Congestion and Optimal Immigration Policy

• Author: Chi‐Chur Chao,Bharat R. Hazari,Jean‐Pierre Laffargue
• DOI: http://doi.org/10.1111/rode.12017
• Published date: 01 February 2013
• Date: 01 February 2013

Congestion and Optimal Immigration Policy

Chi-Chur Chao, Bharat R. Hazari, and Jean-Pierre Laffargue*

Abstract

This paper presents a model to explain the stylized fact that many countries have a low ratio of migrants in

their population while some countries have a high ratio of migrants. Immigration improves the income of

the domestic residents,but migrants also increase the congestion of public services. If migrants are unskilled

and therefore pay low taxes, and the government does not limit access to these services, then the welfare of

the domestic residents decreases with the number of migrants.Visa auctions can lower the cost of immigra-

tion control and substitute legal migrants for illegal migrants. If the government decides to limit the access

of migrants to public services, immigration control becomes unnecessary and the optimal number of

migrants can be very large.

1. Introduction

Borjas (1999, 2003) uses a one-sector model of a competitive labor market to estab-

lish, theoretically and empirically, that immigration leads to a decrease in the wages of

domestic workers whose skills are substitutes for foreign migrants. It increases the

return on factors which complement the labor of migrants: physical and human capital

and land. The total gain is positive for the host country.It is very low when the propor-

tion of migrants in the active population is of the order of magnitude observed

in OECD countries. However, it can become very significant when the number of

migrants is higher.

The OECD countries have a moderate ratio of migrants in their populations. For

instance, in 2006, about 13% of the US population and 12% of the total population in

the OECD countries were foreign born. The International Migration Outlook of the

OECD (2008) notes that most foreign migrants are allowed to settle in the OECD

countries for non-economic reasons: asylum seekers,family reunification, the regulari-

zation of illegal migrants and so on. People who migrate for economic reasons and

are given working permits are few, about 6% of the total flow of legal migrants into

the US, France or Germany in 2006. However, a few other countries admit a much

higher number of migrants for economic reasons. The International Organisation for

Migration (2005, 2008) notes that, in 2005, non-nationals made up 78.3% of the total

population in Qatar, 71.4% in the United Arab Emirates, 61.1% in Kuwait, 40.6% in

Bahrain, 25.9% in Saudi Arabia and 24.4% in Oman. The share of migrants in the

labor force was still higher: it was equal to 55.8% in Saudi Arabia and represented

70% in all Gulf Cooperation Council (GCC) countries in 2000.

* Chao (corresponding author): Graduate School of Business, Deakin University, Melbourne, Australia,

and Chinese University of Hong Kong, Shatin,Hong Kong. Tel: 852-3943-8195; Fax: 852-2603-5805;E-mail:

ccchao@cuhk.edu.hk. Hazari: City University of Hong Kong, Kowloon, Hong Kong. E-mail: bhazari@

gmail.com. Laffargue: University of Paris I and CEPREMAP, Paris, France. E-mail: jean-pierre.laffargue@

orange.fr. We would like to thank two anonymous referees and the seminar participants at the China

Center for Economic Studies of Fudan University,on 27 December 2011, especially Zhao Chen and Zhang

Yuan, for their comments. This paper was started when Laffargue was visiting the City University of Hong

Kong in August 2006 and June 2007.

Review of Development Economics, 17(1), 88–104, 2013

DOI:10.1111/rode.12017

© 2013 Blackwell Publishing Ltd

Why do OECD countries not welcome economic migrants and establish tough

immigration controls? One answer is that immigration changes the income distribu-

tion among domestic residents. For example, Scheve and Slaughter (2001) and Fac-

chini and Mayda (2009) analyse opinion surveys and show that people with lower

skills, who directly compete with foreign migrants, are more hostile to immigration.

Another answer is that immigrants often have a very different culture and values

from those of the domestic residents, and that they threaten the national identity and

the social cohesion of the host country (Huntington, 2004).

We propose in this paper a different (but not mutually exclusive) explanation, bor-

rowed from Hanson (2005) and Nannestad (2007). Migrants use public services in the

host country: public safety (fire and police protection), roads and bridges, public

space (parks and recreational facilities), public education, housing, health, unemploy-

ment insurance, social assistance, etc.The quality and the availability of these services

decrease with the number of users. If migrants have full access to public services and

if the taxes they pay are too low to finance the cost of increasing the production of

these services (for instance when the skill and earnings of migrants are low), domes-

tic residents will have to choose between lower performing public services and higher

taxes.1

The government can use two policies to reduce the loss of welfare induced by immi-

gration, or even to turn it into a gain. First, it can set immigration controls and forbid

migrants to enter the country.However, these controls have a cost and cannot prevent

the illegal entry of some migrants. Freeman (2006) and Becker (2011) propose to

auction immigration visas and redistribute the revenue to native residents. Collie

(2009) investigates this policy with a model different from ours. We establish that

selling the right to immigrate would usefully complement immigration controls. The

welfare of domestic residents would improve, and the number of immigrants who

under this system would all enter the country legally, would rise.

The second policy is to exclude migrants from a wide share of public services.Then,

immigration controls become unnecessary because domestic residents find it in their

interest to admit a large number of migrants.2This situation seems to prevail in the

guest workers societies of the type of immigration to the Gulf countries (Chand and

Paldam, 2004).We have something similar in China where a system of residential reg-

istration (hukou) limits the access of migrants (from rural areas to fast developing

cities) to the public services of the place they work.3

The framework of our analysis is presented in the section 2, and the two policies are

successively analysed in sections 3 and 4.

2. Immigration, Consumption and Welfare

We successively present the model, its solution when the economy is closed, the

effects of immigration on the welfare of domestic residents, and the factors determin-

ing the decision to migrate.

The Model

The home economy is assumed to produce a private consumption good and a public

good. The production of each good uses labor and a specific factor, which is supplied

in fixed quantity and normalized to 1. The output of private and public goods are

respectively given by:

CONGESTION AND IMMIGRATION POLICY 89

© 2013 Blackwell Publishing Ltd