Immigration, Aging, and the Regional Economy

Seryoung Park
Geoffrey J.D. Hewings

As with the articles in this issue, this introduction reflects the views of the authors and does not necessarily reflect the views of the U.S. Department of Housing and Urban Development.

Using a two-region computable general equilibrium model (Chicago and Rest of the United States) integrated with an Overlapping Generations model, this analysis explores the implications of various indicators for changes in the level of immigration in Chicago. Initially, and not surprisingly, wages fall as a result of increased immigration. This finding is consistent with an equilibrium view of a market receiving a supply shock and a fall in the capital/labor ratio; but after 2040, the effects appear to be reversed. One reason for this reversal can be traced to the retirement of the first wave of immigrants, but more important, increasing numbers of immigrants will provide contributions to taxes that will reduce the social security tax burden and thus increase the after-tax income of native workers. Over time, the model assumes that immigrants and their offspring begin to accumulate skills so that they become undifferentiable from the native population. In terms of regional macroeconomic impacts, immigration would appear to reverse a projected decline in gross regional product (GRP) that would occur essentially as a result of an aging population with no stimulus provided by immigration. In per capita GRP terms, however, the positive effects occur only after the immigrants (cumulatively) acquire skills to elevate their productivity levels. The Chicago region, under an asymmetric immigration policy (Chicago gains more immigrants as a percentage of its base population than the United States as a whole), actually increases its share of gross national domestic product. One might expect that, given these findings, the effect on the social security tax rate would be positive in the sense of either muting increases or actually decreasing the rate. This impact is true until the immigrants start to retire in significant numbers after 2050; this result stems from the fact that, over time, the effects of immigration begin to diminish—a finding that is revealed in the results for the United States as a whole.