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The economics of international migration

Evariste Lefeuvre By Evariste Lefeuvre Published on December 21, 2015

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The increasing gap in living standards between the North and the South, the increasing number of climatic incidents and the lack of resolution of ethnic and religious conflicts will make international migration a key issue in the 21st century. The debate on immigration is already at the core of the US presidential campaign. The inflow of refugees at the gates of Europe also highlights the need for permanent solutions to the migratory phenomenon.

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From a global viewpoint, the problem is nevertheless simple: migratory flows should by nature increase the planet’s level of GDP and therefore be favored, albeit subject to control. In the same way as for international trade, they do, however, have substantial distributive effects in terms of wages, employment and welfare spending. It is therefore necessary to factor in the generosity of the distributive system, the average level of education and the structure of the population by age to understand and adapt the host countries’ migratory policies. It is also necessary to understand the causes and the local impact of the departure of migrants on the economies of their home countries, whether through the remittances they send home or in terms of the drain on the grass-root talent needed for economic development.

The increase in the number of ethnic and religious conflicts, combined with the growing risks of climate-related migration, makes it necessary to adopt a long-term view on the factors underlying migratory flows. Emotions, anxiety, and political and humanitarian reactions created by the growing waves of refugees must not mask the multi-faceted economic aspects of this phenomenon. As is often the case in economics, there are no clear-cut conclusions but mechanisms that must be well understood to steer the political decisions in terms of labor laws, reception (points or quotas, selection) and government transfer payments.

It is fundamental to emphasize at the outset that migration is not a problem only for rich countries that fear for their jobs, finances and sometimes public order. The issue is no less pressing for the countries that are losing their sometimes well-educated young population, and for which the financial windfall (remittances) sent to the families that have remained does not offset the disastrous impact of the departures on long-term growth.

Migration and international trade: the same battle?

The concern fueled by migration is similar in nature to the concern caused by trade liberalization. When experts or economic theory see it as a way to allocate economic resources more efficiently and to increase global GDP, the most vulnerable members of the population in the host countries are primarily concerned about their well-being - fears that for a long time have been channeled by political parties. If international trade puts downward pressure on the wages and jobs of the least skilled, immigration may trigger similar tensions.

If we look at the classical framework for trade policy, the reference model dates back to 1941. The economists Stolper and Samuelson showed that in an advanced country (i.e. richly endowed with productive capital), the most skilled individuals will take advantage of an opening up to trade. Conversely, the least skilled - because they are a minority - will be the losers. It is the country’s least abundant resource (in this case unskilled labor) that has the most to lose from trade liberalization (unemployment or lower wages). Non-graduates are the big losers, whether the country imports labor-intensive goods or the immigrants have a low level of education. 

This simplistic model makes it possible to identify the nature of the challenges raised by immigration: direct economic impact; more or less pronounced redistributive effects according to the level of generosity of the welfare state; and relative political influence of social groups, be they graduates or pensioners.

A Global Immigration Organization?

Migration requires different economic policy responses than those related to the mere opening of borders to flows of goods, services and capital. Razin and Sadka point out that there is no equivalent of the World Trade Organization for immigration, the objective of which would be to reduce administrative barriers. Contrary to trade of goods and capital movements, migratory flows have a considerable impact on public policies and are most of the time seen in a sovereign, national context.

One could always try to strike a "global optimum". Such an approach is very well illustrated in a paper published by the economists Benhabib and Jovanovic: "It will probably become harder for richer countries to justify their non-discriminatory and redistributive welfare policies at home, while denying access to their labor markets to citizens of poorer countries, basing the exclusion simply on ethnicity and nationality.”

Not only from a viewpoint that could be qualified as moral, or simply by looking at the situation that currently prevails in Lampedusa or Calais, it is difficult to disagree with the authors. But maintaining a decent income for the least skilled and taking into account the financial weight of social services, the distributive effects of non-discriminatory welfare policies and possibly the cultural components and social cohesion cannot simply be dismissed as "externalities". The global outlook is very clear: opening borders could only have a beneficial effect given the large productivity gaps between economic regions. Unfortunately, there are constraints that cannot simply be ignored. That does not mean, conversely, that given the future scale of the migratory phenomenon, countries will not be forced to review their immigration and redistribution policies, for free circulation of individuals is incompatible with a generous redistribution system.

A few figures:

Although the terms are inappropriate when talking about individuals, migration represents a "flow" while "migrants" are comparable to a stock. According to UN statistics, migrants - defined as individuals in a country who are born abroad - account for only a small percentage of the global population (3.2%). There has been a 1 percentage point increase since 1980 that contrasts with the heterogeneous trajectories of countries’ per capita GDP. The regional divergences are particularly marked since, for example, the share of foreign residents is 7% in the European Union and 6.6% in the United States.

It is South-North and South-South flows that predominate, as can be seen below.

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With the notable exception of North America, migration has a very pronounced regional and local character. According to Eurostat, Algeria and Morocco have provided more than 30% of all migrants in France. More than 18% of the Finnish immigrant population was born (≠ nationality) in the former Soviet Union. Japan has a high proportion of migrants of Chinese and Philippine origin. Mexico accounts for not far from 25% of the total number of migrants in the United States. This interactive map enables us to get a good picture of population flows.

Welfare state and migrants’ "free choice"

A global perspective is impossible. That is why immigration policies are often considered from an "individualistic" angle. The economic gain is gauged by the yardstick of the host country’s transfer policy. The generosity of the welfare state is presented as a "magnet" for generally unskilled persons for whom the welfare benefits would make up for any precarious situation in the local labor market.

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Conversely, an overly generous system, which is therefore associated with a high degree of taxation, may be a deterrent factor for graduate migrants, whose preference will very clearly be a low marginal taxation of labor. The chart below shows that there is a decreasing relationship between the marginal tax rate and the share of inventors of foreign origin in a country.

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While the preference for a selective immigration of well-educated individuals is partly explained by their net contribution to the tax system, it can also be justified by their potential contribution in terms of innovation. In the United States, a one percentage point increase in the share of immigrants that are university graduates in the total population leads to a 6% increase in the number of patents per capita. Over the last few years, the preference for educated migrants has increased for all immigration policies, whatever the geographical regions (source: OECD).

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Immigration policy and the magnet theory

The generosity (and the associated tax burden) of the social welfare system of the final destination to a large extent determines migrants’ choice. More precisely, the ease of access to welfare benefits is generally associated with migrants’ skill level. This approach must obviously be checked against geographical proximity, language, and earlier migration waves. However, a comparative table of the relative generosity of social systems in Europe and the United States makes this approach credible: it would be normal to assume that the relatively less generous nature of the US social system tends to attract more skilled individuals. Conversely, it would be logical to think that European social coverage will act as a magnet for the least skilled.

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The chart below shows that there is indeed a relationship between the generosity of the welfare state, defined here as the replacement wage of job seekers, and the share of immigrants in the total population. Is this sufficient to "prove" the magnet theory?

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Not really. The chart below gives us a more nuanced picture: it shows that while there is a positive relationship between the share of unskilled in the immigrant population and the net tax contribution of the natives versus the immigrants, the statistical link is very poor (what about the orange line, for example?).

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The most widespread view that draws a link between unskilled migrants and their excessive tax burden because of "overly" generous or poorly targeted welfare policies is only partially verified empirically.

Above all, there are reasons to call into question the causality of the magnet theory. It is possible that unskilled migrants are attracted by good employment prospects rather than by generous but stigmatizing welfare benefits. It could be assumed that a less generous redistribution system is less dissuasive for unskilled migrants the more vigorous the labor market is.

The chart above shows that in many countries, the less skilled migrants have a higher employment rate than the natives. That is in particular the case in the United States which is, and this is important to point out, the only advanced country where immigration tends to lower the general education level. We actually see that in the OECD, the share of individuals who have received a tertiary (post-secondary) education is now higher than that of the natives of the host country (30.3% versus 23.6%).

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We also see that the employment prospects of skilled migrants relative to the natives are far from better than those of their less-educated peers. This example illustrates the very close links between the generosity of the redistribution system, labor market efficiency and immigration. It seems that the unskilled are not attracted only by the welfare state. The trade-off can be made in favor of attractive employment prospects as their employment rate is sometimes far higher than that of the natives and/or the skilled migrants.

Immigration policy and financing of welfare policies

Even though there is no indisputable and universal proof of the net tax burden of unskilled migrants, the perception according to which they put downward pressure on low wages and have a negative impact on the solvency of social systems is sufficient to influence the nature and the target of migration policies.

While a free immigration regime is hardly compatible with a favorable redistributive system, measures targeting the most educated could probably be a way to maintain a relatively generous welfare state. They should in fact rapidly become net contributors. Unfortunately, a generous system is often associated with more taxes, a dissuasive factor for graduate migrants that seek to maximize their income. They will probably prefer to target other economies.

A comparison of the age pyramids of the migrants and the natives also makes it possible to identify a risk of generational conflict. In principle, an over-representation of young among the migrants is a quite simple way to ensure the solvency of pay-as-you-go pension systems. Accordingly, the "old" ought to be positive towards net immigration, whether chosen or not.

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For the young natives, the equation is different and presents a double threat: in terms of pay for the least skilled and in terms of the general tax rate for all members of the labor force.

Migration, refugees and non-refoulement

It is difficult to reconcile a generous redistribution system and an open immigration policy. This is, beyond the economic argument, the mantra of all those opposed to receiving the refugees currently at the gates of Europe. This argument overlooks the fact that nothing distinguishes migrants and refugees except the assumption of "free choice" and maximization of the life trajectory.

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The traditional analytical framework of migration is not adapted to the type of population flows that currently concern the European authorities. Mostly based on the assumption of rational choice and cost/benefit analysis, usual approaches to the topic often fail to take into account two aspects: the increasingly forced nature of the exodus (conflicts, droughts, risk of death) and the trade-off between demands, humanitarian assistance and the capacity to receive migrants.

This lack of theoretical interest may be explained by the quite limited nature of this phenomenon until now. According to the OECD, refugees accounted for 7% of total international migrants in 2013 (15.7 million). What is even more interesting, in 2013, 87.2% of them lived in Southern countries, with (Western) Asia being the largest reception area by far, followed by Africa. The UNHCR statistics are also instructive. Based on the concept of "displaced" individuals, they show 59.5 million persons divided into, for 2014, refugees (19.5 million), "internally displaced persons" (38.2 million) and asylum seekers (1.8 million). Developing countries received 86% of the total number of refugees worldwide in 2014, among them Turkey, Pakistan and Lebanon.

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What causes these refugee flows currently is flight - often in a hurry - and not the economic appeal, although that can obviously be a decisive factor at a certain point.

Until now, we have seen two types of reaction to this migratory flow:

The first consists in restricting access to the territory since any asylum seeker is protected once inside the country’s borders (principle of non-refoulement contained in the Geneva Convention of 1951 on the status of refugees). Once the country has been reached (whether legally or not), the number of asylum procedures is in principle unlimited. Therefore, since refugees often transit through mafia-like illegal immigration networks, deterrent measures are becoming more common: closing of borders, and even construction of border barriers at present, reduction in potential welfare benefits or increasing complexity of asylum procedures. The chart below shows the drastic tightening of conditions for access to political asylum between 1995 and 2005.

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The absence of regional or global coordination has led to a sub-optimal situation where each country considerably tightens its conditions for access to political asylum for fear of having to single-handedly shoulder the financial and political weight of it.

There are also rare and often fruitless attempts to address the problem at its source. Increasing help to the countries of origin that welcome the displaced populations is a priority, with a view to preventing massive migratory flows. Even though complementary, the issue of taking part in attempts to resolve local conflicts is fundamental, but recent experience has shown that most interventionist initiatives are relatively ineffective or even counterproductive.

Efforts must be continued since 80% of the refugees worldwide are stuck in camps and makeshift facilities inside or at the border of their countries - countries which for the most part are underdeveloped economically. Direct aid programs should for a long time remain the best way to help these countries, whose reception capacity is saturated.

Going beyond purely budgetary thinking

In the trade-off between closing the borders and attempting to help permanently resolve local conflicts, it is necessary to go beyond the purely budgetary thinking and look at an approach based on growth sources.

GDP growth is nothing other than the sum of productivity gains and population growth. When the population ages, immigration is a growth driver, and not only a way to finance the pensions of pay-as-you-go systems. The calculation of growth is based on a number of variables; inter alia the growth in the population and its education level. The refugees’ geographical and social origin is so diverse that it is not possible to assess the wealth of knowledge and skills they have. But one can take into account two effects - quantity and quality - to expect a positive effect on European growth.

Obviously one cannot deny that among refugees, there are individuals who are also motivated by the prospect of social aid. But there are many others who, beyond survival, seek to develop and maintain an economic activity. One would have to have a Malthusian vision of the economy to not understand the contribution of an increase in the working-age population to growth.

Asylum criteria are linked to threats to life. Populations looking for a host country are not covered by this rationale of “choice” discussed above. Should refugees, who account for less than 10% of the total, be given preferential treatment over other immigrants? Especially when it is mafia-like networks that have enabled them to gain illegal entry to the country? This is a question of politics and not economics. Any type of idealism or conclusions based on a purely theoretical approach must be tempered by caution. But not taking into account the effects of migration - refugees or migrants - on growth would be an error in geographical areas where the potential for GDP growth is limited by ageing.

Refugees and coordination

The rationale underlying refugee flows is flight - often in a hurry and not always premeditated - and not economic attractiveness as is often assumed in traditional migration models. While such population movements are likely to increase in the future because of ethnic conflicts or climatic imbalances, the real question will be cooperation between the host countries. Europe in particular receives only a marginal percentage of refugees worldwide but the bulk (77%) of those who have come to advanced countries.

In a book from 2000, Greg Noll talked about a "common market of deflection". He criticized the national strategies of "deflection" of the asylum seeker problem: a sincere desire that Europe should do something, but with reluctance in each country to act alone and therefore preference for a generous welcome in the neighboring countries. In his book he criticized the Europeans’ inability to share the financial burden and suggested that the European Court of Human Rights should be the only transnational body empowered to deal with receiving refugees. The existence of this deflection phenomenon undoubtedly calls for a supranational solution. It must, nevertheless, factor in the cost of receiving refugees and what could be called the "national humanitarian conscience", both of which vary between countries.

In the European Union, cooperation is above all synonymous with harmonization. The Common European Asylum System, introduced in 1999, made it possible to plan and share the criteria, procedures, controls and rights linked to applications for asylum. But it has not made it possible to reduce the imbalance between EU countries in terms of refugee flows. What is the main reason? The principle of "country of first entry" that determines the country in which an application for asylum must be processed. The fear of receiving a disproportionate number of refugees has encouraged many countries to significantly tighten the reception conditions, a national approach that runs counter to the cooperation principle.

Harmonization has not led to a fair (moral or political criterion) or balanced (economic criterion and capacity to receive refugees) distribution of asylum seekers. In principle, centralization therefore seems to be necessary, based on various criteria such as the size and the density of the population or per capita GDP. An equalization rule could set quotas and put in place government transfer payments and financial compensation in the event of imbalances between member countries. That would amount to abandoning the first country principle to the benefit of a coercive European body. This issue, as always in Europe, would be far more political than technical, as a loss of sovereignty in terms of migratory flows is a major stumbling block in many countries. 

Evariste Lefeuvre began his career at Caisse des Depots et Consignation in 1999 as the U.S. economist before being appointed Deputy Head of Research in 2003. In 2006 he created the Multi Asset ... Show More

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