Yves here. This post is more important than it seems for several reasons. First, it reveals one of the dirty secrets of modeling: if you tweak assumptions within plausible ranges, you can come up with wildly different outcomes. Second, it identifies what some of these assumptions are in the now-hot-topic of whether letting more migrants enter is an economic cost or an economic burden. Although this article discusses various studies of the cost and benefits of immigration in Europe, the same methodological issues are likely to apply to similar work in the US.
BY Nuria Boot, as a Research Assistant in the area of Competition Policy, and Pia Hüttl, an Affiliate Fellow at Bruegel. Originally published at Bruegel
What’s at stake: Many research institutes have estimated the economic impact of migrants, in particular regarding fiscal budgets and the labour market. These studies often give contradictory results. This blogs review looks at the different assumptions and approaches behind these results.
The German Council of Economic experts describes four scenarios for labour force potential and expenditures related to refugees. They divide integration into 3 stages: asylum application, approval and labour market integration. The scenarios are linked to assumptions on direct fiscal expenses during the 3 stages of integration.
This assumes that the asylum application takes 4 months, and the decision8 months. Asylum applicants receive benefits, then benefits continue if they are recognized as refugees, or they receive a lump sum after rejection. The report assumes a 40% participation rate and an 80% unemployment rate upon recognition. After 5 years, they assume that the participation rate increases to 70%, while the unemployment rate drops to 20%.
Faster procedures, quicker integration
The second scenario assumes 6 months from arrival to asylum decision, and faster labour market integration, with an 80% participation rate after 5 years and a 10% unemployment rate.
Greater inflows, slower procedures, slower integration
The third view assumes 20% more arrivals per year than in the base scenario, 18 months until the asylum decision and slower labour market integration, with a participation rate of 60% and an unemployment rate of 30% after 5 years.
Higher expenses better integration
The last scenario assumes higher benefits for asylum applicants, and higher lump sums for both training measures and upon rejection. Labour market integration is assumed to be better than in the second scenario, with an unemployment rate of 5% after 5 years, while the participation rate is also assumed to be 80% after 5 years.
Importantly, all the scenarios assume that the number of refugees coming to Germany drops relatively quickly, from a million in 2015 to 200,000 in 2020.However limiting this number would require political measures.
Depending on the scenario, migration, as well as social and integration benefits for asylum seekers and recognised refugees will result in direct annual additional gross expenses for public budgets in the range of €5.9 to €8.3 billion in 2015 and €9.0 to €14.3 billion in 2016 (0.2-0.3 % of GDP in 2015 and 0.3-0.5 % of GDP in 2016). Slower procedures combined with worse labour market integration would likely raise these costs noticeably (figure below).
Source: Annual Economic Report 2015/16 ‘Focus on Future Viability’, Sachverständigenrat
Holger Bonin investigates the impact of current immigration on the German budget. He presents a simple tax-transfer-calculation for 2012 based on data from the socio-economic panel of Germany. He finds that in 2012 , the average non-citizen paid 3300€ more in taxes than they received in terms of social transfers and free schooling.
Bertolla et al from CESifo point out that when all public expenditure is included, this number turns actually negative. They adjust Bonin’s calculations, and find a net cost of 1800€ to 1450€ per non-citizen in 2012. The key difference driving this result is the inclusion of fixed costs, such as military expenditure, in government spending.
In a second question, Bonin explores the impact of future immigration on the German budget. Here, he takes into account all public expenditures, and assumes that immigrants will have the same tax and transfer profiles as non-citizens already living in Germany, which translates into lower employment rates and lower income compared to the native population.
The author assumes similar favourable age structure of future immigration, and a yearly influx of 100,000, 200,000 and 300,000 people. Using a generational accounting study, he finds that future immigration is more of a burden to the public finances than a benefit.
He finds that for 200,000 immigrants per year, to achieve a balanced budget in an intertemporal calculation, the primary surplus would have to increase by 3.7 %, compared to 3.3 % without migration. Holger assumes that new immigrants make lower net contributions than migrants already living in Germany. Assuming migrants are higher qualified, the net burden decreases.
Christian Dustmann and Tommaso Frattini look at the fiscal impact of immigration on the UK economy since 1995. Similar to Bonin, the authors use a tax-transfer calculation based mainly on the UK Labour Force Survey to find the net fiscal contribution of migrants between 1995 and 2011.
Government expenditures on goods and services are mainly allocated pro rata to the different population groups. However, for public goods a distinction is made between pure public goods and congestible public goods, for which the costs may increase with the size of the resident population. Only the costs for the latter are assigned to migrants.
The authors find that from 1995-2011 the resident immigrant population from European Economic Area (EEA) countries made a positive fiscal contribution, while those from non-EEA countries contributed less than they received; however, native workers also make a negative contribution during this period. Moreover, they find that both groups of immigrants that arrived after 2000 made a positive contribution.
These estimates have been criticised by Migration Watch UK, mainly on the grounds that government revenue from recent migrants has been seriously overestimated, while costs of public service provision have been underestimated. Using different assumptions over the same period, Migration Watch finds negative fiscal impacts for all groups.
Rowthorn, re-evaluates Dustmann and Frattini’s estimates for recent migrants. His adjustments include all Migration Watch assumptions excluding those for debt interest and personal taxes (income tax and national insurance). They also include an adjustment for native labour displacement and his own estimate of the migrant share of debt interest. He finds negative impacts for both groups of migrants.
The 2014 update of Dustmann and Frattini does not really change their initial results (see figure below), the main difference being that more recent public expenditure data published by HM Treasury is used to allocate expenditures. As a side remark, the authors point out that migration can be temporary, and that remigration is an underexplored issue. If migrants return to their country of origin after reaching their career peak or upon retirement it would relieve to the fiscal system.
This is further explored in a socio-economic panel study at DIW by Dustmann and Görlach, who propose a general theoretical framework for modelling temporary migration decisions. The authors find that temporariness of migration has typically not been accounted for in the past. This can change results significantly, as most of the fiscal burden may be borne by the country in which migrants settle after retirement.
As a general critique to the studies above, Marcel Fratzscher and Simon Junker from DIW point out that measuring the economic value only in terms of taxes and government benefits received, without incorporating refugees’ contribution to economic performance, is false and misleading.
There are two sources of positive economic effects: employed refugees stimulate the economy on the supply side by contributing to corporate production and refugee-related expenditures come with positive demand impulses as high demand helps business overall.
The authors outline a model on the economic potential of refugees, capturing the effects arising in the macroeconomic cycle incorporating multipliers. They assume that the refugee influx declines gradually from 1.5 million people in 2015-2016 to half a million in 2018-2020.
They assume late entry into the labour market, with refugees taking up employment only after 2 years. The following assumptions hold:
- Baseline scenario: Unemployment rates are assumed to be 60% in years 2-5, 45% in years 6-10 and 30% in year 11 and later. Participation rate is 80%, while labour productivity is assumed to be 67%. The acceptance rate is 45%. Costs related to care, accommodation and integration during the application stage are assumed to be 40% of per capita income, while social benefits for unemployed refugees are 30% of per capita income.
- Pessimistic scenario: Unemployment rates are 65% in years 2-5, 50% in years 6-10 and 35% in year 11 or later. Participation rate is 75%, while labour productivity is assumed to be 50%, rising to 67% over time. The acceptance rate is 40%. Costs during the application stage are 66% of per capita income, while social benefits for unemployed refugees are 40% of per capita income.
- Optimistic scenario: Unemployment rates are 50% in years 2-5 falling to 38% and 25% over time. Participation rate is 85%, while labour productivity is the same of the baseline scenario. The acceptance rate is 50%, and the costs related to the first years and beyond are assumed to be half of the pessimistic scenario.
The multipliers assumed are 0.5 in the baseline and the optimistic scenario, and 0.4 in the pessimistic scenario, in order to factor mainly the direct effects. As a result, the initial costs are predominated by positive effects in the long run (see figure below). Even in an unfavourable scenario, in which significantly lower productivity and high costs are assumed, the breakeven point appears a few years later.
The costs that are discussed here appear to be public costs such as the cost of infrastructure, public education, and healthcare. I may have misunderstood something, but it appears that another cost is being ignored. This cost is the increase in the levels of inequality as a large population of low wage workers moves into a region. The cost of inequality isn’t likely to appear in GDP estimates and projections, but it is real. This sort of problem isn’t caused by moderate levels of immigration, but it is caused when huge numbers of people migrate to a region.
Germany, once upon a time when they were Social Democrats, believed that the only time you wanted migrant workers was when the unemployment rate was approaching the “zero bound”. I also heard rumors from relatives up in Northern Germany that Bavarians actually picked lettuce.
But we showed them the Neo-liberal way.
German bosses learned how beautiful life can be when you leverage workers with a new desperate group, way back in the 1960s. Now they get to do it again, and with a beautiful joy in their hearts as they help the struggling refugee. Let’s all accept lower pay for the good of the company!
I think you are correct, Vatch. The attendant measurement issues include: a) Does increased inequality simply reflect the distribution of already-calculated costs to the detriment of the working class and further engrossment of the income and assets of the large-scale owning class and its management staff? b) Or is increased inequality an independent cost to the state, insofar as labor market expansion, unemployment and/or the swelling of the secondary labor market reduces labor sellers’ bargaining position and capacity for collective contribution– thus declining wages, purchasing power, and tax contributions (and so not only reducing the social wage in all its forms but public infrastructure more broadly)?
Once immigrants learn to eat, text, drink and drive in leased Uber driverless cars, they’ll have melted into the pot like as not.
Ah, but we’re not supposed to be a melting pot, any reference to which is now deemed a serious micro-aggression. Instead, we’re supposed to be a mixed salad.
This article comes to mind again:
How many individuals care about GDP growth?
How many of the people on minimum wage prioritise GDP growth over their own personal income and cost of living (housing)?
How large a percentage of a population gain from GDP growth in the current environment? 1%? 5%? 50%? Does that matter in a democracy?
This is intellectual masturbation. Facts on the ground are: most are illiterate and innumerate. Only 13% have a school diploma which is worthless in Western Europe. You can get a diploma in Syria and be illiterate. The only way these people add to productive capacity is to be used as slaves.
They will simply live on Welfare and boost the spending on consumer durables and food as they levy increased taxes on German workers. Already there is talk of doubling health insurance payments, but only that component paid 100% by the worker – the employer has an opt out. The other great idea is increased petrol taxes across Europe to pay for these people…….so the aim is to transfer spending power from the native population to the incomers. That should boost numbers entering.
The fact that currently an Immigrant gets an alliance for daily sustenance 300% level of an unemployed German seems to be ignored. That these incomers get free train travel and 130,000 have used it…..free entry to public swimming pools where they touch up free women and girls.
The necessity for the State to boost spending on Police and probably reintroduce the Draft is forgotten. there are 500,000 – 800,000 young Muslim men on the posse facing an Army of 120,000 men and WOMEN who are not battle-hardened.
The cost od Civil Insurrection has not been factored in yet
You’re such a meanie. We’re supposed to love them like good christians. Frankly, Germany and the other places these poor folks are rushing into should be rethinking their slavish devotion to NATO and the US Washington Consensus global agenda. Instead, predictably they’ll double down on it. In the same way they all double down on neo-liberalism.
The best way to stop the human flood tide and also to ameliorate the condition of the refugees is to go all out on a peace settlement in Syriana. The US is trying to maintain its position as hegemon by letting a trio of its ostensible allies pursue a really monstrous schemes in order to score some points against neocon enemies Russia and Iran.
Obama looks on as the West crumbles.
Nice paranoid angry-old-white-dude rant. I’m sure they couldn’t wait to hop on that smuggler raft in the Mediterranean because it was one step closer to your delicious tax money!
The Syrians that I’ve met here were generally relatively wealthy and educated back home and therefore had the means to arrange transit. Some speak fantastic English and have risen to higher proficiency levels in Swedish remarkably fast so they can continue their University education or get certifications to practice their old professions here. I’ve also given directions to others with only hand signals and confused smiles and while the interactions were friendly it’s obvious that it will take a generation for them to even start to integrate. The Syrians have generally had a much easier time of it than Afghans or Eritreans.
But I think it’s mostly just people coming and not, um, an invading army. Probably a lot of nice ones, a lot of assholes, and a lot of ugly cultural clashes in the making like with every large-scale human migration in history.
Studies, theory and charts are nice. Here’s a local impact:
The overpriced bakery cafe that used to employ many local teenagers and adults now has a staff of people from the same village in Mexico. No local can get a job there unless they speak Spanish. No, I don’t know if they are legal or not.
The staff live together in one big house and boast of sending most of their money back to the village. So much for the multiplier effect of local spending of wages.
Another nearby cafe in Larkspur, has the same situation, all Peruvians, all wearing black t-shirts.
Local teenagers are out of luck, as are the jobless adults living in their cars nearby, who cannot find any job. Your theoreticians can perhaps explain to locals why this situation is to their advantage.
Maybe some advantageous Broken-Window “growth” will come when the locals torch the place and it has to be rebuilt?
In Sweden the locals are regularly torching refugee centers – so far without any refugees inside – but this is only a question of time & bad luck. I observe that the Swedish are more violent than the Danes; the Danes talk a lot, while the Swedes *do* and they don’t brag either.
Its hardly a surprise to anyone who’s been reading research on migration – I’ve read many studies and they all seem to come to conclusions in miraculous agreement with the researchers prejudices. There are so many variables involved its all too easy to pick the convenient ones. My personal baseline assumption is that the overall impact is likely to be fairly neutral, largely depending on the background of the refugees. If you get educated ones, your country will benefit. If they are semi-literate villagers – probably not.
I recall years ago talking to an Irish civil servant who was involved in the 1970’s in helping Vietnamese refugees. He found that countries with more experience (especially the US and Canada), were quite ruthless in ensuring that their ‘quota’ wasn’t randomly chosen – they made sure as many professionals as possible were in their lists. The result was that some European countries who were taking relatively small numbers found that their quota included a very high proportion of what the Vietnamese would call ‘second rice’, or downright criminals.
I’d be interested to see if anyone is doing a long term comparison of Denmark and Sweden. They would seem ideal controls – very similar countries, but completely divergent immigration policies. So far, neither country seems to have been hurt by being on the extremes in Europe.
Denmark and Sweden are actually similar. The difference is mostly in the presentation. Unlike Sweden, many Danes will argue and talk a lot at (a a “high” volume) in public and media against immigration and all it’s ills, however, we hardly ever kick anyone out no matter what (People may be scheduled to be expelled, but, the actual work is rarely done, some excuse is always found) and “we*” are always bending over backwards to placate whatever mullah or imam that happens to feel offended this week.
It was interesting to watch the Swedes spin up the border checks in 4 weeks, while the Danes were caught totally flat-footed with some fat customs officers a few mangy dogs and dilapidated border facilities in the way of border protection. The Swedes must have silently prepared the plans and procedures prepared in advance, the Danes had been downsizing and outsourcing everything for years while running their gob.
Danes in general mistrust religious displays of any kind, for us religion is a private thing. We particularly despise the very publicly enacted religious performances like we see in the US and Islam. Danes finds that behavior offensive, they feel that these people are putting on an elaborate public display of not wanting to be seen as “one of us”, and, yet they are making demands from us.
Double-Rude. Here, one has to give something before one can ask for something in return (and it’s rude to ask, it’s also very rude not to match a gift with another and it’s even rude to “top” the gift – because then the receiver has to “raise” to match). This “gift culture” is the reason people dislike refugees in general, they “get” something by being allowed into society as guests, then they are expected to return that favor before they have any rights to ask for anything.
The Official Denmark, the public at large – not so much! However, this time “we” are actually arguing over the royals visiting Saudi Arabia. Most think that they should not. This is new. Before “business” was always right.
Irony is everywhere. America the country of immigrants passing judgment on other immigrants. People do not lightly decide to leave their homes, family and culture. This whole immigration mess is the result of the blowback from the US, its NATO enablers and the BFFs Israel and the Sauds making a total pigs breakfast out of the middle east just to foam the runway for the convenience of multi-national corporations. Comments such as General Butler’s “War is a racket” and LBJ’s wry comment that the CIA had been running “a goddamn Murder Inc in the Caribbean,” for the benefit of the legal mafia…American corporations come to mind. In the name of “exceptionalism” (aka corporate profit) we pour poison into our fellow ants’ ant hills and stomp all over them as they try to escape. This is just the tip of the mass migrations that climate change will add to the mix.