Effects of migration: An applied general equilibrium analysis for Belgium

To get an accurate picture of the effects of migration one needs to take into account all the channels through which immigration affects the economy. Applied general equilibrium analysis seems to be an appropriate tool. The first part of this paper describes in detail the construction and calibration of an applied general equilibrium model. The idea is to help readers interested in building an AGE model themselves to find their way into a widely used instrument for policy analysis. Although the model in this paper is built to simulate the impact of immigration in Belgium it can be applied or adapted to other countries looking at other policy questions. The second part of the paper simulates the effects of immigration within the AGE model. The results show that immigration may lead to impacts while macroeconomically beneficial, have significant adverse distributional implications. It appears that unskilled workers are disadvantaged by the inflow of immigrant households. They are confronted with a severe decline in factor income due to increased competition in the less skilled segment of the labour market. Unskilled households therefore experience a decline in real disposable income. On the contrary, households that are headed by skilled workers appear to benefit from immigration. On the production level all sectors can increase their total output due to immigration. The two sectors gaining most are agriculture and industrial production thereby increasing their market shares. Although construction also uses relatively more less skilled labour its increase in total output is not large enough to improve its market share probably because of the small share in household consumption. Other sectors with decreasing market shares are services and energy which use relatively more higher skilled labour and thus face increasing production costs.