Do immigrants bring fiscal dividends? The case of Venezuelan immigration in Colombia

Valencia, Oscar M.; Angarita, Matilde; Santaella, Juan; de Castro, Marcela Working Paper Do immigrants bring fiscal dividends? The case of Venezuelan immigration in Colombia IDB Working Paper Series, No. IDB-WP-1170 Provided in Cooperation with: Inter-American Development Bank (IDB), Washington, DC Suggested Citation: Valencia, Oscar M.; Angarita, Matilde; Santaella, Juan; de Castro, Marcela (2020) : Do immigrants bring fiscal dividends? The case of Venezuelan immigration in Colombia, IDB Working Paper Series, No. IDB-WP-1170, Inter-American Development Bank (IDB), Washington, DC, https://doi.org/10.18235/0002993 This Version is available at: https://hdl.handle.net/10419/237465 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/legalcode IDB WORKING PAPER SERIES Nº IDB-WP-1170 Do Immigrants Bring Fiscal Dividends? The Case of Venezuelan Immigration in Colombia Oscar M. Valencia Matilde Angarita Juan Santaella Marcela De Castro Inter-American Development Bank Institutions for Development Sector December 2020 December 2020 Do Immigrants Bring Fiscal Dividends? The Case of Venezuelan Immigration in Colombia Oscar M. Valencia Matilde Angarita Juan Santaella Marcela De Castro Inter-American Development Bank. 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Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Do immigrants bring fiscal dividends?: the case of Venezuelan immigration in Colombia / Óscar Valencia, Matilde Angarita, Juan Camilo Santaella, Marcela De Castro. p. cm. — (IDB Working Paper Series ; 1170) Includes bibliographic references. 1. Venezuelans-Colombia-Econometric models. 2. Foreign workers, Venezuelan- Colombia-Econometric models. 3. Labor market-Colombia-Econometric models. 4. Unemployment-Colombia-Econometric models. 5. Fiscal policy-Colombia- Econometric models. 6. Tax collection-Colombia-Econometric models. 7. Venezuela- Emigration and immigration. 8. Colombia-Emigration and immigration. I. Valencia, Óscar. II. Angarita, Matilde. III. Santaella, Juan Camilo. IV. De Castro, Marcela. V. Inter-American Development Bank. Fiscal Management Division. VI. Series. IDB-WP-1170 http://www.iadb.org Copyright © 2020 1 Do Immigrants Bring Fiscal Dividends? The Case of Venezuelan Immigration in Colombia Oscar M. Valencia* Matilde Angarita * Juan Santaella † Marcela De Castro ‡ Abstract* This paper analyzes the effects of recent Venezuelan immigration to Colombia on the fiscal balance, the labor market, and economic growth. For this purpose, we built a dynamic general equilibrium model with a search and matching structure in the labor market. The higher fiscal spending to address immigration negatively impacts the government's budget in the short term, which is offset by higher output, consumption, and employment level, increasing the government's revenues mainly through indirect tax collection. The effect on the labor market is different for unskilled workers–whose higher supply generates a negative effect on wages and an increase in the unemployment rate–and skilled workers, who benefit from higher wages and lower unemployment. These changes in the labor market affect the government's revenue, resulting, in the long term, in positive fiscal dividends of migration. JEL Codes: E62,J61,H24 Keywords: fiscal policy, labor market, migration, unemployment * Corresponding author Óscar Valencia Inter-American Development Bank (IADB). Contact: [email protected]. * Matilde Angarita Contact: [email protected]. † Juan Camilo Santaella Contact: [email protected]. ‡ Marcela De Castro Contact: [email protected]. * We would like to thank Philip Keefer and participants of the FMM internal and VPS Seminars at Inter-American Development Bank (IDB) for their useful comments. We also thank participants of the Seminar “The Migration Crisis: Its Human and Economic Faces" at the George Washington University Elliot School of International Affairs for their significant contributions. 2 1. Introduction International migration has grown and transformed in recent decades due to globalization, armed conflicts, and socioeconomic conditions at the international level, which have had economic, social, and cultural implications in countries of origin and destination alike. There is a vast body of literature on the economic and sociological aftermath of migration—its short, medium, and long-term effects, as well as the public policy aspects that should be considered to tackle this issue. While previous studies have addressed the fiscal effects of migration on host countries’ economies, there has been considerable debate about the capacity of immigrants to generate tax revenues. This issue merits further study, because migration leads to sharp increases in the demand for social services and the allocation of expenditures to address the needs of the immigrant population in host countries. Empirical evidence has found that this fiscal asymmetry, that is, the increase in the demand for social services and reduced tax revenue coming from immigrants, does not occur in the same way in all migration flows. Furthermore, the individual decision to emigrate plays an important role. The literature on migration identifies two types: voluntary and forced. While voluntary migration is the result of decisions taken over a longer period and entails investment decisions and long-term consumption in the host country, forced migration occurs when conditions in the expelling country leave inhabitants no choice but to depart. For the reasons mentioned above, empirical evidence shows that voluntary migration tends to flow to advanced countries, whereas those who forcibly migrate tend to settle in neighboring countries, and that a positive fiscal effect is positively correlated with migrants’ skill level. For example, Storesletten (2003) provides evidence for Sweden that immigrants generate a net positive fiscal effect because the labor market absorbs the shock with higher vacancies and participation rates. Chojnicki, Docquier, and Ragot (2011) show positive impacts in France because migration flows of younger workers reduce fiscal pressures on the social security system. Dustmann and Frattini (2014) study the fiscal impact of immigration in the United Kingdom and find a net positive effect for immigrants from the European Economic Area (EEA) and a net negative effect for non-EEA immigrants. In the case of Colombia, the Colombian Ministry of Finance and Public Credit (2019) found that Venezuelan migration is a considerable fiscal shock because of its impact on the unemployment rate and the need to provide additional public goods associated with migrants flows. Migration increases the overall unemployment rate while fostering economic growth due to an increasing demand generated by immigrants and government expenditure in response to the social requirements of migrants. However, this analysis does not 3 differentiate the impact of migration on wages of skilled versus unskilled labor. Furthermore, Tribin-Uribe et al. (2020) show that the aggregate macroeconomic impacts of Venezuelan migration in Colombia are small in terms of inflation and, therefore, they do not require a monetary policy response. However, they do cause changes in the unemployment rate and the aggregate participation rate. Conversely, forced migration usually flows to neighboring countries, as exemplified by the exodus of segments of the Syrian, Lebanese, Jordanian, and Venezuelan populations. Moreover, the sudden exogenous shocks created by forced migration are different from the voluntary migration events due to the socioeconomic similarities among the destination countries and the countries of origin. In such economies, fiscal capacity is limited, and the shock increases demand for public goods and services in destination countries. Although the literature has previously addressed the fiscal effects of migration flows in advanced economies, which tend to be voluntary, the fiscal effects of forced migration on emerging destination economies is unexplored. This paper seeks to contribute to the literature on the fiscal impact of migration shocks in emerging economies and to enrich migration studies by analyzing the economic effects of forced migration. Specifically, this paper analyzes the fiscal dividend of the Venezuelan migration shock in Colombia, measured as the difference between the fiscal contributions of migrants and public spending on them. The model shows direct and indirect effects from the shock captured in general equilibrium and the direct fiscal impact generated by increased public expenditure. Furthermore, it shows the impact on fiscal revenues due to the demographic effect on the economy and the indirect effect created by the labor market's recomposition, investment, and output after the shock. To achieve this, we build a dynamic general equilibrium model that contains two main features. First, the model considers agent heterogeneity by type of skill and residence. In equilibrium, unemployment rates are heterogeneous and endogenously determined, capturing the labor market's migratory flow dynamics. Second, it includes fiscal variables such as government expenditure allocated to meet the needs of the migrant population and fiscal contributions. It also incorporates distortionary taxation—direct and indirect–into the model to evaluate the endogenous response in terms of revenues. The findings show that that the migration shock generates positive albeit small effects on aggregate variables such as output, consumption, and investment. The aggregate unemployment rate is persistent in the medium term. Moreover, the model simulates the potential path of government spending on migrant needs in the medium term and computes 4 the transitional dynamics of tax revenues. The paper finds that the economy initially experiences a large deficit which decreases over time. Consequently, the simulations suggest that indirect tax revenues can rise around 1 percent of GDP per year, reducing the deficit over time. This fiscal contribution is possible due to the recomposition of the labor market. Hum and Simpson (2004) find that immigrants enter the labor market and replace part of the local supply, but with lower average wages than native-born workers. Similarly, Tribin-Uribe et al. (2020) show that Venezuelan migration to Colombia impacted immigrants' unemployment and has effects on the global participation rate. Consistent with this finding, the literature has shown that these lower salaries are explained to a large extent by the self-employment assumed by many of the immigrants when they enter the labor market. 4 One of the reasons for this is the complexity of finding an immigrant employee by the employer. As Beladi and Kar (2015) argue, information asymmetries do not allow employers to find employees within the migrant population. Likewise, immigrants face constraints in accessing the health system and public services, which, in turn, affect their adaptation and lead to a predominant vulnerability (Somerville and Sumption, 2009). However, these results differ depending on the skill level of the migrant population. When immigrants are highly skilled, the local labor market is less affected than when migrants are unskilled (Vargas-Vila, 2014). In addition, unemployment for unskilled labor is more volatile than for the skilled labor market (Dustman, Glitz, and Vogel, 2010). This effect depends directly on the elasticity of substitution between migrant and local workers and the between skilled and unskilled workers. This paper follows a similar approach by adding skilled and unskilled labor but analyzing how taxation affects labor participation rates. Our findings show an increase in tax collection due to migration. In our model, labor frictions and taxes enable an analysis of the how the migration shock and the marginal effect of distortionary taxation affect equilibrium unemployment rates. This yields a more accurate analysis than Storesletten (2003) and Dustmann and Frattini (2014), where relative prices are constant and in partial equilibrium. Unlike Chojnicki, Docquier, and Ragot (2011) and Tribin-Uribe et al. (2020), which do not differentiate between skilled and unskilled workers, we evaluate the unskilled migrant population shock. We find that there are medium-term benefits for skilled immigrants and 4 Some papers related to this perspective are Andersson and Hammarstedt (2010), Bates (1997), Clark and Drinkwater (2000), Constant and Zimmermann (2006), Fairlie and Meyer (1996), Kidd (1993), Razin, (1992), Robson (1998), and Yuengert (1995). 5 native-born workers in terms of higher wages and lower unemployment rates. Given its structure, our model cannot highlight the positive demographic effect on fiscal balance, as do those of Storesletten (2003) and Chojnicki, Docquier, and Ragot (2011). This paper is organized as follows. Section 2 presents the main stylized facts of the immigration process in Colombia. Section 3 presents the model, and Section 4 explains its main parameters and calibration of the variables. Section 5 presents the results of the immigration shock simulation and the impact on the fiscal variables. Sections 6 concludes. 2. Stylized Facts about Venezuelan Immigration and the Labor Market in Colombia In emerging economies, the Venezuelan exodus has been one of the most significant migration shocks. According to the UN Refugee Agency (UNHCR), Colombia is currently the second-largest (1.8 million) destination country in the world after Turkey (3.6 million) (UNHCR, 2019). Venezuelan immigrant flow has increased by 330 percent in less than four years (Figure 1). Figure 1. Total Arrivals of People from Venezuela to Colombia (in thousands) Source: Migración Colombia (2020). 2018: 2549 376 381 349 317 291 264 242 216 192 357 333 313 297 281 2017: 1182 238 216 2016: 788 72 73 76 81 81 82 79 86 87 90 91 171 157 129 97 98 98 102 106 108 111 108 109 113 26 33 40 47 53 60 92 93 Household’s problem The household optimization problem is to choose Y 𝑐(,!,𝑏(,!,ℎ(,!4* ,&& ] !31 2 for 𝑖= ( 𝑠,𝑢 ) and 𝑗= ( 𝐻,𝐹 ) such that it maximizes its intertemporal utility per capita, taking the prices of factors Y 𝑤(,! ,,𝑟(,! ] !31 2 , the benefits of the firms { &Π! } !31 2 , the probabilities of finding employment Y 𝑝(,! , ] !31 2 , and the initial conditions on Y ℎ(,1 , ] given for 𝑖= ( 𝑠,𝑢 ) and 𝑗= ( 𝐻,𝐹 ). Consider that the equation of employment evolution implies that the household chooses the consumption, bonds, and working individuals that offer labor in t+1, taking the current labor as a state variable. Let us define 𝑉( ( . ) as the household value function. The recursive representation of the household problem in per capita terms is: 𝑉( 1 𝑏(,!,ℎ(,! %,ℎ(,! & 2 =max 7 6!,#,8!,#,9!,#$% &:: ; #'( ):: Y 𝑢!+𝛽𝐸!𝑉( 1 𝑏(,!4*,ℎ(,!4* %,ℎ(,!4* & 2] &&&&&&&&&&&&&&&&&&&& (4) subject to 𝑐",! ( 1+𝜏6 ) +𝑏",!4* ≤&𝑤",! %ℎ",! % ( 1−𝜏" % ) +&𝑤",! &ℎ",! & ( 1−𝜏" & ) +&π!+&𝑟",!𝑏",!&&&&&&&&&&&&& (5) and for the immigrants: 𝑐$,! ( 1+𝜏6 ) +𝑏$,!4* ≤&𝑤$,! %ℎ$,! % ( 1−𝜏$ % ) +&𝑤$,! &ℎ$,! & ( 1−𝜏$ & ) +&𝑟$,!𝑏$,! +𝑠+,-,!&&&& (6) Moreover, the law of motion for the skilled employment is given by: ℎ(,!4* %𝑔(,!4* = ( 1−𝜒 ) ℎ(,! %+𝑃(,! % f ∅(,! −ℎ(,! % g &&&&&&&&&&&&&𝑗=(𝐻,𝐹)&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (7) Symmetrically, the law motion for unskilled employment is: ℎ(,!4* &𝑔(,!4* = ( 1−𝜒 ) ℎ(,! &+𝑃(,! & f (1−∅(,!)−ℎ(,! % g &&&&&&&&&&&&𝑗=(𝐻,𝐹)&&&&&&&&&&&&&&&&&&&&&&&&&& (8) where 𝑐(,! =𝐶(,!/𝑁(,! , ℎ(,! ,=𝐻(,! ,/𝑁(,! , 𝑏(,! =𝐵(,!/𝑁(,! , π!=&Π!/𝑁",! , &𝑠+,-,! =𝑆+,-,!/𝑁$,! denotes percapita variables for each type of households 𝑗 . 𝑔(,! =𝑁(,!/𝑁(,!)* is the population growth rate for each type of household. The Euler equation for each type of household is given by: 𝐸! h 6!,#$% 6!,# i =&𝛽𝐸! h <!,#$% -!,#$% i ;&&&&&&&&&&&&&&𝑗= ( 𝐻,𝐹 ) &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (9) Equation 10 is the standard smoothing condition for the household. Equation 11 is the firstorder condition for the labor supply by type of labor and household 𝑖=(𝑠,𝑢)𝑗=(𝐻,𝐹) : 𝑉9!,# &=&−𝜑ℎ(,! 5+&=!,# & > *)?! & @ 6!,# ( *4?* ) +𝛽𝐸! jk * -!,#$% l 𝑉9!,#$% & f( 1−𝜒 ) −𝑃(, gm ;&&&&𝑖= ( 𝑠,𝑢 ) ,𝑗= ( 𝐻,𝐹 ) &&&&&&&&& (10) We highlighted two effects. The first is a static margin where direct and indirect taxation and compensation reduce incentives to offer labor supply. Second, there is a dynamic margin in which there is a positive effect on the labor supply of finding a job or maintaining the current job. 3.5. Firms There is a representative firm that uses capital, skilled, and unskilled workers to produce a single consumer good (see Krusell et al. (2000)): 𝑌!=𝐴 p 𝜎(𝐻! &)C+(1−𝜎) [ 𝜌(𝐴D𝐾!)E+(1−𝜌)(𝐻! %)E ] + , u % +&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (11) where 𝐴>0 and 𝐴D>0 are the total factor productivity and capital-augmenting technology. Meanwhile, 𝛼& and 𝜈 are the substitution elasticity between factors and 𝜎>0,𝜌<1 are the factor shares within the production function. 𝐾! is the amount of capital used by the firm, while 𝐻! % and 𝐻! & are the skilled and unskilled labor that the firm uses as inputs. The total unskilled and skilled labor is a simple aggregation between local and foreign workers: 𝐻! &=𝐻",! &+𝐻$,! &&;&&&&&𝐻! %=𝐻",! %+𝐻$,! %& This implies that, for the firm, local and foreign workers are perfect substitutes. Therefore, the firm would only discriminate in terms of productivity between skilled and unskilled workers. To employ any type of worker, the firm can open any vacancies 𝑉(,! , at a specific cost 𝑞( , for each type of worker. The number of employed workers evolves as: 𝐻(,!4* ,= ( 1−𝜒 ) 𝐻(,! ,+𝜇(,! ,𝑉(,! ,;&&&&&&&&&𝑖= ( 𝑠,𝑢 ) ,𝑗=(𝐻,𝐹)&&&&&&&&&&&&&&&&&&&&&&&&&& (12) For the total number of workers employed in 𝑡+1 for each household type 𝑖,𝑗 is equivalent to the mass of workers who keep their jobs plus the vacancies filled in period 𝑡 . The firm owns the capital, and hence there is an adjustment cost. We follow the standard quadratic specification form (see Hayashi, 1982). Then, the law motion of capital is given by: 𝐾!4* =𝐼!−&F G | H# I#−𝛿 ~ G𝐾!+ ( 1−𝛿 ) 𝐾!&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (13) By transforming the problem to per capita terms, dividing each variable into the total population of the economy (𝑁!) , the firm’s problem is: max 7 D#$%,J!,# & ; &&&&&&&𝐸1 Ek 1 1+𝑟! l ! 2 !31 [ 𝜋! ] &&&&&&&& where 𝜋!=&𝑦!−&𝑤",! %𝐿",! %−&𝑤",! &𝐿",! &−&𝑤$,! %𝐿$,! %−&𝑤$,! &𝐿$,! &−&𝑣",! %𝑞" %−𝑣",! &𝑞" &−&𝑣$,! %𝑞$ %&− &𝑣$,! &𝑞$ &−𝐼!&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (14) subject to 𝑘!4*𝑔!4* =𝑖!−&F G | ,# D#−𝛿 ~ G𝑘!+ ( 1−𝛿 ) 𝑘!&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (15) 𝐿(,!4* ,𝑔!4* = ( 1−𝜒 ) 𝐿(,! ,+𝜇(,! ,𝑣(,! ,;&&&&&&&&&𝑖= ( 𝑠,𝑢 ) ,𝑗=(𝐻,𝐹)&&&&&&&&&&&&&&&&&&&&&&&& (16) 𝑦!=𝐴 p 𝜎(𝐿! &)C+(1−𝜎) [ 𝜌(𝐴D𝑘!)E+(1−𝜌)(𝐿! %)E ] + , u % +&&&&&&&&&&&&&&&&&&&&&&&&&&& (17) where 𝑦!=K# L#,𝑣(,! ,=M!,# & L#,𝑖!=H# L#𝑘!=I# L#𝐿(,! ,="!,# & L#, denote the variables per capita and 𝑞( , is the cost of opening a vacancy for household type 𝑖,𝑗 . Firm’s optimality conditions The problem of the representative firm is to choose Y 𝑘!4*,𝐿(,! ,,𝑣(,! ,,𝑖!& ] !31 2 such that it maximizes the present value of its lifetime profits, taking as given the factor prices Y 𝑤(,! ,,𝑟(,! ] !31 2 , the probabilities of filling a vacancy Y 𝜇(,! , ] !31 2& and the initial conditions Y ℎ(,1 , ] and for 𝑖= ( 𝑠,𝑢 ) &𝑗= ( 𝐻,𝐹 ). The Euler condition for employment is: N! & O!,# &=&𝛽𝐸! j 𝑃𝑚𝑔!4* ,−𝑤(,!4* ,+N! & O!,#$% && ( 1−𝜒 )m ;&&&&&&&&&&&&&𝑖= ( 𝑠,𝑢 ) ,𝑗= ( 𝐻,𝐹 ) &&&&&&&&&&& (18) where the marginal product for skilled and unskilled workers is: 𝑃𝑚𝑔! %=&𝐴C𝑦! *)C(1−𝜎)& [ 𝜌(𝐴D𝑘!)E+(1−𝜌)(𝐿! %)E ] C E)*(1−𝜌)(𝐿! %)E)* 𝑃𝑚𝑔! &=&𝐴C𝑦! *)C𝜎(𝐿! &)C)* Equation (21) shows that the cost of an effective vacancy must be equal to the net surplus of hiring a worker 𝑃𝑚𝑔!4* ,−𝑤(,!4* , plus the savings of not having to open a vacancy in the future N! & O!,#$% && ( 1−𝜒 ). Also, the Euler condition for the investment evolves: 𝐸! „ P#$% P# … =𝛽𝐸! j| * -#$% ~h 𝑃𝑚𝑔D,!4*𝑀!4* + ( 1−𝛿 ) +𝜅 | ,#$% D#$% −𝛿 ~ ,#$% D#$% −F G | ,#$% D#$% −𝛿 ~ G im &&&& (19) where 𝑀!≡ h 1−𝜅 k 𝑖! 𝑘!−𝛿 li 𝑃𝑚𝑔D,! =&𝐴C𝑦! *)C(1−𝜎)& [ 𝜌(𝐴D𝑘!)E+(1−𝜌)(𝐿! %)E ] C E)*𝜌(𝐴D𝑘!)E)*𝐴D 3.6. Wages: Nash Bargaining Once the matching process occurs and each worker is assigned to a firm's vacancy, there is a bargaining process to set the wage. The wage equilibrium is determined by a Nash negotiation. In particular, the wage is established in such a way that maximizes Nash's surplus: 𝑤(,! ,=&argmax = Q !,# & ‹„ 𝑉 Œ 9! &(𝑤 • (,! ,) … R! & „ 𝐽S- . •1 𝑤 • (,! && 2… *)R! & • &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (20) Thus, the equilibrium wage is one that maximizes the marginal value of offering and demanding an additional unit of employment, weighted by the bargaining power of each agent. Where 𝜆( , is the bargaining power of household 𝑖 for worker 𝑗& - type relative to the firm. Symmetrically, (1−𝜆( ,) is the bargaining power of firms relative to each household. Equilibrium wages From the value functions of the agents and replacing in equation 23, we obtain: 𝑉9! &=& R! & (*)R! &) ’> *)?! & @ 6!,# ( *4?* )“ 𝐽S! &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (21) Using equations (21) and (24)–(27) and solving for 𝑤(,! , yields: 𝑤(,! ,=&𝜆( , h 𝑃𝑚𝑔! ,+N! & O!,# &𝑃(,! , i + 1 1−𝜆( , 2’ T U 9!,# V /6!,# ( *4?* ) > *)?! & @“ &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (22) Wages are a weighted average between what firms can offer and what households demand for each worker. Each agent's weight is determined by its bargaining power ( 𝜆, ( ). 3.7. Government The government obtains resources from taxes on consumption and labor and bonds that the household buys with its wages. These resources are used to pay the interest on bonds, a fixed-sum transfer to households, and transfers that are proportional to immigrants. Thus, the government's budget restriction is given by: 𝑤",! %ℎ",! %𝜏" %+𝑤",! &ℎ",! &𝜏" &+𝑤$,! %ℎ$,! %𝜏$ %+𝑤$,! &ℎ$,! &𝜏$ &+𝑐",!𝜏6+𝑐$,!𝜏6+𝐵",! +𝐵$,! = 𝑟",!𝐵",!)* +𝑟$,!𝐵$,!)* +𝐺+𝑠+,-,!&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& (23) where 𝐺=𝐺"+𝐺$ and spending on immigrants is defined as: 𝑠+,-,! =&𝜇+,-(𝑔$,! −1) 3.8. Market-clearing Conditions In equilibrium, the following conditions must be satisfied: Labor market clearance: ℎ(,! ,Ω=𝐿(,! ,;&&&&&&&&&&&&&&&𝑖= ( 𝑠,𝑢 ) ,𝑗=(𝐻,𝐹) Bond market clearance: 𝐵!=𝐵!)* =0 Additionally, the aggregations are of the form: 𝐶!=&𝐶",! +𝐶$,! 𝑐!=&Ω𝑐",! +(1−Ω)𝑐$,! 𝐵!=&𝐵",! +𝐵$,! 𝐵",! =&∅W𝐵! 𝐵",! =(1−∅W)𝐵! Where ∅W is the share of total bonds demanded by local households, the resource constraint of the economy is given by: 𝑌!=𝐶!+𝐼!+𝑉",! %𝑞" %+𝑉",! &𝑞" &+𝑉$,! %𝑞$ %+𝑉$,! &𝑞$ &&&&&&&&&&&&&&&&&&&&&&&&&&&& (24) 3.9. Model Solution Given the initial conditions for Y 𝐾1,𝐻",1 %,𝐻",1 &,𝐻$,1 %,𝐻$,1 & ] , decentralized equilibrium, it is defined by a series of prices, Y 𝑟",𝑟$,𝑤(,! , ] !31 2&&& matching probabilities Y &&𝑃",! %,&&&𝑃",! &,&&&𝑃$,! %,&&𝑃$,! &,&&𝜇",! %,&&𝜇",! &,&&𝜇$,! %,&&𝜇$,! &&& ] :!31::::: :2 &&&&&&&&&&&&&&&&&&&&&&&&&&&&&and allocations Y 𝐶",𝐶$,Π!,𝐻",! %,𝐻",! &,𝐻$,! %,𝐻$,! &,𝐾!,𝑉",! %,𝑉",! &,𝑉$,! %,𝑉$,! && ] !31 2& such that households and firms optimize their decisions by taking into account labor market frictions. Wages are determined by a Nash bargaining where all budget constraints are satisfied and the markets are cleared. 4. Calibration 4.1 Structural Parameters Table 1 reports the values of the structural parameters of the model based on quarterly calibration. We calibrated parameters to match the relevant steady-state variables for Colombia in 2018, and others are taken directly from the related literature. Depreciation Rate and Intertemporal Discounting Factor Following relevant literature, the intertemporal discount rate was set at 0.99, consistent with a real steady state interest rate of 2 percent. Similarly, the capital depreciation rate was set at 2.5 percent to obtain, at a steady state, the capital-output ratio of 9.7. Production Krusell et al. (2000) estimated the substitution elasticities between skilled labor and capital and unskilled labor and capital. We assume that unskilled capital and labor are net complements, and we fix the parameter at 𝛼=−0,2 . The assumption of gross complementarity between capital and skilled workers, drawn from Grossman (1982), is 𝜈= −0,2. Parameters 𝜌 and 𝜎 were calibrated consistently with data on the participation of the factors in the economy (DANE, 2019) at 73 percent and 40 percent, respectively. Finally, parameters 𝐴 and 𝐴D were measured to calibrate the share of capital and consumption to output in a steady state. Additionally, parameters associated with the disutility of work were calibrated so that the equilibrium unemployment rate of the economy was 9.7 percent. Once the economy's unemployment rate is calibrated, we determined that workers' separation rate is 0.11. These data are consistent with Dustman, Glitz, and Vogel (2010) for non-OECD countries. Table 1. Calibration of Parameters Parameter Value Definition Source 0 < β < 1 0.985 Intertemporal discount factor Calibration 𝜑 > 0 0.15 Labor disutility Calibration 0 ≤ 𝛿 ≤ 1 0.025 Capital depreciation rate Calibration 1 1 − 𝜈 -0.2 Capital-skilled labor substitution elasticity titution Literature 1 1 − 𝛼 -0.2 Capital-unskilled labor substitution elasticity Literature 0 < 𝜎 < 1 0.405 Share of unskilled labor in production Calibration 0 < 𝜌 < 1 0.733 Share of capital in production Calibration 𝑞! " 0.018 Vacancy cost for local skilled workers Calibration 𝑞! # 0.009 Vacancy cost for local unskilled workers Calibration 𝑞$ " 0.361 Vacancy cost for foreign skilled workers Calibration 𝑞$ # 0.199 Vacancy cost for unskilled foreign workers Calibration 𝜒 > 0 0.11 Employment separation rate Data 0 ≤ 𝜂 ≤ 1 0.5 Employment search elasticity Literature 0 ≤ 𝜆!≤ 1 0.85 Relative negotiating power of local workers Literature 0 ≤ 𝜆$≤ 1 0.5 Relative negotiating power of foreign workers Literature 0 < 𝛾 < 1 0.2 Frisch elasticity Literature 0 < 𝜏%< 1 0.08 Consumption tax rate Calibration 0 < 𝜏! "< 1 0.04 Labor tax for local skilled workers Calibration 0 < 𝜏! #< 1 0.04 Labor tax for local unskilled workers Calibration 0 < 𝜏$ "< 1 0.04 Labor tax for skilled foreign workers Calibration 0 < 𝜏$ #< 1 0.04 Labor tax for unskilled foreign workers Calibration 𝐴& 0.3 Capital productivity Calibration A 0.6 Total factor productivity Calibration 𝜇! " 0.6 Match efficiency for local skilled workers Calibration 𝜇! # 0.6 Match efficiency for local unskilled workers Calibration 𝜇$ " 0.6 Match efficiency for skilled foreign workers Calibration 𝜇$ # 0.6 Match efficiency for unskilled foreign workers Calibration 𝜇'() 0.31 Public expenditure as share of migrant population Calibration 𝜌'() 0.8 Migration shock persistence Calibration 4.2. Labor Market Parameters Matching Technologies and Bargaining Power The values used for the new match's elasticity concerning the search time were set to 0.5, consistent with the empirical evidence found by Petrongolo and Pissarides (2001). The bargaining power for locals and foreigners was set at 0.85 and 0.5, respectively, coinciding with Hosios (1990), who finds that locals have more bargaining power than immigrants. Chassamboulli (2013) asserts that immigrants have a lower bargaining power than locals because, on average, immigrants have a lower reserve wage. Cost of Opening Vacancies The costs of opening a new vacancy were calibrated to obtain steady-state unemployment rates of 9.5 percent for locals. Thus, 𝑞" X=0.018 , 𝑞" Y=0.009 , &𝑞$ X=0.361 y 𝑞$ Y=0.199 . This is consistent with Chassamboulli (2013), who found that skilled workers' opening vacancies have higher costs than those for unskilled workers. Furthermore, since immigrants face higher transaction costs (i.e., verification, work permits), the cost of opening a vacancy for foreigners is higher than for nationals. Pairing Efficiency Following Shimer (2010), pairing efficiency is established so that, in steady state, the probability of filling a vacancy is more significant for the skilled population than for the nonskilled population. This corresponds with Krause and Lubik (2006; 2010). 4.3. Fiscal Parameters The size of the consumption tax was calibrated to be consistent with the consumption collection level as a percentage of GDP observed in Colombia of 6 percent of GDP in 2018. Similarly, the labor tax rate was calibrated to observe the same collection level generated by the labor tax, which was 2.7 percent of GDP for 2018 in Colombia. Conversely, spending on immigrants was calibrated to be consistent with estimates by the Ministry of Finance and Public Credit, which calculates that the spending percentage is between 0.4 and 0.8 percent of GDP. 4.4. Shock Persistence of Migration Shock The match's persistence was calibrated to replicate the Ministry of Finance and Public Credit scenarios in the Medium-Term Fiscal Framework (2019) on the migration flow's estimated saturation time. 5. Results The arrival of Venezuelan immigrants in Colombia was characterized as an exogenous shock because of the number of unskilled foreigners. This analysis constructed three scenarios consistent with the immigrant flows projected by the Ministry of Finance and Public Credit, the International Monetary Fund, and the World Bank. Panel A shows the growth rate of the migrant population. The low-case scenario is consistent with an increase of 1 million additional people, who stop arriving after approximately three years. The mid-case scenario calculates that, after four years, there will be about 3 million more people than there were in the economy before the shock. Finally, the high-case scenario shows the arrival of about 5 million additional people over four and a half years. Figure 5. Migration Shock Scenarios Source: Authors’ elaboration. Figure 5. Immigration shock scenarios Panel A. Number of immigrants arriving in Colombia (thousands of people) Panel B. Migration growth rate. 6000 6000 5000 5000 4000 4000 3000 3000 2000 2000 1000 1 3 5 7 9 11 13 15 17 19 1000 1 3 5 7 9 11 13 15 17 19 Low Quarters Medium High Quarters Medium High Low Figure 11. Tax Collection (percentage variation with respect to steady state) Source: Authors’ calculations. Consequently, the shock affects the government's fiscal balance as a percentage of GDP (Figure 12). In the short term, spending pressures lead to a 0.3 percent to 0.9 percent decrease in the GDP's primary fiscal balance. Later, as more people find employment and labor tax collection increases, the primary fiscal balance returns to the steady state. In the long term, surpluses are expected due to the higher level of tax collection. Figure 11. Tax collection (percentage variation for steady-state) Panel A. Tax collection from direct taxes 5.0 4.0 3.0 2.0 1.0 0.0 1 3 5 7 9 11 13 15 17 19 Quarters Low Medium High Panel B. Tax collection from indirect taxes 3.7 2.7 1.7 0.7 -0.3 1 3 5 7 9 11 13 15 17 19 Quarters Low Medium High Source: Authors’ calculation Figure 12. Primary Fiscal Balance as a Percentage of GDP (difference from steady state) Source: Authors’ calculations. Thus, the immigration shock impacts the labor market in the aggregate macroeconomic and fiscal variables. The fiscal effect is negative in the short term due to the public spending pressure and labor market restructuring, which increases income tax collection. However, in the long term, migration brings fiscal dividends as fiscal revenue as a percentage of GDP converges to a steady-state level higher than that observed before the shock, while public spending returns to the previous level. Consequently, the fiscal balance as a percentage of GDP also reaches higher steady-state levels. Therefore, the preceding implies higher output levels in the long term, higher consumption, higher capital, and fair tax dividends caused by migration. 6. Conclusions This paper proposes a general equilibrium model with search and matching with qualified and unskilled work to evaluate the effect of Venezuelan migration on the labor market, fiscal balance, and growth in Colombia. It finds that migration increases the labor supply, which initially generates a decrease in wages for both types of workers. However, in the medium term, skilled workers, both local and foreign, present higher labor returns thanks to the higher marginal productivity derived from immigrants' complementary work. These results highlight the challenge of economies with high rates of informality (characteristic of emerging economies) in designing and creating institutions that allow increasing human capital and attract skilled labor. Figure 12. Government Balance as a percentage of GDP (difference for steady-state) 0.1% -0.1% -0.3% -0.5% -0.7% -0.9% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Low Quarters Medium At the aggregate level, the model suggests that migration drives GDP growth in the short term due to an increase in the amount of labor employed. The model shows that the migration shock generates a non-standard effect in the literature, in which the general unemployment rate increases even as economic growth increases. 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