International Migration and the Welfare State. Prof. Panu Poutvaara Ifo Institute and University of Munich

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1 International Migration and the Welfare State Prof. Panu Poutvaara Ifo Institute and University of Munich

2 1. Introduction During the second half of 20 th century, Europe changed from being primarily origin of migration flows to a destination Guest worker programs in Germany and many other countries, initially to attract temporary migrants Political debate on immigration, identity and integration of immigrants

3 Migration and income maximization Adam Smith noted already in 1776 in An Inquiry into the Nature and Causes of the Wealth of Nations that the wage differences in the United Kingdom were much larger than price differences, concluding that it appears evidently from experience that a man is of all sorts of luggage the most difficult to be transported. Migration responds to economic incentives, but there are also a lot of non-monetary barriers to migration

4 Net migration in 2008

5 Immigrants per 1000 inhabitants

6 Intro Data Model Simulations Share of foreign born in the labour force Lithuania 5.9% Portugal 9.9% Italy 11.8% Denmark 12.0% France 13.0% Slovenia 13.1% Latvia 13.4% United States 13.5% Greece 14.0% Netherlands 14.0% United Kingdom 14.2% Estonia 14.7% Ireland 15.3% Germany 15.3% Spain 17.7% Sweden 17.8% Belgium 17.8% Austria 18.3% Canada 19.9% Australia 21.0% Switzerland 29.2% Luxembourg 39.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Data sources: EU LFS and EU-SILC, CPS, US Census, Canadian LFS, HILDA Institute 7 / 59

7 2. Migration and efficiency Migration arising from differences in marginal productivity promotes welfare. Migration that is based on differences in taxes and transfers (redistribution) generally reduces efficiency Adverse selection problem for redistribution Musgrave (1969) assigns redistribution to national rather than local governments

8 Migration and redistribution Migration challenges redistribution, whether the rich or the poor are mobile Migration reallocates income risks. It reduces income risks of mobile workers and increases income risks of complementary immobile factor

9 Winners and losers Migration generates generally winners and losers among different classes of workers / owners of complementary factors of production in the source and destination country Corresponds to the effects of trade

10 3. Welfare effects of immigration Opposite demographic challenges: population aging in Europe and youth bulge in many developing countries How does immigration affect different skill groups? What type of immigration policies allow unlocking gains from trade by allowing migration? How should welfare state institutions be adjusted?

11 A challenge How should welfare state and labour market institutions be reformed in response to increasing international migration? Target from the perspective of natives: to ensure that migrants are net contributors to the welfare state Labour market effects should be taken into account

12 4. Empirical results on immigration and the welfare state Although theoretical studies suggest that immigrants should reduce wages of natives, several empirical studies have found no clear effect An explanation could be that natives and immigrants are imperfect substitutes No consensus on whether immigrants are net contributors or beneficiaries from the welfare state

13 Intro Data Model Simulations Share of High skilled Immigrants and Natives Immigrants Portugal Italy Canada Austria Denmark Australia Estonia Sweden United States Luxembourg Switzerland United Kingdom Latvia Lithuania Belgium Netherlands France Spain Germany Greece Slovenia Ireland 45 degree line Natives Data sources: EU LFS and EU SILC, CPS, US Census, Canadian LFS, HILDA Figure : Share of High Skilled in the Labour Force Institute 8 / 59

14 Intro Data Model Simulations Immigrants Unemployment Rates of Immigrants and Natives Low Skilled Workers Denmark Austria Italy Netherlands United Kingdom Canada Switzerland Slovenia United States Luxembourg Australia Sweden Belgium Germany Ireland France Lithuania Greece Portugal EstoniaLatvia Spain 45 degree line Natives Data Sources: EU SILC, average over Line is a 45 degree line Figure : Unemployment Rates of Low Skilled Immigrants and Low Skilled Natives Institute 12 / 59

15 Intro Data Model Simulations Immigrants Unemployment Rates of Immigrants and Natives High Skilled Workers Sweden Germany France Belgium Estonia Ireland Italy Latvia Denmark Lithuania Netherlands Canada Austria United Kingdom Switzerland Slovenia Luxembourg United States Australia Portugal Spain Greece 45 degree line Natives Data Sources: EU SILC, average over Line is a 45 degree line Figure : Unemployment Rates of High Skilled Immigrants and Low Skilled Natives Institute 13 / 59

16 Intro Data Model Simulations Immigrant wage gap of low skilled Italy β = 0.25 p value = 0.04 R squared = 0.20 Greece Luxembourg United States Netherlands Portugal Wage gap and GDP of origin country Low Skilled Workers Austria France Germany Slovenia United Kingdom Spain Canada Belgium Denmark Switzerland Sweden Ireland Latvia Australia Lithuania Estonia Ratio between origin and destination GDP per capita Sources: Doquier et al. (2011), World Bank, EU SILC, CPS, US and Canadian Census, HILDA Figure : Relative GDP and wage gaps of low skilled workers Institute 15 / 59

17 Intro Data Model Simulations Immigrant wage gap of high skilled Greece β = 0.07, p value = 0.66 R squared = 0.01 Canada Germany Netherlands Belgium Sweden United States Wage gap and GDP of origin country High Skilled Workers Luxembourg Slovenia France Australia Latvia Austria United Kingdom Switzerland Estonia Spain Ireland Portugal Lithuania Italy Denmark Ratio between origin and destination GDP per capita Sources: Doquier et al. (2011), World Bank, EU SILC, CPS, US and Canadian Census, HILDA Figure : Relative GDP and wage gaps of high skilled workers Institute 16 / 59

18 Current work in progress Manuscript Migration, Labor Market Frictions and Redistribution by Michele Battisti, Gabriel Felbermayr, Giovanni Peri, Panu Poutvaara Main aim: provide an integrated analysis on the effects of immigration when both labour market effects and income redistribution are taken into account

19 5. Emigration from a welfare state Research project Danes Abroad: Economic and Social Motivations for Emigration and Return Migration Originally financed by the Danish Social Science Research Council (FSE) Data subsequently used in a NORFACE project and now in Ifo Center of Excellence for Migration and Integration Research (CEMIR) Comprehensive register data and two surveys

20 Target population Danes who had emigrated in 1987, 1988, 1992, 1993, 1997, 1998, 2001 or Survey in summer Age at the time of emigration at least 18 years, and in 2008 at most 60 years Statistics Denmark identified return migrants and the relatives of those who had not returned from population registers

21 Danes abroad A representative sample of 4,126 Danes who stay abroad Response rate 61 %

22 The Self-Selection of Emigrants from a Welfare State (with George Borjas and Ilpo Kauppinen) How Danish emigrants are self-selected in terms of education and earnings? Register data on Danish working-age men who don t have immigration background and who have been working full time the year before migration Migrants positively selected in terms of both education and earnings and in terms of unobservable characteristics

23 Preferences for Redistribution among Emigrants from a Welfare State (with Ilpo Kauppinen) How attitudes towards redistribution differ between Danes who stay in Denmark, and Danes who emigrate? Focus on Danes who stay abroad

24 Attitudes towards increasing redistribution in Denmark among Danes living in Denmark (ESS) Strongly against Somewhat against Neutral Somewhat in favour Men Women Strongly in favour

25 Attitudes towards increasing redistribution in Denmark among Danes living abroad (our survey) Strongly against Somewhat against Neutral Somewhat in favour Men Women Strongly in favour

26 Other Nordic countries vs. Englishspeaking countries Strongly against Somewhat against Neutral Somewhat in favour Strongly in favour Men % Other Nordic Women % Other Nordic Englishspeaking Englishspeaking

27 Summary Strong evidence on positive selection in terms of earnings ability among emigrants Male emigrants have a clearly more negative attitude towards the welfare state than non-migrants Female emigrants are more positive towards redistribution than female nonmigrants

28 6. Migration and education The government has to invest in the education of the young before they decide where to live, work, and pay taxes after graduation. The expected returns to the government are lower the higher the probability that the student emigrates. Therefore, even migration based on productivity differences may reduce efficiency

29 Internationally applicable and country- specific education (Poutvaara CESifo Economic Studies 2004; Scandinavian Journal of Economics 2008) Some degrees internationally more applicable, like engineering, economics and medicine Other degrees quite country-specific, like law and national history With increasing mobility, governments have incentive to provide too much country-specific education

30 Solutions Income-contingent student loans, which would be converted into ordinary loans in case of emigration Provides both insurance and guarantees that the state that financed education also receives part of returns Opportunity to opt out to protect young people against expropriation