Aging Population in a Regional Economy

Abstract

This article seeks to examine the effects of the aging population in Illinois with inclusion of the household’s heterogeneity across migration status and investment in human capital. By adopting a stylized Mincer wage regression, the article shows that there are significant gaps in returns to education between migration statuses in Illinois; further, there exist significant relationships between a resident’s demographics and the probability of in- and out-migration to/from Illinois. Using a two-sector Overlapping Generations (OLG) model incorporated with the household’s heterogeneity over migration status, this article projects the economic growth of Illinois in the future. This article also shows that the effects of the government’s immigration policy that aims at replacing low-productive international immigrants with native and relatively high-productive unemployed individuals who have been unemployed, are very limited in terms of per capita income, welfare, and aggregate productivity. On the contrary, a tax and transfer policy inducing international immigrants to invest more in their education works relatively better under the demographic changes facing Illinois over the next three decades.