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This paper explores the economic effects of illegal immigration in a dynamic general equilibrium
model when the domestic labor supply is elastic and the fiscal policies include
various taxes and income transfers. We show that, despite the mixed welfare effects of
endogenous labor-leisure choices, illegal immigration improves the welfare of domestic
households in the short- and long-run equilibrium allocation in a dynamic laissez-faire
economy. We also show that the wage difference between domestic workers and illegal
immigrant workers improves individual welfare but hurts aggregate output production. In
addition, we explain how the fiscal policies generate a distortive wealth effect on a decentralized
competitive equilibrium with illegal immigration. We show that the domestic
household's welfare depends on the combination of the wage difference and the fiscal burden
or drain from illegal immigrants under the various tax and income transfer policies.
The fiscal burden often causes the opposite effect on individual welfare and aggregate performance
in the presence of illegal immigration.
