Abstract

The flows of migration from neighbouring countries into the European Union have, since its inception, been more relevant than those of internal migration. Thus, labour movements from relatively less industrialized countries of the EU "such as Italy in the 50’s" towards the relatively more advanced ones "such as France and Germany" quickly vanished after the European Community was established among the initial six members. Later, migration from Portugal and Spain towards the richer EU countries was again greatly reduced, when those countries, as Italy and Greece before them, also became members of the Community. Migration flows from Turkey, on the other hand, were slowed down only by specific restrictions, particularly in Germany, and will probably be no longer relevant once the customs union between the EU and Turkey is completed. In the meantime, migrants from Southern Mediterranean, Eastern European, and other extra-EU countries keep pressing at the EU borders. The recent flow of illegal immigrants from Albania, particularly into Italy and Greece, is only the latest and more dramatised example of a larger and continuing phenomenon. Thus the issue of labour migration, as well as its legal or illegal aspects, is strictly intertwined "both theoretically and empirically" with the issue of economic integration, particularly when this takes place among countries that are relatively more advanced than their neighbours. In this paper, as an attempt at exploring some theoretical basis of these phenomena, we consider a country into which immigration takes place exogenously. footnote The model used to describe its economy is based on overlapping generations. People go through two periods in their life. During the first period they work, consume and save, in order to afford consumption also in the second period, when they will no longer work. The government taxes labour income in order to finance public expenditure, which takes the form of transfers to retired workers. footnote Thus government expenditures may be interpreted as a pension scheme based on the "pay as you go" system. Workers are both natives of the country, and immigrants. Without attaching any particular value judgment to it, we make the assumption that the government of the host country, in optimising its behaviour, takes into account only the utility of indigenous residents. footnote We assume that the exogenous rate of immigration is higher than the rate of growth of native population. Also, we assume that, relative to a previous situation when the pension scheme was put in place, the rate of growth of indigenous population has fallen below the rate of interest. Thus promises of a "pay as you go" pension scheme can no longer be kept, and a new scheme based on capitalisation becomes superior. In such a situation, immigration is beneficial, in the sense that the government is able to keep the promises based on the "pay as you go" pension scheme, by drawing on the higher demographic fertility of the immigrant population. Immigrants come and work in the host country either legally or illegally. Besides exploring the viability of the old pension scheme through immigration, we are interested in endogenising the share of total immigrants that come in legally, and in explaining the decision by legal immigrants to retire in the host country, or to return to their country of origin after their working period. We analyse two fiscal means through which the government of the host country can influence these decisions. They are the rate of labour income taxation, and the share of pension that the government will transfer to legal immigrants, in case they decide to return home, rather than remain in the host country, after retirement. In Section 2 we present the structure of the basic model. Section 3 examines how the government can maximise the welfare of its natives by using fiscal instruments, that are related to the income of immigrants during both the working and the retirement periods of their life. Section 4 presents the conclusions that can be drawn from our analysis, and indicates directions for further research.