Illegal Immigration, Labour Supply, and Fiscal Policies

ABSTRACT This paper explores the economic impact of illegal immigration in a dynamic general equilibrium model when the domestic labour supply is elastic and the fiscal policies include various taxes and income transfers. We first find that despite the mixed effects of illegal immigration on endogenous leisure-labour and saving-investment decisions, illegal immigration improves the welfare of domestic households in a dynamic competitive economy. The countervailing effects, however, show the wage differential improves individual welfare but hurts aggregate production. We then examine how the fiscal policies of illegal immigration influence a decentralised competitive equilibrium. Whereas the equivalence of economic incidence requires taxation on illegal immigrants, partial compliance causes the nonequivalence between labour income taxes and payroll taxes. Again, due to the countervailing effects, fiscal burden causes an adversary effect on the welfare of domestic households but stimulates aggregate economic performance. The opposite effects also arise in the fiscal contribution of illegal immigrants.