To what extent does immigration affect inequality?

Abstract

The current surge in income and wealth inequality in most western countries, along with the continuous immigration to those countries demand a quantitative analysis of the effect immigration has on economic inequality. This paper presents a quantitative analysis framework providing a way to calculate this effect. It shows that in most cases, the effect of immigration on wealth and income inequality is limited, mainly due to the relative small scale of immigration waves. For a large scale flow of immigrants, such as the immigration to the US, the UK and Australia in the past few decades, we estimate that 10% ÷ 15% of the wealth and income inequality increase can be attributed to immigration. The results demonstrate that immigration could possibly decrease inequality substantially, if the characteristics of the immigrants resemble the characteristics of the destination middle class population in terms of wealth or income. We empirically found that the simple linear relation ∆S = 0.18ρ roughly describes the increase in the wealth share of the top 10% due to immigration of a fraction ρ of the population.

A Fokker-Planck model for wealth inequality dynamics

“…The model differs from previous models of wealth dynamics by the explicit inclusion of stochastic terms and by analyzing the joint income-wealth dynamics, in contrast to the models presented in refs. [3,10,12]. This allows for obtaining closed-form expressions for the wealth distribution moments, hence new analytic results and insights.…”

“…Different modeling approaches were suggested in the past few decades in order to better understand the sources of wealth inequality [3,[7][8][9][10][11][12]. These approaches, in addition to claims raised in response to Piketty's argument, are debated on whether wealth inequality generally tends to increase indefinitely, making wealth concentrated more and more in the hands of few.…”