Immigration and the Pattern of Public Spending: Evidence From OECD Countries

Abstract

Using a panel of OECD countries, we show that immigration systematically alters the composition of public spending in the destination country. To mitigate the bias from endogenous sorting of immigrants, we use an IV estimation strategy. The instrument is constructed by estimating a bilateral migration model for 24 destination and 208 source countries. We find that the host country responds to the increase in immigrants by adjusting various expenditures — for instance, reallocating resources from social welfare to national defense and public order. Our findings imply that: (1) immigration affects policy outcomes in areas with little ethnic or re-distributive dimension, and (2) the impact of immigration on the total size of government may not be substantial.