Immigration and Public Spending

Abstract

We examine the relation between low-skilled and high-skilled immigration and public spending from a theoretical and an empirical perspective. We introduce the distinction of public spending on private goods and on public goods. Our model implies that high-skilled immigration can have a negative effect on public spending only in the presence of an anti-social effect. We test our theoretical hypotheses, the 'income effect' and the 'anti-social effect' of immigration, and a 'welfare magnet effect' of public spending empirically using OECD panel data for 1990-2001. Estimating a system of simultaneous equations using three stage least squares (3SLS), we find evidence for an anti-social effect for low-skilled and high-skilled immigrants. In addition, we also find empirical evidence for the welfare magnet effect.