Migration and the welfare state

<p><em>Romesh Vaitilingam interviews Assaf Razin for Vox</em></p>
<p><em>February 2011</em></p>
<p><em>Transcription of a VoxEU audio interview [http://www.voxeu.org/index.php?q=node/6196]</em><b><br />
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<p><strong>Romesh Vaitilingam</strong>: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today's interview is with Professor Assaf Razin from Cornell University and Tel Aviv University. Assaf and I met at the European Economic Association's annual meetings in Glasgow in August 2010, where we spoke about his forthcoming book &quot;Migration and the Welfare State: Political Economy Policy Formation&quot;. I began by asking him to outline what the book is about.</p>
<p><strong>Assaf Razin</strong>: OK, the best introduction is to quote Milton Friedman. He said that it's impossible to have both a generous welfare state and free migration. Actually, he said it's one thing to have free migration for jobs, it is another thing to have free migration to welfare. And you cannot have both. Which means that in the welfare states that we know about, which are rather generous in terms of the benefits that they provide, you can hardly find free immigration into those welfare states. The immigration is controlled, is regulated and it is regulated by the political economy system.</p>
<p>So policy formation, based on political economy, is really a very important subject to look at. It has important implications. If you look at the last three decades, Europe&rsquo;s generous welfare state encouraged a massive surge of what we call welfare migration.</p>
<p>This is especially unskilled migrants who come in. Some of them legal, some of them illegal. At the same time, across the Atlantic, the US has another policy. A policy of screening migrants, based on several criteria including their skill level.</p>
<p>Actually they were able to attract big share of migration, skilled migration, the US, whereas Europe was able to attract, with this kind of policy and the very generous welfare state, a lot of the unskilled migration. And the US is very, very innovative in science, in technology, in many things. And I guess part of this is driven by these highly skilled migrants that come to the US. So there is a big gap between the US and Europe in that regard.</p>
<p>Now another implication is that there is all this lengthy negotiations with Turkey - whether Turkey can enter the European Union. Now the way I understand things is that the main obstacle for the entry of Turkey in the European Union is the concern that there will be massive unskilled migration out of Turkey into Europe and that, of course, will create a lot of fiscal burden on the European fiscal system.</p>
<p>It's very important to understand what is the political economy behind the formation of policies regarding migration and to look at it jointly with the formation of policies regarding the generosity of the welfare state. And that is the subject matter of my book.</p>
<p><strong>Romesh Vaitilingam</strong>: Assaf, I wonder if you could lay out in broad terms what economists think of as being the costs and the benefits to the European societies or to the US society of the different kinds of migrants coming into their countries, you talk about unskilled and skilled migrants. How do we think about the different costs and benefits of those two different groups coming in?</p>
<p><strong>Assaf Razin</strong>: Of course there are benefits from migration that we all know. I am basically looking at the cost side because a generous welfare state is sort of egalitarian in terms of its benefits. It's spread across different income groups equally. Education, health and all these kind of benefits, in terms of what the labor contributes, the workers contribute to the welfare state in terms of taxes. Basically the skilled people contribute more in taxes than the unskilled. So you get this, what we call, fiscal burden of unskilled migration because they contribute relatively little to tax revenue but they enjoy the same benefits per capita as their counterparts, the rich counterparts. So the main cost that I am looking at is the fiscal cost.</p>
<p>On the other hand there is also the ageing issue of Europe. Migrants typically are screened to come at a young age. And if they are also screened to come with skills, they can actually resuscitate the welfare state. There basically is an antidote to the ageing of Europe.</p>
<p>So when policy making is done according to different preferences or different voters, people are concerned about the fiscal burden on them of the immigrants. At the same time, they are also concerned about&hellip;they are also looking forward to the injection of young blood so to speak into the labor market, especially the skilled young blood that will help them to finance this ageing welfare state.</p>
<p>So there are conflicting elements in the policymaking about migration and also how generous should be the welfare state.</p>
<p><strong>Romesh Vaitilingam</strong>: How should we think about how voters react to migration in terms of their support for the welfare state? One of the debates in recent years in the UK particularly, and I think it has been also in other European countries has been, if you get a more diverse society, you get a weakening of support for the very idea of the welfare state, because people feel less tied to the general population because they feel that fewer of them are part of their own countrymen if you like. How should we think about as economists?</p>
<p><strong>Assaf Razin</strong>: Well, if you talk about diverse in terms of ethnicity, I am not an authority to talk about it, but if you talk about diversity in terms of different skills, different income levels and all of that, it is usually the understanding of economists that the more unequal the economy is, there will be more demand for redistribution of income from rich to the poor. So that will be strengthening the political backing of the welfare state. But as far as migration is concerned, there could be different views between the old, the retired - who are very much, for very, very much liberal migration policies - and working the people who sees possible competition on wages, especially the unskilled guys, when the unskilled migrants are coming in.</p>
<p>If you can decompose voting groups into different age groups, after retirement, close to retirement, before retirement and also in terms of the skill level in the workforce, you can actually analyze what are the voting preferences regarding migration for each one of them.</p>
<p>So the old will be the most liberal, but they will be of course very much looking for skilled migration to come in, and they will not support unskilled migration. The young skilled working people would obviously support very little taxation because they share the most of the burden of it.</p>
<p>So they would be for squeezing the welfare state, but at the same time, they would be looking at migration as a source of affording some backing to the existing welfare state. And especially they would like to have those migrants that have come with good skills and all of that, but they for some competition that they could impose in terms of their wages, then they might be slightly against it.</p>
<p>So it's complicated preferences for these voters. For the unskilled guys, they are very much for liberal migration policy because they will help the benefits of the welfare state being prolonged and they are very much for high benefits of the welfare state.</p>
<p>So you have these different views that show up in voting by these groups of people. And actually my book is trying to analyze them, these voting patterns, what we call voting profiles of different groups, and combine everything into a general equilibrium model so that we can see what sort of an equilibrium comes in.</p>
<p>And one of the interesting results of the analysis is that the unskilled, young working people form sort of a center in most of the coalitions that will be formed. So it could be that they will form a coalition with the working skilled young, in some situations or they will form a coalition with the old guys in some other.</p>
<p>So always, what we found out is that the unskilled young will be part of the coalition of the generous welfare state as far as migration and welfare state policies are concerned.</p>
<p><strong>Romesh Vaitilingam</strong>: So in a way, the way you are analyzing it is you've got potential conflict within generations, between skilled groups and unskilled groups and then conflict between generations, between the interests of young and old.</p>
<p><strong>Assaf Razin</strong>: Exactly, exactly. We cite, you know, inter generational conflicts which are the differences between young and old, and intra generational conflicts which is across income groups on skill levels. And we basically analyze the mixture of all these conflicts and how they are resolved in a political economy set up.</p>
<p><strong>Romesh Vaitilingam</strong>: So how do you actually see that applying in terms of different societies? So let's talk about Europe first, so you have a Europe, you have an ageing society and some countries in Europe you have a shrinking population. So how do you see the preference is playing out over time in terms of the political economy outcomes, in terms of preferences for the generous welfare estate and preferences for immigration?</p>
<p><strong>Assaf Razin</strong>: Well I can see it, because it's an ageing society, Europe, relative to the US, the coalition that would like to preserve the welfare state is stronger, than say in the US. So there would be much more resistance to reducing the welfare states, to moving the pension age forward. You can see what happens now in France where Sarkozy is trying to have a pension reform in terms of moving up the retirement age, he has a hard time to do it. So Europe has some stubbornness in terms of how they can squeeze the welfare state. Europe also has this mixture of voting profiles where they are not able to screen out unskilled migrants very well.</p>
<p>That means that the welfare state will become more burdensome, when unskilled migrants come in, in terms of providing education to these guys and all of that. So Europe is sort of a bit resisting to, if you like, fiscal reforms and also migration reforms. In the US, of course always there is a resistance to fiscal reforms.</p>
<p>Now the US has a huge budget deficit and they talk about fiscal reforms and all of that, but they don't really come to terms with it. But the need for fiscal reforms in the US in my mind are less than the need for fiscal reforms in Europe.</p>
<p>As far as migration policy is concerned, the US is excelling in screening migrants into the US. And this is what I started saying at the beginning, that US among the migrants in the world is keeping about 90% of the skilled migrants into them.</p>
<p>They are basically able to benefit for this kind of migration policy. And that also of course important for them in terms of innovating their economy, but also in terms of relinquishing the fiscal burden that is now because of the deficit and all of that. So there is a vast difference between the US and Europe in that regard.</p>
<p>And my book is basically a more fundamental research into the underpinning of these kind of differences that could, emerge Europe versus the US.</p>
<p><strong>Romesh Vaitilingam</strong>: In the US they have a far less generous welfare state. They've also, as you said, they've done well in terms of attracting high skilled migrants. But they also do have pressure from the south, don't they with high, unskilled Mexican migrants.</p>
<p><strong>Assaf Razin</strong>: Right, from Mexico, that's sure.</p>
<p><strong>Romesh Vaitilingam</strong>: That seems to be very a dominant theme in American political discussion. How do you think about that?</p>
<p><strong>Assaf Razin</strong>: That's more involved than my simple analysis is concerned because it has the problem of crime; it has the problem of securing the borders. But in the US basically it's the conflict between business who benefits from this unskilled migrants and the rest of the economy that is not benefiting. So there is a lot of need for the US to come to grips with unskilled migrants from Mexico. And it looks like although there are hills and valleys in terms of this fight, that they are moving ahead. Mostly it is a matter of the illegal migrants. It's an issue that is a bit outside of what I am researching in my particular book.</p>
<p><strong>Romesh Vaitilingam</strong>: How about the issue in the source countries for migrants. Do you analyze that, those questions, the political economy questions around that, the kind of motivation for people to leave the source countries and come to the western countries?</p>
<p><strong>Assaf Razin</strong>: Well, I do it only to the extent that I am looking at the enlargement of the European Union into the East. And obviously at some point, I guess it is 2012 where those newcomers into the European Union will have free labor mobility into the rest of the European Union countries, the core of Europe. So I look at the effect of the migration, which is coming in the next 10 years from east to west in Europe, from the source country point of view. And there is the issue of fiscal competition because when these guys are leaving the East, they erode the fiscal institutions of the east.</p>
<p>So the east will try to attract them by lowering their taxes. The question is whether this fiscal competition will also be catching in terms of what of the core Europe will do.<br />
Obviously there is movements, especially among Conservatives in Europe, the Tories in the UK and Conservatives in Germany and others, to reduce the tax burden. If they will reduce the tax burden, then that will increase the attractiveness to migration. So the source country from the east will have to reduce their own taxes. So there will be sort of a race to the bottom because of this emergence of this possibility of essentially free migration within the European Union.</p>
<p><strong>Romesh Vaitilingam</strong>: In the last 10 to 15 years in the UK, there has been a huge discussion about migration into the country. I think some people of the country have almost felt that the UK has been the major recipient of immigrants to the EU because they come in, they go to France, and then they cross the border and come into the UK. I am interested in your thoughts on how that interaction of policies has played out there?</p>
<p><strong>Assaf Razin</strong>: If you recall, after the enlargement of the EU in 2004, only three members of the core EU - and they were the UK, Sweden and Ireland - allowed free access for residents of the accession countries into their national labor markets. And that was an extremely successful story for the UK. The other countries of the EU, after a grace period, will allow the free access for them. But the UK took advantage of this grace period and they were able to attract migrants who on average were better educated and very well motivated in the labor force. I am talking about Polish, Czechs and the others. And they basically did not pose any fiscal burden on the UK but they helped to resuscitate the fiscal situation in the UK.</p>
<p>So it was a very, very successful exploitation, if you like, that the UK was doing in terms of this opportunity to move ahead of the others to bring in this good labor force.</p>
<p><strong>Romesh Vaitilingam</strong>: Final question Assaf. I wonder what your perspective is on how policymakers in European countries and the United States think about this interaction of issues. Because you are talking about a lot of different potential policy areas. You are talking about fiscal consolidation on the one hand as a result of the response to the crisis. You are talking about the generosity of the welfare state, public services provided out of taxes. You are talking about migration. Do you get any feeling that policymakers think about how you need to think about all these things in the round?</p>
<p><strong>Assaf Razin</strong>: Well, I am looking at it from a long term perspective. And it has been around this mixture of issues for centuries. Actually the US is a good case in point because the US had free migration, immigration until the end of World War I. And this is really what built the US as we know it today, all this migration. This is a migration country. It is a melting pot of migrants. So the US benefited a lot from this free migration. But at the time that they had free migration, they didn't have a very elaborate welfare state. They basically copied the European model of the welfare state, only later in the 20th century, especially after Roosevelt came to power, and he established all these institutions of the welfare state.</p>
<p>And then Lyndon Johnson came in and all of that. Once they were starting to build the welfare state, they started also to control their borders from migration. And so it's a beautiful sort of description of what Milton Friedman was saying, &quot;You can have free migration, you can have a welfare state, but you cannot have both.&quot;</p>
<p>So if you have a welfare state, you have to control, I mean, it's not you have to, but this is the political economy, will mean that you will control your migration. So this mixture of issues, as far as the US is concerned has been around for 200 years, starting with zero welfare state and free migration and then moving to a relatively generous welfare state and very much controlled migration.</p>
<p>The US was able to engineer their migration policy like Australia and like Canada in terms of screening migrants. So they didn't allow - until they got this illegal immigration from Mexico - all this unskilled migrants that could have posed a tremendous burden on their institutions, fiscal institutions.</p>
<p>The US is basically a good illustration of what I am talking about. And I am trying to analyze the different elements of the political game, underlying this mixture of policies.</p>
<p><strong>Romesh Vaitilingam</strong>: Assaf Razin, thank you very much.</p>
<p><strong>Assaf Razin</strong>: Thank you. <br />
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