Needed but not wanted – Economic migrants are seen as a threat to jobs and the welfare state. The reality is more complex
Oct 1st 2016 Economist
Stoke-on-Trent in northern England is home to the world’s second-oldest professional football club, Stoke City FC. Founded in 1863, it enjoyed its heyday in the mid-1970s, when the club came close to winning the top division. The playing style was described by its manager, Tony Waddington, as “the working man’s ballet”. These days the flair is often provided by players from far afield. More than half the first-team squad comes from outside Britain, mostly from other parts of Europe. But that is about as far as Europhilia in Stoke goes. In June’s referendum on Britain’s European Union membership, the city voted strongly for Brexit.
Where jobs are vulnerable to competition from Chinese imports, mainly those in Britain’s faded industrial north, tended to be in favour of leaving. Stoke City FC are known as the Potters in tribute to the city’s once-great pottery industry. But Stoke also seemed predestined to be a Brexit supporter on another count. In places such as Stoke, where the foreign-born population had increased by more than 200% between 2001 and 2014, a vote to leave was almost certain.
Immigration of low-skilled workers has become an increasingly contentious political issue in both America and Britain. Voters in host countries often see a sudden influx of people from places with lower wages, poorer working conditions and a less generous welfare system as a threat to their livelihoods and living standards. In America the debate is about whether migrants hold down the wages of native workers. In Britain the main concern is that migrants put additional pressure on housing, public health services, schools and transport systems.
Along with trade, migration is one of the two main sources of public anxiety about globalisation. For the host economy, the gains and drawbacks are similar to those from trade. Immigration enriches the workforce, allowing for a more finely graded specialisation that raises average productivity and living standards. Diverse workforces are likely to be more productive, especially in industries where success depends on specific knowledge, such as computing, health care and finance. By easing labour bottlenecks, low-skilled migrants help to keep down prices of goods and services.
The drawback for native workers is competition for jobs and public services. In principle, an influx of low-skilled workers depresses wages for competing native workers, in the same theoretical way that opening up to trade with poor countries does. The balance of benefits and costs will depend on income: the rich are likely to do better out of the bargain. Economists dispute the extent of the overall gains and losses to hosts and labour-sending countries respectively.
Some benefits are uncontested. For immigrants from poorer countries moving to Stoke, or indeed to any part of Britain, there are clear gains. They can hope for a better job, a marked improvement in their quality of life and access to better public services such as health care. Economic migrants are by definition a mobile labour force. Migration helps to deal with labour shortages in low- or mid-skilled industries, such as mining or agriculture, and in remote places where it is difficult to attract native workers. Migrants are also often granted work visas on the strength of having scarce skills.
Other elements of migration are more controversial. If host countries benefit from immigrants, then the countries that send them must be losing out on manpower, skills and tax revenue. The people who move are often the brightest and best—those with the get-up-and-go, the languages and the connections—so their country of origin may suffer a brain drain. Between 1990 and 2012 almost 20m people moved from central, eastern and south-eastern Europe to richer countries in western Europe. This east-west migration accelerated after 2004 when eight eastern European countries, including Poland, the Czech Republic and Hungary, joined the EU. The IMF researchers reckon this exodus lowered cumulative population growth in labour-sending countries by eight percentage points. If those mostly young and skilled workers had stayed put, the gap with the EU in income per person would have been five percentage points narrower.
These results are open to dispute. Migrants typically move from places where economic prospects are poor, making it hard to establish whether weak growth is a cause or a consequence of their leaving. The chance of a better life elsewhere may also create a stronger incentive for those who remain to acquire new skills. A natural experiment was provided by a military coup in Fiji in 1987 to study the effects of emigration on that country. The economy was split between indigenous Fijians and those of Indian origin. A large chunk of the second group, generally high-skilled, left after the coup. Most of them went to Australia and New Zealand, which admitted well-qualified migrants. It seemed the ideal opportunity to measure the effects of a brain drain.
Indian Fijians who stayed behind started to acquire skills at a faster rate in order to be able to emigrate (or at least to have the option of doing so). They also concentrated on disciplines that allowed them to meet the skills-based immigration criteria most efficiently. The increased investment in skills was large enough to raise the stock of human capital net of the first wave of emigration, in which a fifth of the Indian-Fijian population left. The brain drain was fully offset.
Impact on Host Countries
Many native workers see uncontrolled immigration as a break with an implicit contract: that the state will look after its own. It creates a tension between immigration and the welfare state. That tension, though, is mostly policy-related. Where migrants’ employment rate is higher than that of natives (as is the case with migrants within the EU), fears that immigration will add to the welfare burden are largely unfounded, though much depends on how welfare policies are designed. In America, for instance, only those who have paid into the public Social Security (pension) scheme for at least ten years are entitled to benefits. A well-designed policy could make immigration and welfare provision complementary.
The trouble is that at the local level there is often a mismatch between the extra resources that immigrants add and the extra demand they create. Additional pressures on local public services are a particular problem in Britain, where central government raises taxes and allocates spending. Centralised budgets make it difficult for local authorities to respond flexibly to changes in local conditions, and strict planning rules limit the construction of new homes when demand surges.
Some other European countries deal with economic migration rather better than Britain does. In Denmark a lot of budgetary policy is made at municipal level. If an area has an influx of migrants, it receives more local tax revenues to expand public amenities, build more schools, hire more doctors and so on.
Effects on Wages
Another concern among natives has been that immigrants put downward pressure on wages. In theory they should, but empirical studies come to different conclusions. On one side is George Borjas, of Harvard University, whose study in 2006 found that although immigration did not depress overall wages between 1980 and 2000, it did hold down the pay of the low-skilled by 5-10%. On the other side, David Card, of the University of California, Berkeley, concluded that there was no effect. His view was based on a study of the “Mariel boatlift”, an unexpected surge in Cuban migrants to Miami in 1980. Mr Card reckoned that Miami had become accustomed to handling large inflows of unskilled migrants. Mr Borjas has recently looked at Mr Card’s analysis again and claims that high-school dropouts, a subset of the low-skilled native workers in Mr Card’s study, did in fact suffer a material fall in wages.
Until quite recently the academic literature treated migrants as substitutes for native workers. But what if they were complements; if low-skilled migrants helped to boost the productivity of low-skilled natives? For workers with at least a high-school qualification, the wage effects of low-skill immigration are positive if you drop the assumption that workers of the same age and education are perfect substitutes and that workers of one skill level, say cooks, do not affect the productivity of workers at other skill levels, say waiters or restaurant managers. The effect on the wages of high-school dropouts is only mildly negative. Immigrants to Britain are imperfect substitutes for native-born workers, so they have little impact on natives’ job prospects or wages. New immigrants tend to affect only the pay of recently arrived immigrants.
From these muddy waters, it is possible to draw two tentative conclusions about the broad impact of migration on wages. First, the effect on the bulk of low-skilled native workers has been fairly muted—perhaps because the way work is done changes in response to large-scale migration. However, the pay of some narrow categories of workers (say, farm labourers in Britain or high-school dropouts in America) may still be affected.
To deal with the tension between immigration and the welfare state, three rules suggest themselves. First, make benefits conditional on having paid into the system. Second, tie the funding of local public services to local tax revenues to ensure an automatic response to an influx of migrants. Third, restrict migration to prime-age, skilled workers who are more likely to get jobs and less likely to lose them in a recession.
But this may not be as straightforward as it sounds. Almost two-thirds of the new jobs that will be added to America’s economy in the next decade will be low-skilled or mid-skilled jobs, according to a projection by the country’s Bureau of Labour Statistics. Care workers, kitchen staff, auxiliary nurses and builders will be in strong demand in Europe, too. Such demand may not easily be met by indigenous workers, even at higher wages.
Will these jobs be filled in a black market or in a formal labour market? This is a question America has faced before. In the 1980s the baby-boomers were moving towards middle age, causing a spike in demand for young, low-skilled labour. This coincided with a demographic bulge in Mexico. An overhaul of America’s immigration rules in 1986 regularised those Mexican workers who had arrived before 1982. Henceforth work visas would be granted only to high-skilled migrants. The interplay of supply and demand created a black market, causing the number of illegal migrants to reach 12m in 2007, when policing of the border was stepped up. It was only quite recently that the flow of migrants was reversed.
Europe now faces a supply-demand dynamic similar to America’s in the 1980s. It has an ageing population, whereas on its doorstep, in the Middle East and Africa, populations are young and growing rapidly. A lesson from America’s engagement with Mexico is that a formal system for low-skilled immigration, perhaps with fewer entitlements than for skilled workers, is far preferable to turning a blind eye to informal migration.
Only within the EU’s borders is the free movement of people tied to the free movement of trade and capital. For the most part, enthusiasts for globalisation have rooted only for freer trade and open capital markets, not migration. Yet many of them are now having second thoughts about the benefits of unfettered capital too.