Heated debates surround the economic effects of immigration in receiving countries. Research has shown that fears about competition for jobs or welfare are misguided, as immigrants contribute to receiving countries’ GDP (also per capita), employment rate, public budgets, or cross-border trade and business relationships; and immigrant entrepreneurs directly create jobs.
Much less is known, however, about the effects of immigration on inequality. This is because these effects are complex, as immigration changes the composition of the host population, may affect the distribution of wages or rents, and its effects may also be channeled through a behavioral response of natives or policy adjustment.
A new study by IZA director Klaus F. Zimmermann and CEU professor and IZA visiting research fellow Martin Kahanec published in the IZA Journal of Migration shows that skilled immigration increases the quality of the labor force, which in turn leads to a lower measure of inequality, the Gini coefficient, in receiving countries. The argument is supported by a theoretical model and empirically tested using data for the countries from the World Income Inequality database and OECD. The authors show that these effects are independent of a range of economic and demographic variables, such as GDP per capita, unemployment and participation rates, government size, or share of working age population. The authors conclude that immigration may decrease inequality in receiving countries.