Blogs review: Freedom of movement in Europe

Migration, economic performance and public finances

Brian Keeley presents research on the impact of migration on public finances from the latest OECD Migration Outlook. It shows that where immigrants do have a “fiscal impact”, it amounts to more than 0.5% of GDP in only ten OECD countries, and in those it’s more likely to be positive than negative. The research also shows that the sub-group of low-skilled migrants is less likely to have a negative impact than equivalent locals.

Katerina Lisenkova writes that the long term impact of Cameron’s intended restriction of UK immigration to “tens of thousands” would be to significantly reduce GDP and worsen public finances. Under lower immigration, GDP per capita would by 2060 be 2.7% below the baseline level. As government spending will have to rise, labour taxes on a smaller base of working people would have to rise more sharply. While gross wages increase slightly, the resulting increase in taxes means after-tax wages also fall. By 2060, the net wage would be 3.3% lower in the low migration scenario than under the baseline.

The 2012 fiscal sustainability report of the Office for Budget Responsibility comes to compatible conclusions on the evolution of public debt: The difference between a “low migration” scenario of 140 000 net immigrants per year and a “high migration” scenario of 260 000 annual immigrants is that under high immigration, the public debt stock will be 40 percentage points of GDP lower in 2060.

Joakim Ruist argues that one can expect a clearly positive fiscal effect on the UK of unrestricted immigration from Romania and Bulgaria. In Sweden, which had unrestricted labour market and welfare system access to Romanians and Bulgarians, the fiscal effect in 2007-2010 had been substantially positive, with a revenue/cost ratio of around 1.3. The UK and Ireland stand to expect an even more positive effect: Comparatively small welfare states minimise the fiscal risk and language problems are likely to be smaller, aiding labour market integration.

Christian Dustmann and Tommaso Frattini find that between 1995 and 2011, immigrants from EEA countries to the UK contributed to the fiscal system 4% more than they received in transfers and benefits, whereas natives’ payments into the system were just 93% of what they received. Rather than being a drain on the UK’s fiscal system, immigrants arriving since the early 2000s have made substantial net contributions to its public finances, a reality that contrasts starkly with the view often maintained in public debate.

The politics of migration

Hans-Werner Sinn argues that the possibility of welfare migration is essentially created by the EU freedom of movement directive, which stipulates that after 5 years of residence in any EU country, a national of another EU country becomes eligible for the same benefits as nationals of his country of residence. Considering that the expected income as a benefit recipient in Germany is a multiple of the average work income in Romania or Bulgaria, welfare migration has the potential to lead to a strong erosion of the welfare state. The remedy would be to modify the freedom of movement directive with a “home country principle”, in which basic income support would, irrespective of one’s country of residence, always be provided by one’s home country.

Herbert Brücker disagrees: Although it is sensible to exclude immigrants who have never worked in their destination country from eligibility to benefits there, introducing the “home country principle” for immigrants who work would be highly problematic. It would separate the country that receives one’s taxes – the country of residence – from the country that has to pay income support, should it become necessary – the country of origin. This would create strong problems for crisis countries: Although people are leaving the countries, the cost of social transfers may not decline. And the home country principle would distort migration incentives as one would pay taxes in one’s country of residence without being eligible for the full range of social services. This effectively would be a tax on immigration.

Simon Wren-Lewis writes that in the austerity debate, the economics of it are quite interesting, but the politics are fairly simple to understand (right-wingers like it because it helps them fight for a smaller state). With migration, the opposite is the case: The economics are quite simple – evidence overwhelmingly suggests that migration is beneficial for the economy. But it is far more of a challenge to understand why there is so much opposition to immigration. Explanations may invoke a) the media and politics fuelling a natural tendency of communities to be concerned about outsiders (which may explain why there is so much opposition against immigration where there are so few immigrants), b) an negative impact of immigration on some groups, e.g. through less unskilled vacancies or higher rents and c) a nuanced view of differential costs and benefits of social diversity.

Jonathan Portes subscribes to variant b). Like trade, immigration is beneficial to the economy , but it creates losers. The coal trade resulted in the mine closures of the 1980s as the UK did not have a comparative advantage in producing coal. The economy benefited from the trade, but coal miners lost out. The same seems likely to be true of immigration. Average British households have gained economically – but those in direct competition with immigrant workers are likely to have lost. Nevertheless, while there is some evidence of negative wage impacts for lower-paid workers, the numbers are small compared to the impact of other factors, such as technological change. If politicians who consider reducing immigration are concerned about protecting people negatively affected by market liberal policies, to be consistent, they’d have to start by re-imposing import tariffs on coal.

There must be an optimal level of immigration, writes Paul Collier. Diversity has both beneficial and detrimental effects. It tends to accelerate innovation and increase variety of choice, but it weakens the mutual regard among citizens on which cooperation for public goods, and generosity for transfers, rest. As both the benefit of diversity to innovation and the benefit of homogeneity to mutual regard of are likely subject to decreasing returns, there must be an optimum level. The European left would be well advised to start discussing what level and composition of immigration is optimal. A discussion of the desired level of diversity from the “legitimate right” is too likely to be contaminated by the “illegitimate right” to maintain balance.

David Brady and Ryan Finnigan study whether immigration really undermines the support for social policies. Purportedly, ethnic fractionalization reduces one’s sense of solidarity with other residents. But the opposite may also be the case: As people may feel insecure due to rising immigration, they might seek protection from the state. Using data from the 1996 and 2006 International Social Survey Programme (ISSP), they find almost no evidence that immigration (even less for migration flows than stocks) reduces support for the welfare state. A heterogeneity-egalitarianism tradeoff seems not to exist.

Municipal fears

The German Association of Cities in a press release demands support from the EU and the German federal government for cities and municipalities due to “poverty-migration”: the influx of individuals, particularly from Romania and Bulgaria, who were already socially disadvantaged in their countries of origin and now live in poverty in German cities. In the first half of 2012, immigration from Romania and Bulgaria into Germany increased by 24 percent. Living conditions in the immigrants’ countries need to be improved and cities need support in order to cope with the challenges in areas such as housing, healthcare and education.

Herbert Brücker puts the cities’ call for help in perspective: 10% of Romanians and Bulgarians in Germany received welfare benefits, which is below the average of foreign nationals residing in Germany. Among basic income support recipients in Germany, Romanians and Bulgarians make up only 0.6%.. Immigrants from Romania and Bulgaria on balance are a benefit for Germany, particularly through an overwhelmingly positive impact on the pensions system. The problem is one of intra-German distribution. Sharp regional differences exist: Whereas unemployment of Romanians and Bulgarians is 5.6% in Stuttgart, in Berlin it is 25%. And German municipalities participate only in the costs of immigration – basic income support comes from municipal coffers – but not in the benefits created by immigration.

Swiss self-harm?

Charlemagne writes that the EU-Swiss relationships is endangered after the referendum. The likeliest outcome is that the Swiss will, sooner or later, breach the freedom of movement provisions agreed in 1999. Under a guillotine clause, such a breach would annul six other economic agreements struck at the time. Other accords such as Switzerland’s participation in the Schengen passport-free travel zone may also come apart. Swiss voters have ended up harming themselves. Their economy is far more dependent on trade with the EU than vice versa; their world-leading companies rely on skilled foreign workers; and proportionately more Swiss live in the EU than the other way around.

Tyler Cowen believes the Swiss case shows the practical limits for immigration. Switzerland has one of the highest proportions of foreigners in Europe, accounting for 27% of the country’s population. That seems to be a benchmark. As you approach that number, you get a backlash. In the data, smaller countries seem to often have and accept higher levels of migration. This suggests that the realistic range for liberalising US immigration would be to increase inflows from 1 million to 3 million per year. The difficulty of the open borders idea is that it might be negative for actual flows of immigration.