The ageing, crisis-prone welfare state is bad news for welfare migration

Assaf Razin

06 November 2010

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"Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The Wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
Emma Lazarus, 1883

In the 19th century, these words were so emblematic of the spirit of the free-immigration era in the US that they were engraved in bronze at the base of the Statue of Liberty. These words might not be so popular if they were written today.
Back in 1883, the idea of the welfare state and the threat it would bring to free immigration was still in its embryonic state in Europe and had yet to be brought to the US shores. From one hundred years before to one hundred years after, economists have argued in favour of the free movement of peoples. In 1776, Adam Smith labelled the restriction on immigration as being just as debilitating as a restriction of capital movements. Towards the end of the 20th century, Milton Friedman remarked that free immigration and a welfare state are mutually exclusive. A welfare state with open borders, he argued, might turn into a haven for the poor and needy from all over the world, draining its finances and bringing the welfare system to its knees.

Yet whereas free capital mobility is now widespread, free migration is rare indeed.

The state of Europe

Given the demographic pressures facing Europe today, the ongoing restriction on migration might seem surprising. In 10 of the European Union's 27 member states, the number of deaths is expected to outnumber births in 2010. By 2015, the EU as a whole is expected to experience negative natural population growth.

Yet Europe’s generous social benefits have encouraged a massive surge of "welfare migration" over the past two decades. Twenty-six million migrants now call Europe their home. This migration has been concentrated in the unskilled sectors. Eighty-five percent of all unskilled migrants to developed countries go to Europe, but only 5% of highly skilled migrants do so.

Public opinion in the developed economies, with their generous welfare systems, now favours, in some way or other, putting restrictions on migration. In Europe, public support for Turkey's efforts to join the EU has drained away largely out of fear that millions of unskilled Turks might seek homes, jobs, and welfare benefits in Western Europe’s cities.

As a guard against this, developed economies attempt to sort out immigrants by skills (see, for instance, Bhagwati and Gordon 2009). Australia and Canada employ a points system based on selected immigrants' characteristics. The US, meanwhile, employs explicit preference for professional, technical, and kindred immigrants under the so-called third-preference quota. Jasso and Rosenzweig (2009) find that both the Australian and American selection mechanisms are effective in sorting out the skilled migrants and produce essentially similar outcomes despite of their different legal characteristics. While Europe has been attracting unskilled migrants over the last 20 years, the US has retained its innovative edge by attracting 55% of the world’s educated migrants to developed countries.

Immigration at what cost?

The net fiscal burden of immigration has been the subject of numerous studies. While immigrants can bring economic growth, they can also be a cost to the government through dependence on welfare. Meyer (2000) uses a conditional logit model, as well as a comparison-group method, to analyse the 1980 and 1990 US Census data and finds significant welfare-induced migration, particularly for high-school dropouts (see also Walker 1994, Edmonston and Smith 1997, Borjas 1999, Gelbach 2000, and McKinnish 2005, 2007) .

Moreover, Southwick (1981) uses US data to show that the higher the welfare-state benefit gap between the origin and destination regions in the US, the higher the share of the welfare-state benefit recipients among the migrants (see also Gramlich and Laren 1984, Blank 1988, and Enchautegui 1997, see also Cohen and Razin 2008 and Barbone et al. 2009 with a focus on Europe).

As well as attracting migrants, the size of the welfare state can determine the likelihood of those to leave. Khoudouz-Castezas (2004) studies emigration from 19th-century Europe and finds that social insurance adopted by Bismarck in the 1880s reduced the incentives of risk-averse Germans to emigrate. He estimates that in the absence of social insurance, the German emigration rate from 1886 to 1913 would have more than doubled.

The root of restrictions

In recent research, Razin et al (forthcoming), we explore the root causes of restrictions on migration, particularly how age- and skill-dependent restrictions on migration are shaped by the political process. A welfare state, with a heterogeneous (by age, skill, etc.) population, typically does not have a commonly accepted attitude towards migration.

For instance, a skilled (rich) and young native-born who expects to bear more than an average share of the cost of providing the benefits of the welfare state is likely to oppose admitting unskilled migrants on such grounds. On the other hand, the same native-born may favour unskilled migrants to the extent that a larger supply of unskilled workers boosts skilled workers’ wages. The native-born older voters may favour migration, even low-skilled, on the ground that it could help finance their old-age benefits.

Indeed, Canada decided to keep its borders open and even to speed up acceptance procedures for some highly skilled arrivals. While migrants have lost some ground recently, they're still twice as likely as native Canadians to hold doctorates or master's degrees. Another example is Sweden, where policymakers weren't satisfied with merely implementing a new, skills-based immigration policy. Sweden actually upgraded its integration efforts, including language and vocational training for existing immigrants – right in the middle of the financial crisis (see also Chiswick and Hatton 2003 for data on the US).

Hanmeueller and Hiscox (2010), using survey data in the US, find two critical economic concerns that appear to generate anti-immigrant sentiments among voters:

  • concerns about labour-market competition, and
  • concerns about the fiscal burden on public services.

Perhaps unsurprisingly, Hanson et al. (2007) show using opinion surveys that US native residents of states that provide generous benefits to migrants also prefer to reduce the number of migrants.

Furthermore, the opposition is stronger among higher income groups. Similarly, Hanson et al. (2009), again employing opinion surveys, find for the US that native-born residents of states with a high share of unskilled among the migrant population prefer to restrict in migration. Native-born residents of states with a high share of skilled migrants among the migrant population, meanwhile, are less likely to favour restricting migration

Price wedges in international markets for commodities and financial assets rarely exceed the ratio 2:1. Wages on labour services of similarly qualified individuals in advanced and low-income countries differ by a factor of 10. Clearly, the greatest impediments to international economic exchange are those associated with labour mobility. To move forward from this, we need to embed existing unilateral schemes of regulating labour mobility within multilateral schemes. Without multi-lateralising the labour mobility schemes, there is a severe coordination failure: host countries’ competition for source countries’ skilled and unskilled labour could erode their welfare system, in the presence of welfare migration.

In the post-crisis environment, host countries and countries of origin have an opportunity to consider how best to provide safety nets for their overseas workers. As the global economy recovers, unemployed migrant workers will likely find new jobs and those who returned to their home countries will likely be redeployed. How should a portable unemployment insurance system be established? Are there political economy constraints that need to be addressed? Should such a system be negotiated bilaterally or in a multilateral setting? Should it be managed by the private sector or the public sector?

But, we should not forget, macro-systemic risk is not insurable.

What are the design features of such a system? An appropriate unemployment insurance system would be an important step toward offsetting the devastating impact of the next economic downturn – whether local or global in scope – among overseas workers and their families.

References

Barbone, Luca, Bontch-Osmolovsky, Misha and Salman Zaidi (2009), "The Foreign-Born Population in the European Union and its Contribution to National Tax and Benefit Systems", Policy Research Working Paper, the World Bank (April).

Bhagwati, Jagdish and Gordon Hanson (2009) (eds.), Skilled Immigration Today: Prospects, Problems and Policies, Oxford University Press.

Borjas, George J (1999), Heaven's Door: Immigration Policy and the American Economy, Princeton University Press.

Chiswick, Barry R and Timothy J Hatton (2003), "International Migration and the Integration of Labour Markets", in Michael D Bordo, Alan M Taylor and Jeffrey G Williamson, Globalisation in Historical Perspective, The University of Chicago Press: 65-120.

Cohen, Alon, and Assaf Razin (2008), "The Skill Composition of Immigrants and the Generosity of the Welfare State: Free versus Policy-controlled Migration", NBER Working Paper No.144459, October.

Dustmann, C, T Frattini, and C Halls (2009), "Assessing the Fiscal Costs and Benefits of A8 Migration to the UK", CReAM Discussion Paper No. 18/09

Enchautegui, Maria E (1997), "Welfare Payments and Other Determinants of Female Migration," Journal of Labour Economics, 15:529.

Gelbach, Jonah B (2000), "The Life-cycle Welfare Migration Hypothesis: Evidence from the 1980 and 1990 Censuses", working paper.

Gramlich, Edward M and Deborah S Laren (1984), "Migration and Income Redistribution”, The Journal of Human Resources.

Hainmueller, Jens, and Michael J Hiscox (2010), "Attitudes toward Highly Skilled and Low-skilled Immigration: Evidence from a Survey Experiment", American Political Science Review, 104(1):61-84.

Jasso, Guillermina and Mark R Rosenzweig (2009), "Selection Criteria and the Skill Composition of Immigrants: A Comparative Analysis of Australian and US Employment Immigration", in Jagdish Bhagwati and Gordon Hanson (eds.), Skilled Immigration Today: Prospects, Problems and Policies, Oxford University Press.

Khoudour-Castéras, David (2008), "Welfare State and Labour Mobility: the Impact of Bismarck's Social Legislation on German Emigration before World War I", Journal of Economic History, 68(1):211-243.

Levine, Phillip B and David J Zimmerman (1999), "An Empirical Analysis of the Welfare Magnet Debate Using the NLSY", Journal of Population Economics, 12(3), 391.

Meyer, Bruce D (2000), "Do the Poor Move to Receive Higher Welfare Benefits?", unpublished paper.

Razin, Assaf, Efraim Sadka, and Benjarung Suwankiri (2011), Migration and the Welfare State: Political-Economy Policy Formation, MIT Press, forthcoming.

Smith, James P and Barry Edmonston (eds.), (1997), The New Americans: Economic, Demographic and Fiscal Effects of Immigration, National Academy Press, Washington, D.C

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Topics:  Migration Welfare state and social Europe

Tags:  immigration, migration, welfare migration

Barbara and Steven Friedman Professor of International Economics, Cornell University; Bernard Schwartz Professor (Emeritus), Tel Aviv University

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