76