New NBER Paper Finds Separating Immigration’s Labor and Fiscal Effects Can Misstate Who Gains and Loses

Immigration reshapes an economy through two big pathways: it changes wages and employment in the labor market, and it alters government finances through taxes paid and benefits received. Those effects are often analyzed in isolation—either as a jobs-and-wages story or as a fiscal ledger. A new NBER working paper argues that separating the two can badly misstate both the overall impact and who actually gains.

In the study, economists Michele Battisti, Giovanni Peri, and Eleonora Romano build a general-equilibrium model that links labor markets and public budgets in a single framework. The model includes realistic frictions in how workers and firms find each other (a search-and-matching setup), different skill groups, progressive labor income taxes that vary by skill, taxes on capital, and the provision of public goods. The authors then calibrate the model to data from 17 OECD countries over 2015–2019, allowing institutional differences—such as unemployment levels and tax progressivity—to shape the results.

Their central finding is that the welfare consequences for native-born residents of a one-percentage-point rise in immigrant inflows are not uniform. The direction and magnitude vary substantially across countries, depending on factors such as the skill composition of immigrants, wage differences between immigrants and natives, the amount of unemployment among residents, and the structure of the tax system. In other words, the same increase in inflows can look positive in one country and negative in another because the surrounding economic and fiscal environment is different.

When the simulated inflows are set to match the skill mix observed in arrivals during 2019–2024, the results tilt strongly positive: native welfare increases in 14 of the 17 economies studied. Moreover, in most countries both lower- and higher-skilled natives come out ahead—but through distinct mechanisms.

For lower-skilled natives, the main gains show up as higher earnings before taxes. The model attributes this to job creation and to complementarities between lower-skilled native workers and higher-skilled immigrants, which can raise demand for certain tasks and expand employment opportunities. For higher-skilled natives, the dominant benefit is fiscal: an immigration-driven expansion of the tax base allows the government to fund spending with a smaller labor-tax burden, so the welfare gain appears primarily via lower effective taxation rather than higher pre-tax wages.

The paper’s broader implication is methodological but consequential: immigration policy debates that focus narrowly on fiscal “costs” or “burdens” risk missing the ways migration changes the size and functioning of markets. Looking only at public budgets can understate the benefits generated through labor-market reallocation and the broader gains from exchange and specialization that come with a larger, more diverse workforce. Even if the pure “trade-like” gains are modest, the authors’ framework suggests they can dominate the arithmetic of apparent fiscal shortfalls in many settings.

The accompanying commentary underscores that point, while disputing one possible interpretation: that immigrants are paid less than their productivity and natives “capture” the difference. A more plausible channel, the critique argues, is that immigrants enlarge market size and—particularly in the United States—can amplify increasing returns, innovation dynamics, and a country’s pull as a global talent hub. Whatever the mechanism, the bottom line remains: the net fiscal impact of immigration cannot be credibly assessed without incorporating the economic gains that arrive alongside the tax-and-transfer effects.

Why it matters

Governments frequently justify immigration restrictions or expansions on budgetary grounds, but this research suggests that fiscal accounting alone can misidentify both winners and losers. If labor-market gains and tax-base effects are intertwined, policies based on one channel risk backfiring—or leaving large benefits unrealized. The next key question is whether country-specific institutions, especially tax progressivity and labor-market slack, can be adjusted to share gains more broadly when inflows rise.