policymakers demonstrate

132 Christian Dustmann, Giovanni Facchini and Cora Signorotto
The immigrants’ impact on the government budget in the host country might
have important policy consequences, which have also received some attention
in the literature. Razin and Sadka (1999, 2000) develop an overlappinggeneration
model where each generation lives for two periods, two types of
skills coexist, and a pay as you go pension system is in place, which requires the
young generation in employment to finance retirement benefits for the elderly
through income taxes. Under the assumption of free capital mobility, 10 the
model predicts a net gain from migration for both low and high income groups
and young and old age groups of individuals living at the time of the immigrant
flow. This is possible since, in an everlasting economy, the potential net
burden immigrants impose on the native population may be indefinitely shifted
onwards to the next generation. This result crucially depends on the assumption
of free capital mobility, which ensures that factor prices are unaffected. If this
assumption is relaxed, Razin and Sadka (2000) show that an anti-immigration
sentiment may arise and weaken or even overturn the positive effects of migration:
the migrants’ net contribution may turn into a loss for some native income
groups of both current and future generations.
Open Issues
The analysis of the fiscal impact of immigration in destination countries still
does not systematically include return or circular migration when modelling
migrants’ net contributions to the host country public finances. Moreover, the
assumptions needed for dynamic models of the fiscal impact of immigration,
especially in the generational accounting context, are very strong, and predictions
are highly sensitive to small changes in these assumptions. For example,
in a recent study Bonin et al. (2014) show that the findings of traditional generational
accounting exercises are significantly affected when the impact of business
cycle fluctuations is taken into account. The more robust approach, with
minimal data requirements and at the same time answering politically important
questions, is developed by Dustmann and Frattini (2014).
3.6 Migration and Skill Shortages
Immigration can – at least partially – offset the effects of a shrinking population.
In this section we review research concerned with how the inflow of foreign
workers can help to fill labour shortages and bring about skills that are in short
supply in destination countries, thus relaxing important bottlenecks leading to
inefficiencies in the production of goods and services. 11
Even if the notions of labour and skill shortages are extensively used by
economists and policy-makers, there is no consensus over a universal definition
of ‘shortage’ (see UK Migration Advisory Committee – MAC, 2008, 2010
and Dustmann et al., 2010b). From a theoretical perspective, a shortage arises
when supply and demand for a given type of worker are not in equilibrium and