Immigration, Labour Dynamics, and Fiscal Sustainability

A descriptive analysis of OCDE data suggests that a positive relationship exists between the population share of seniors and public debt as percentage of GDP. This fact points to the relevance of population structure for public finance management. Because Immigration can deeply modify countries’ population structure, we propose a Dynamic Stochastic General Equilibrium model to evaluate how immigration affects the receiving country sustainable debt and asset prices. Our model features consumer heterogeneity, death risk, population growth, skills, labor efficiency, life cycle with periods of labor inactivity, and social security transfers. We calibrate the model using Canada data and perform a set of experiments. Specifically, we evaluate how each factor characterizing the immigrating population, factors such as immigrants age profile, fertility, or relative labor efficiency, affects the receiving country fiscal solvency. Our response variable is the change in sustainable debt resulting from a temporary immigration shock. Whatever the driver we consider, immigration seems to improve fiscal solvency. Largest changes in sustainable debt result from moves in immigrants’ fertility and relative efficiency in labor.