Welfare Leakage and Immigration Policy

This paper analyzes the interaction between the welfare state and immigration policy. We establish a negative relationship between the number of dependents and the extent of the welfare state due to the leakage of benefits. We also explain the determination of immigration policy as the outcome of a lobbying game between domestic interest groups and the government. Our results indicate that there is evidence for welfare leakage and for lobbying as a determinant of immigration policy. In our baseline specification, a 10 percentage points increase in the share of dependents leads to a 7–10 percentage point decrease in the labor tax rate. Furthermore, an increase by 10 percentage points in union density leads to a decrease of one percentage point in the share of immigrants in the population. In the context of EU enlargement and the ensuing migration flows, our model predicts a reduction in the size of the welfare state in the old member countries. (JEL H5, J1, J61)