By Assaf Razin

Today, we’re fortunate to have Assaf Razin, Friedman Professor of International Economics at Cornell University, and Professor Emeritus at Tel Aviv University, as a Guest Contributor.

“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

This wonderful sonnet captures the spirit of the free immigration era in the 19th century U.S.A. The welfare state idea, still in its embryonic state in Europe, had yet to be brought to the U.S. shores.
Free migration has been the subject of extensive theoretical investigation, dating back to Adam Smith (1776) who pointed out that curtailing free migration has a similar (and negative) effect to curtailing free flows of capital. In his words:

“Whatever obstructs the free circulation of labour from one employment to another, obstruct that of a stock likewise; the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it.”

Nevertheless, whereas free capital mobility is widespread, free migration is very rare in practice.
About a century later, the Noble laureate, Milton Friedman, remarked that obviously one cannot have free immigration and a welfare state. That is, a welfare state with open borders might turn into a heaven for the poor and needy from all over the world, thereby draining its finances, and bringing it down.
In 10 of the European Union’s 27 member states deaths are expected to outnumber births in 2010. As of 2015 the EU as a whole is expected to experience negative natural population growth. The European Union has attracted 26 million migrants in the past two decades, But most of the European countries attempt to protect native-born labor by shutting out foreign workers, which results in massive inflow of illegal immigrants. That is, Europe generous social benefits encouraged a massive surge of “welfare migration”. Consequently, Europe has ended up with 85 percent of all unskilled migrants to developed countries, but only 5 percent of the highly skilled migrants.
As a consequence, public opinion in the developed economies, with their fairly generous welfare system, favors putting, in some way or another, restrictions on migration. Largely because of fears that millions of unskilled Turks might seek homes, jobs and welfare benefits in Western Europe cities, it has caused public support to drain away for Turkey’s efforts to join the European Union.
Developed economies do attempt to sort out immigrants by skills (see, for instance, Bhagwati and Gordon (2009)). Australia and Canada employ a point system based on selected immigrants’ characteristics. The U.S. 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 ended up in the last two decades with 85 percent of all unskilled migrants to developed countries, US retain its innovative edge by attracting 55 percent of the world educated migrants.
Edmonston and Smith (1997) look comprehensibly at all layers of government (federal, state, and local), all programs (benefits), and all types of taxes. For each cohort, defined by age of arrival to the U.S., the benefits (cash or in kind) received by migrants over their own lifetimes and the lifetimes of their first-generation descendents were projected. These benefits include Medicare, Medicaid, Supplementary Security Income (SSI), Aid for Families with Dependent Children (AFDC), food stamps, Old Age, Survivors, and Disability Insurance (OASDI), etc. Similarly, taxes paid directly by migrants and the incidence on migrants of other taxes (such as corporate taxes) were also projected for the lifetimes of the migrants and their first-generation descendents. Accordingly, the net fiscal burden was projected and discounted to the present. In this way, the net fiscal burden for each age cohort of migrants was calculated in present value terms. Within each age cohort, these calculations were disaggregated according to three educational levels: Less than high school education, high school education, and more than high school education. Indeed the findings suggest that migrants with less than high school education are typically a net fiscal burden that can reach as high as approximately US$100,000 in present value, when the migrants’ age on arrival is between 20-30 years.
Khoudouz-Castezas (2004), who studies emigration from the 19th century Europe, finds that the social insurance legislation, adopted by Bismarck in the 1880s, reduced the incentives of risk averse Germans to emigrate. He estimates that in the absence of social insurance, German emigration rate from 1886 to 1913 would have been more then doubled their actual level. Southwick (1981) shows with U.S. data that high welfare-state benefit gap, between the origin and destination regions in the U.S., increases the share the welfare-state benefit recipients among the migrants. Gramlich and Laren (1984) analyze a sample from the 1980 U.S. Census data and find that the high-benefit regions will have more welfare-recipient migrants than the low-benefit regions. Using the same data, Blank (1988) employs a multinomial logit model to show that welfare benefits have a significant positive effect over the location choice of female-headed households. Similarly, Enchautegui (1997) finds a positive effect of welfare benefits over the migration decision of women with young children. Meyer (2000) employs a conditional logit model, as well as a comparison-group method, to analyze the 1980 and 1990 U.S. Census data and finds significant welfare induced migration, particularly for high school dropouts. Borjas (1999), who uses the same data set, finds that low skilled migrants are much more heavily clustered in high-benefit states, in comparison to other migrants or natives. Gelbach (2000) finds strong evidence of welfare migration in 1980, but less in 1990. McKinnish (2005, 2007) also finds evidence for welfare migration, especially for those who are located close to state borders (where migration costs are lower). Walker (1994) uses the 1990 U.S. Census data and finds strong evidence in support of welfare-induced migration. Levine and Zimmerman (1999) estimate a probit model using a dataset for the period 1979-1992 and find, on the contrary, that welfare benefits have little effect on the probability of female-headed households (the recipients of the benefits) to relocate.
Dustmann at al (2009) bring evidence against welfare migration following the EU enlargement in 2004, which allowed a grace period of perfect labor mobility with the EU; the UK chose however to allow immigrants immediately. The average age of the A8 migrants during the period 2004. More accurately, the said period extends from the second quarter of 2004 through the first quarter of 2009 is 25.8 years, considerably lower than the native U.K. average age (38.7 years). The A8 migrants are also better educated than the native-born. For instance, the percentage of those that left full-time education at the age of 21 years or later is 35.5 among the A8 migrants, compared to only 17.1 among the U.K. natives. Another indication that the migration is not predominantly driven by welfare motives is the higher employment rate of the A8 migrants (83.1%) relative to the U.K. natives (78.9%). Furthermore, for the same period, the contribution of the A8 migrants to government revenues far exceeded the government expenditures attributed to them.
A recent study by Barbone et al (2009), based on the 2006 European Union Survey of Income and Living conditions, finds that migrants from the accession countries constitute only 1-2 percent of the total population in the pre-enlargement EU countries (excluding Germany and Luxemburg); by comparison, about 6 percent of the population in the latter EU countries were born outside the enlarged EU. The small share of migrants from the accession countries is, of course, not surprising in view of the restrictions imposed on migration from the accession countries to the EU-15 before the enlargement and during the transition period after the enlargement. The study shows also that there is, as expected, a positive correlation between the net current taxes (that is, taxes paid less benefits received) of migrants from all source countries and their education level.
Cohen and Razin decompose the sample into two groups. The first group contains source-host pairs of countries which enable free mobility of labor among themselves. They also prohibit any kind of discrimination between native-born and migrants, regarding labor market accessibility and welfare-state benefits eligibility. These are 16 European countries, 14 of them are a part of the EU (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, and U.K.), and Norway and Switzerland. For notational brevity, we will nonetheless refer to this group as the EU group. The data for this group, therefore, consist of bilateral migration stock for any pair of these countries. The second group includes source-host pairs of countries, within which the source country residents cannot necessarily move freely into any of the host countries. That is, the host countries control migration from the source countries. The host countries are the same 16 countries from the first group, and the source countries comprise of 10 developed non-European countries (U.S., Canada, Japan, Australia, New Zealand, Israel, Taiwan, Hong Kong, Korea and Singapore).
Razin et al (2011) attempt to explore how these age and skill-dependent restrictions are shaped in the political process. A skilled and young migrant may help the finances of the welfare state; whereas an unskilled and old migrant may inflict a burden on the welfare state. Of a particular interest is therefore the skill and age composition of these restrictive policies. A welfare state, with an 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 favor unskilled migrants to the extent that a larger supply of unskilled workers boosts skilled-workers wages. The native born old may favor migration, even low-skilled, on the ground that it could help finance her old-age benefits. Chiswick and Hatton (2003) provide some figures describing the shift from uncontrolled migration in the pre-WWI to selective policies afterward. Despite the dramatic decline in the cost of relocation to the migrants, rates of migration went down. For instance, the annual immigration rate to the U.S.A. fell from 11.6 immigrants per thousand population in the first decade of the 20thcentury to 0.4 per thousand population in the 1940s, rising to 4.0 per thousand population in the 1990s. The post WWII immigration rates are substantial bellow the pre-WWI rate.
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. Sweden wasn’t satisfied with merely implementing a new, skills-based immigration policy; it actually upgraded its integration efforts, including language and vocational training for existing immigrants, right in the middle of the financial crisis.
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 labor-market competition, and concerns about the fiscal burden on public services. Not unexpectedly, employing opinion surveys, Hanson et al (2007) bring evidence that in the United States native residents of states which 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 United States that native-born residents of states with a high share of unskilled migrants, among the migrants population, prefer to restrict in migration; whereas native-born residents of states with a high share of skilled migrants among the migrant population are less likely to favor restricting migration
Price wedges in international markets for commodities and financial assets rarely exceed the ratio 2:1. Wages on Labor services of similarly qualified individuals in advanced and low income countries differ by a factor of 10. Thus,impediments to international economic exchange whose removal produces the greatest efficiency bang are definitely those associated with labor mobility. To move ahead, we need to embed existing unilateral schemes of regulating labor mobility by multilateral schemes. Without multi-lateralizing the labor mobility schemes, there exist a severe coordination failure: host countries A and B competing for source country B’s skilled and unskilled labor 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, 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), editors, 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, Princeton, New Jersey.
Chiswick, Barry R. and Timothy J. Hatton (2003), “International Migration and the Integration of Labor Markets”, in: Bordo, Michael D., Alan M. Taylor and Jeffrey G. Williamson, Globalization in Historical Perspective, The University of Chicago Press, pp. 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., Frattini, T. & Halls, C. (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 Labor Economics, 15, 529.
Friedman, Milton, YouTube http://www.youtube.com/watch?v=3eyJIbSgdSE
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
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, no 1, February, 61-84
Jasso, Guillermina and Mark R. Rosenzweig (2009) “Selection Criteria and the Skill Composition of Immigrants: A Comparative Analysis of Australian and U.S. Employment Immigration,” in Bhagwati, Jagdish and Gordon Hanson, editors, Skilled Immigration Today: Prospects, Problems and Policies, Oxford University Press.
Khoudour-Castéras, David (2008), “Welfare State and Labor Mobility: the Impact of Bismarck’s Social Legislation on German Emigration before World War I”, Journal of Economic History, Vol. 68, N°1, March 2008 , p. 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, editors, (1997), The New Americans: Economic, Demographic and Fiscal Effects of Immigration, National Academy Press, Washington, D.C

This post written by Assaf Razin.