Foreign Workers, Skill Premium and Fiscal Sustainability in Japan

Abstract

Japan faces rapid and severe demographic aging and rising fiscal deficits due to increasing expenditures and shrinking tax revenues. This paper studies how an inflow or an outflow of foreign workers affects projections of macroeconomic and fiscal variables. We show that foreign workers help slow down a decline in labor force and mitigate fiscal pressures, but effects are not large enough to wipe away concerns even under a very optimistic scenario. We also evaluate effects of foreign workers on skill-specific wages in Japan and welfare consequences across heterogeneous individuals. A rapid rise in the relative size of high-skilled labor force in Japan will give strong downward pressure on skill premium and an arrival of foreign workers is shown to have large differential effects on skill prices and the trend of wage inequality, depending on their size and skill composition.