Welfare & Migration

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Immigrants are often viewed as a drain on a country’s resources and this reason is cited to oppose looser policies. However, the OECD has found that the fiscal effect of immigration is small. Generally, as OECD report indicated, immigration does not push a country’s GDP more than 0.5% in either direction. In a country such as the United States, where immigrants are often young and the social safety net is not large, the effect of immigration is often more positive.
In a country such as Germany, where the social safety net is larger and immigrants are older or aging, the impact is often more negative. In the case of the United States economy, immigration was a net contributor to the United States economy in 2016. It helped increase GDP by 0.03 percentage points.
Economic migration is a relatively new challenge for most rich societies. They have been exposed to it mostly only over the past 50 years. What makes the issue politically virulent, especially so in Europe, is that this movement of people also undercuts the support for the welfare state.
In Europe, where large pockets of immigrants have not been assimilated, integration is not being helped by the fact that the native population believes that the migrants are getting an unfair share of the benefits, even if only by having more children than the natives. Such sentiments underscore an important political and sociological reality. A sufficient degree of homogeneity is necessary for operating a sustainable welfare state. In the era of globalization, the more developed welfare states may experience a perverse effect of attracting less skilled or less ambitious migrants.
Under “everything being the same” conditions, a decision of a migrant as to where to emigrate will depend on the expected income in one country compared with another. In principle, that would favor richer countries. But we have also to include migrant’s expectation regarding where in the income distribution of the recipient country he/she expects to end up. If he/she expects to be in the low income range, then a more egalitarian country with a larger welfare state will be more attractive.
An opposite calculation will be made by the migrants who expect to end up in the higher ends of recipient countries’ income distributions. If the former migrants are either less skilled or less ambitious than the latter which is reasonable to assume, then the less skilled will tend to choose countries with more developed welfare states. Hence the adverse selection. In very abstract terms, the countries that would be exposed to the sharpest adverse selection will be those with large welfare states and low income mobility.
Migrants going to such countries cannot expect, even in the next generation, to have children who would climb up the income ladder. In a destructive feedback, such countries will attract the least skilled or the least ambitious migrants and once they create an underclass, the upward mobility of their children will be limited.
The system then works like a self-fulfilling prophecy. It attracts ever more unskilled migrants who fail to assimilate. The natives tend to see migrants as generally lacking in skills and ambition which may be true because these are the kinds of people their country attracts and hence as “different.”
At the same time, failure to be accepted will be seen by the migrants as confirmation of natives’ anti-migrant prejudices, or, even worse, as religious or ethnic discrimination. There is no easy solution to the vicious circle faced by developed welfare states in the era of globalization.
The only effective way out are policies that would lead toward equalization of endowments, meaning better education also and especially for the children of those at the lower end of the income scale. If that is achieved then eventually taxation of current income can be reduced due to a lesser need of transfer payments. Accordingly, the size of the welfare state can be brought down.
Better yet, this would also change the nature and, crucially, the composition of migration. It would increasingly take on the character of circular migration. People moving in response to temporary labor needs and without automatic access to citizenship and especially consideration of the entire gamut of welfare benefitsg