By Jinwook Hur, Fellow at KDI
※ This article is part of KDI Journal of Economic Policy, November 2020
It is well known that Korea is one of the most rapidly aging countries in the world. The working-age population (15~64) has been in decline since 2017, and the overall population is expected to start declining in 2029 (Statistics Korea, 2019). Korea is still a younger country than most developed economies, such as those in Western Europe and Japan, but the speed of aging is expected to be far higher than in those countries. With this rapid population aging, the major problems already experienced by developed economies, such as problems with fiscal sustainability, can also occur in Korea, but more severely.
As these population imbalances and related problems have emerged as a major issue during the establishment of policy directions in Korea, various alternatives are being discussed. One of these alternatives is a change to Korea’s immigration policy so that Korea will allow more immigrants. While allowing immigrants into Korea has thus far mainly been thought of as a means by which to meet labor demands, the recent idea of an expansionary immigration policy considers immigration as a tool to mitigate the speed of population aging. In particular, mitigating problems such as low growth and the fiscal imbalance caused by the decline of the working-age population by allowing working-age immigrants who can engage in economic activities in Korea has been argued.
Indeed, it is not a new phenomenon from a global perspective that the expansion of immigration policy is mentioned as an alternative to aging. Some European countries, such as Germany and Sweden, which experienced slowing population growth caused by aging prior to Korea, have implemented active population inflow policies with the aim of securing labor and improving fiscal soundness. Even in other advanced economies, it is reported that countries with severe population aging tend to have a high proportion of immigrants to the native population. Therefore, for the U.S. and the major European countries, the socio-economic effects of an influx of immigrants have been studied from various perspectives, as the movement of populations among those countries has been more active for more time compared to population movements in Korea. On the other hand, in Korea, it has not been as long since such discussions actively began. Although the number of foreigners residing in Korea is increasing rapidly, statistical data related to them have not been sufficiently accumulated quantitatively or qualitatively; accordingly, research to derive policy implications through rigorous empirical analyses remains as a future task.
However, despite the limited availability of data, analyzing the economic effects of immigration inflows is essential when setting immigration policies to respond to population aging. The main problem of aging is not simply stagnant or declining populations but rather a problem arising from the decrease in the relative size of the working-age population relative to the dependent population due to aging. In other words, a major policy consideration is whether various fiscal systems such as welfare systems can be sustained even during a population imbalance. Therefore, predicting how immigration policies can solve the problem of a population imbalance from an economic perspective using available statistics must be done prior to actual policy making activities. In this sense, it is an important task to predict the fiscal impact of immigrants using quantitative economic models.
For this purpose, this study aims to examine the main characteristics of foreigners residing in Korea based on available statistical data and then to quantitatively measure their impact on the government’s fiscal soundness in Korea. Specifically, the main content of this study involves a measurement of how much immigrants will contribute through tax and fee payments relative to the amount of government expenditure caused by them, depending on their main characteristics, specifically their visa type, gender, and age. In particular, by estimating how the fiscal contribution of immigrants differs according to the visa type held, this study attempts to derive implications for current foreigner policies in Korea, especially visa issuance policies.
This study is related to the literature on the fiscal impact of immigrants to the host country. First, in a study of the U.S. economy, Auerbach and Oreopoulos (1999) estimated the fiscal effect of an influx of immigrants on the U.S. economy, arguing that if immigrants are strictly limited to young and highly skilled workers, the fiscal burden can be partially mitigated, whereas the overall fiscal effect appears to be insignificant. Lee and Miller (2000) also draw similar conclusions using models that more realistically reflect the population sector. On the other hand, Storesletten (2000) analyzes the fiscal effect of an immigration inflow using a general equilibrium model reflecting the productivity effect on the supply side due to the immigration inflow. In this analysis, he argues that allowing 1.6 million highly skilled immigrants aged 40-44 into the U.S. economy every year can maintain the fiscal sustainability of the U.S. government even without tax reforms. Among studies focusing on European cases, Storesletten (2003) examines the fiscal impact of immigrants entering Sweden using Swedish data. In that case, it was found that immigrants aged approximately 20 to 35 make a positive contribution to the fiscal soundness of Sweden, whereas immigrants of other ages have a negative impact considering that government expenditures related to this group exceeds their lifetime taxes and fees. In other words, he claims that the ages of immigrants have a considerable influence on their degree of fiscal contribution. Schou (2006) presents the results of an analysis of the CGE model using Danish data, showing that the average immigrant imposes a greater fiscal burden compared to their fiscal contribution. Rowthorn (2008) conducts an empirical analysis of immigrants in major European countries and shows that the net contribution of immigrants to the host country’s fiscal status as a whole is positive but negligibly small. On the one hand, Imrohoroglu et al
. (2017) argues that increasing short-term foreign workers (guest workers) is a reasonable policy alternative to Japan’s rapidly aging and declining working-age population using a general equilibrium model analysis. In their study, they argue that Japan’s fiscal problem can be partly solved by allowing more guest workers even if all of the immigrant workers are low-skilled workers.
With regard to studies of the Korean economy, few explicitly analyze the fiscal contributions of immigrants. One of these with theme similar to this is that of Chun (2012), which focuses on how the influx of immigration affects overall productivity in Korea. He shows that the inflow of immigrants can increase the per-capita GDP if their productivity is high enough and public expenditures on them are not excessively large. Lee et al
. (2009) analyzes the effect of an influx of immigrants on the population structure of Korea, concluding that if multicultural families increase, their high fertility rates can substantially alleviate the population imbalance and decline in the working-age population otherwise occurring due to aging in Korea.
This study aims to estimate the fiscal impact of immigrants entering Korea according to visa type, gender, and age, referring to the earlier studies mentioned above. The model for the analysis basically stems from the partial equilibrium model used in existing articles but is modified and extended to reflect the actual Korean economy. For the sectors related to household consumption and the labor market in the model, the method of Storesletten (2003) is applied, in which consumption, savings, and labor input are determined in the form of behavioral equations instead of solutions to the optimization problem. However, his model is modified and extended for the government sector and the immigration policy sector so that it can reflect the reality of Korea to the greatest extent possible. In particular, the national pension, government consumption and transfers are modeled to better suit the Korean system.
Moreover, one of the expected contributions of this study to the literature is that the model actually reflects a visa issuance policy suitable for the reality of Korea. In many existing partial equilibrium estimation models, it is often assumed that all immigrants stay without leaving the host country for their lifetime once they enter, while the model used in this study distinguishes major visa types and derives a solution using not only age and gender but also the immigrants’ visa types. Therefore, the method of this study is specialized in deriving implications for immigration policy – i.e., the visa type to be issued.
The rest of this paper proceeds as follows. The immigration policy and visa types existing in Korea are introduced in Section II. The model setup is demonstrated in Section III, and the calibration strategy is explained in Section IV. After describing the results of the analysis in Section V, Section VI concludes the paper.
※ This paper is a revised version of Hur (2017). Fiscal Implications of Immigration Policy in Korea,
Policy Study 2017-20, KDI (in Korean).