Immigration policy and demographic dynamics: Welfare analysis of an aging Japan

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Highlights

  • Effects of immigration policies on per-capita welfare in Japan were quantified.

  • An extended lifecycle general equilibrium model with endogenous fertility was used.

  • Welfare was optimized with an equal number of immigrants accepted each year.

  • Optimal duration for immigration policy was found to be nine years.

Abstract

This study quantified the effects of immigration policies in an aging and depopulating Japan. Under a constant total number of immigrants, it focused on the optimal period for an immigration policy that maximized per-capita utility. Simulation results, based on an extended lifecycle simulation model with endogenous fertility, showed that a longer period immigration policy increased the future population and enhanced long-run economic growth. Conversely, a shorter period immigration policy enhanced economic growth in earlier years but less so in the long run. This study found that an optimal duration for an immigration policy, under the standard parameter settings for Japan, was nine years; this finding was derived through reconciling the merits and demerits between shorter and longer period immigration policies.

Introduction

Japan's population is currently aging at an unprecedented speed for a developed nation, and the population is also simultaneously decreasing, which has become one of Japan's most important problems. Figure 1 presents old-age dependency ratio projections (defined as the ratio of the population aged 65 or older against that of 20–64) for five advanced countries. The ratio will rise sharply and stay at an elevated level throughout the century. As the figure shows, the speed and magnitude of demographic aging in Japan are remarkable, even compared to other countries that face similar challenges. Thus, the projections of future fertility rates and survival probabilities in Japan indicate a severe reduction in both the total and working-age population. Regarding the problems associated with aging and depopulating societies, increases in childcare allowances are often discussed as an effective countermeasure. Another method for mitigating rapid population decreases in Japan is an enhanced immigration policy.

In reality, advanced countries such as the United States (U.S.) and Germany have accepted many immigrants and have used the immigrant population to maintain their population level or promote economic growth. The recent inflows of immigrants and foreign workers into Japan are illustrated in Figure 2.1 According to the data from the Organization for Economic Co-operation and Development (OECD, 2021a), the permanent inflows of foreigners were 132,000 people in 2019; their share of the total population was only 0.1%. Conversely, people categorized as “foreign workers” in Japan were rapidly increasing and their inflow reached to 1.72 million people in 2020 (Ministry of Health, Labour and Welfare 2011-2021). From the general viewpoint of the world, however, Japan already had an inflow of many “immigrants.” The inflow of foreign population (“immigrants”) in Japan was 519,683 people in 2018 (OECD, 2021b), which shows that Japan received the fourth-largest immigrants among the OECD Member countries. Moreover, Japan had a total of 2,928,940 foreign residents in 2020 (Immigration Services Agency of Japan, 2021), which was 2.32% of its total population (i.e., 126 million people).

Next, we consider effects of the coronavirus pandemic, which is affecting the entire world, on an aging and depopulating Japan. The pandemic continues to have severe impacts on the Japanese economy. According to Kawai (2021), the most serious impact of the pandemic on Japan is the further reduction of birth rates and acceleration of depopulation. In reality, in 2019, there were only 865,239 births in Japan (Ministry of Health, Labour and Welfare, 2020), which was substantially lower than those of the previous year by 5.8%. This suggests that, in 2019, just before the coronavirus pandemic, the number of births was low, implying an already existing critical situation. In 2020, the births further decreased to 840,832 (Ministry of Health, Labour and Welfare, 2021), which was the lowest on record since statistics were first compiled in 1899. Moreover, the number of the couples who married in 2020 was also only 525,490 (Ministry of Health, Labour and Welfare, 2021), which was the lowest after the World War Ⅱ and substantially lower than that of the previous year by 73,517. Furthermore, infectious disease control measures (such as increase in teleworking, mask wearing, social distancing, and avoiding dining in big crowds) would decrease opportunities of the encounter and close contact between individuals.

Therefore, the decrease in the number of marriages and births will continue in Japan. If we consider the period from pregnancy to childbearing, real serious effects of the coronavirus pandemic will gradually emerge from now. Hence, probably, the number of births in 2021 will dramatically decrease to less than 800,000. Kawai (2021) suggests the possibility of approximately 750,000 births in Japan in 2021; because the National Institute of Population and Social Security Research (2017) projects that Japanese births will continue to decrease and reach 750,000 births by 2039, the decrease in the number of births may occur much earlier than the 2039 estimation. The substantial decrease of births will reduce the population of young generations and accelerate labor force shrinkage. Thus, to cover a shortage of labor forces, the necessity of an “immigration policy” will rise after a temporary reset of the entry prohibition (or restriction) on immigrant caused by the coronavirus pandemic. Countermeasures for impending demographic issues and shrinking labor force problems in Japan are insufficient despite their urgency and importance. Hence, to account for a labor force shortage, an “immigration policy” would be an important option in Japan.

However, things may be not so easy. Although the inflow of foreign workers was steadily increasing before the occurrence of the coronavirus pandemic, once the pandemic settles, many foreigners may no longer choose Japan as a workplace for the following two reasons. First, Japan seems to treat foreign workers as simply cheap and convenient labor forces; the treatment of foreign workers in Japan has been often criticized. For example, the Skill Training System for Foreigners is often criticized for the reason that, apart from an original significance of the system, foreigners are treated as merely cheap labor forces. The political economy in terms of an immigration policy is often a sensitive topic to be discussed because historically Japan has been insular concerning immigration; hence, the Japanese government currently continues to take a stance of keeping no immigration policy for certain political reasons. However, the government must improve the treatment of foreign workers, and it should regard many of the “foreign workers” as “immigrants,” according to the general international viewpoint. By doing so, they should be made eligible for public pensions and health insurances. Second, the real wage in Japan has hardly increased over the past three decades, unlike most advanced countries. In terms of real wages, Japan is no longer an attractive country for foreigners as a workplace. Thus, the necessity of an “immigration policy” seems to increase in the current Japanese situation.

During our research, we used the lifecycle general equilibrium simulation model of overlapping generations, developed by Auerbach and Kotlikoff (1983a, 1983b) and similarly applied in Auerbach and Kotlikoff (1987), Auerbach et al. (1989), Altig et al. (2001), Homma et al. (1987), Ihori et al. (2006, 2011), Okamoto (2005, 2010, 2013), and so on. Okamoto (2020) extended the simulation model to introduce the number of children freely chosen by households, thus incorporating endogenous fertility and future demographic dynamics.

In 2014, the Japanese government stated that it would consider a guest worker program that would bring 200,000 foreign workers to Japan annually over 10 years, eventually accumulating a total of 2 million guest workers. To investigate the quantitative effects of an enhanced immigration policy, we extended the simulation model to freely set or choose the numbers and timings of immigrant inflow. Alternative immigration policies have different durations and annual numbers of immigrants. This study analyzes the quantitative effects that increased immigration to Japan might have on the future population and per-capita household welfare. It specifically focuses on the optimal immigration policy duration based on a constant total number of immigrants (with equally distributed immigrants each year). Here it should be noted that this result is obtained under the current level of government childcare subsidies and the assumption that the immigrants are completely identical to Japanese natives.

Regarding government childcare subsidies, in 2014, the Japanese government set a target population of approximately 100 million in 50 years, whereas the population projected by the National Institute of Population and Social Security Research (2017) is to reach only 88 million in 2065. This was the first time in history that the government formally expressed a numerical target for the future population, revealing a sense of impending crisis. To realize the desired fertility rate of 1.8, the government began devising countermeasures for the falling birth rate. When subsidies increase, the optimal period for immigration policy may change. Therefore, we will examine the effects of alternative immigration policies in a situation where child allowances increase.

Although our baseline simulation results are obtained based on the assumption that the immigrants have completely the same features as Japanese natives, immigrants to Japan tend to have higher fertility, a shorter life expectancy, and lower labor productivity than Japanese natives; these three characteristics of immigrants may change the optimal period for the immigration policy. Therefore, we will evaluate the effects of each atypical characteristic.

Next, we explain the validity of simulation scenarios considered in this study. Because an explicit immigration policy plan has not been discussed since 2014, this study essentially considers the immigration policy plan announced by the government in 2014. Moreover, the original plan was to consider the guest (or foreign) worker program; however, this study considers immigration policies. This is because, as aforementioned, the Japanese government needs to improve the treatment of guest workers and accept many of them as the “immigrants” who can continue to live in Japan without a time limit and are eligible for public pensions and health insurances.

Additionally, we state the relevance of exploring an optimal duration of immigration policy under a constant total number of immigrants (with equally distributed immigrants each year). Around 2008, the Liberal Democratic Party in Japan proposed an explicit immigration policy to receive 10 million immigrants in the next 50 years with an annual 200,000 immigrant flow. Further, in 2014, the Japanese government stated that it would consider a guest worker program that would bring 200,000 foreign workers to Japan annually over 10 years, eventually accumulating 2 million guest workers. These plans set the duration of immigration policy as 50 or 10 years, but these durations seem to be convenient round figures, not based on solid foundations. Both Shimasawa and Oguro (2010) and Imrohoroglu et al. (2017), who analyzed the quantitative effects of an immigration policy or a guest worker program for Japan using a lifecycle dynamic simulation model, also seem to consider just round number of years to leave off (such as 10 or 30 years, and eternally) for the period of an immigration policy or a guest worker program in Japan. Nonetheless, when an immigration policy program is concretely considered and designed, the duration or period of the immigration policy is fairy important for the following reason: even if the total number of immigrants is the same for an immigration policy, different durations would bring about different outcomes, thus creating different impacts on the future population and per-capita welfare.

Based on a constant total number of immigrants, a shorter period immigration policy brings more immigrants in earlier years, thereby producing more children and descendants in the short run. Thus, the policy may also result in a larger total population and higher per-capita welfare in the long run. Conversely, a longer period immigration policy brings immigrants in later years too. In a depopulating society like Japan, immigrants in later years are more valuable because of their higher share in the total population, which may lead to more favorable outcomes on the future population and welfare in the long run. Therefore, different durations of an immigration policy have substantially different impacts on the economy not only in a short run but also in a long run. This shows that exploring an optimal duration for immigration policy based on demographic and economic grounds is important. Hence, it is meaningful and crucial to investigate the effects of the immigration policy with different durations on future demography and welfare using an extended lifecycle overlapping generations model with endogenous fertility.

Finally, our study also introduces an additional government institution, the Lump Sum Redistribution Authority (LSRA). The LSRA method is used in previous studies such as Auerbach and Kotlikoff (1987), Nishiyama and Smetters (2005), and Okamoto (2020). An optimal duration for immigration policy is led by an optimization via the LSRA method, and the per-capita utility is calculated for all individuals, including the current and future generations. Alternative immigration policies generally improve the welfare of some generations but reduce the welfare of others. If combined with redistribution from the winning to losing generations, such policies may offer the prospect of Pareto improvements. Without implementing intergenerational redistribution, however, potential efficiency gains or losses cannot be estimated. Therefore, like Auerbach and Kotlikoff (1987) and Nishiyama and Smetters (2005), we introduce LSRA as a hypothetical government institution. This distinguishes potential efficiency gains or losses from possible offsetting changes in the welfare of different generations. To isolate pure efficiency gains or losses, we consider simulation cases via LSRA transfers where alternative immigration policies are implemented. The introduction of LSRA transfers enables us to examine policy proposals from a long-term perspective, considering not only the welfare of current generations but also of future generations, which will allow us to present concrete and useful policy proposals.

The remainder of this paper is organized as follows: Section 2 describes the literature related to our study; Section 3 identifies the basic model applied in the simulation analysis; Section 4 explains the method and assumptions of the simulation analysis; Section 5 evaluates the simulation findings and discusses policy implications; and Section 6 summarizes and concludes the study.

Section snippets

Related literature

This study contributes to the literature on immigration policy; the main literature related to our study is as follows:

Auerbach and Oreopoulos (1999) reconsidered the fiscal impact of immigrants over time, using the technique of generational accounting, and obtained two conclusions. First, whether immigration contributes to (or helps) alleviate fiscal stress depends on the extent to which that stress will be shouldered by future generations. If the entire fiscal imbalance currently estimated

Theoretical framework

We calibrate the simulation of the Japanese economy by applying population data from 2017, estimated by the National Institute of Population and Social Security Research. The model includes 106 overlapping generations, corresponding to ages 0–105. Three types of agents are incorporated: households, firms, and the government. The following subsections describe the basic structures of households, firms, and the government as well as the market equilibrium conditions.

Method

The simulation model presented in the previous section is solved, given the assumption that households fundamentally have perfect foresight and can correctly anticipate interest, wages, the tax and contribution rates, and other factors. If the tax and social security systems and other elements are determined, then the model can be solved using the Gauss–Seidel method [see Auerbach and Kotlikoff (1987) and Heer and Maußner (2005) for the computation process].

Our study assumes the transitional

Simulation results

The overall results obtained by our simulation analysis revealed that more immigrants generate more preferable outcomes and more productive immigrants bring about more favorable results, as shown in Shimasawa and Oguro (2010) and Imrohoroglu et al. (2017). As the previous studies have suggested, our results show that a greater number of immigrants enhance per-capita welfare, indicating that the policy generates favorable economic outcomes. Under the assumption that immigrants are completely

Conclusion

This study examined the quantitative effects of immigration policies on the future demography and individual welfare in an aging and depopulating Japan. Using an extended lifecycle general equilibrium model with endogenous fertility, it quantified the effects of alternative immigration policy proposals during the period from 2015 to 2300. We focused especially on the optimal duration for the immigration policy under a constant total number of immigrants. Additionally, to evaluate the pure

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    I am grateful for the insightful comments and suggestions of Professors Alan J. Auerbach, Ronald D. Lee, and Emmanuel Saez (The University of California, Berkeley). Additionally, I want to thank Associate Professor Yoshinari Nomura (Okayama University), who helped me in writing the computer program used for the simulations. I would especially like to thank two anonymous referees and an associate editor for their helpful comments and suggestions. This research was assisted by a grant from the Abe Fellowship Program administered by the Social Science Research Council in cooperation with and with funds provided by the Japan Foundation Center for Global Partnership. Finally, I also wish to acknowledge the financial support from the Ministry of Education, Culture, Sports, Science and Technology in Japan (Grant-in-Aid for Scientific Research (C) No. 20K01679).

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