Have Skills, Will Travel

Germany is desperately trying to attract skilled immigrants to fill thousands of vacancies in its industries – and its demographic crisis has not even hit it yet. When its Baby Boomers begin to retire in about ten years’ time, its finances and economic growth will really feel the pinch.

The same prospect haunts just about every OECD country. Low fertility rates and ever longer lifespans will pose severe challenges to pension and health-care systems: the EU’s working age population is expected to shrink from about 308 million now to 265 million in 50 years, while pensioners become legions. Europe’s Old World moniker will take on an entirely different meaning.

This will cast a pall over economic growth, which results from rising employment and higher labour productivity. So, many countries keen on preserving their prosperity but not very keen on creating their own people will have to import people from elsewhere.

That’s not an easy sell. Locals tend to view immigrants as a threat, not an opportunity. Nearly all countries have vocal anti-immigration parties. What is needed, then, is hard proof that immigrants are good for you. That they will make your country, and you, richer.

A fair bit has been written on this, focusing in particular on the effects of immigration on the labour market and on the fiscal front. What really matters to change perceptions, though, is the effect on per capita GDP. Not much has been done in this area.

Until now, that is. A new CESifo Working Paper by Christophe Rault and his colleagues Ekrame Boubtane and Jean-Christophe Dumont aims to fill the gap by relying on a unique dataset to assess the impact of migration on economic growth for 22 OECD countries between 1986 and 2006.

They start by pointing out that in the 15 years to 2020 international migration will account for all labour force growth in the OECD as a whole. Unsurprisingly, many countries are tweaking their immigration laws to attract immigrants equipped with the skills that their respective economies need, closely studying the experiences of Australia and other countries that have long relied on skills-based migration programmes. Meanwhile, the EU has introduced the European Blue Card to attract highly qualified migrants to the EU labour market. All of this points to a trend that is set to stay: recipient countries will be paying close attention to the immigrants' demographic and educational characteristics in order to pick out the best ones.

Existing studies have not observed migrants’ education, relying instead on the educational attainment of the population in the country of origin, or on the education level of the immigrant population as a whole (the stock), as a proxy. The paper by Mr Rault and his colleagues departs from this by considering the effect of flows of immigrants by country of birth and individual skill level on GDP per capita. They focus as well on newly arrived immigrants rather than the immigrant population as a whole, given that the socioeconomic characteristics of immigrants have changed over time and flows reflect these changes better than the stock of immigrants.

In the exogenous growth framework, there is always a trade-off with immigration, as well as with labour force growth: while immigrants help to increase human capital accumulation, they also tend to dilute capital, since such capital now has to be spread among a larger population. The question is which effect prevails. Our author’s econometric investigation provides evidence that, over the period considered, the impacts of an increase in net migration on GDP per capita via human capital accumulation and capital dilution are significant, positive the one and negative the other as expected, but with the former being the dominant one.

Thus, all else being equal, an increase in one percentage point in foreign born net migration would increase productivity growth by an average of three-tenths of a percentage point per year for the 22 OECD countries considered. There are, however, differences among the countries. The effect is practically nil for Germany, Greece and the United States, since recent immigrants to these countries are as skilled as the resident population. More highly skilled immigrants would help to improve this score, which speaks for a more selective immigration policy. According to the authors, a 10% increase in the relative share of immigrants with tertiary education compared to the resident population increases the productivity growth rate between one- and fourth-tenths of a percentage point.

But in general the gain may appear small at first sight, even for countries that have highly selective migration policies in place.

To assess the effect on GDP per capita, it is useful to look at the effect on the demographic ratio of working age to total population in addition to the effect on GDP per worker. In all OECD countries, migrant inflows contribute to an improvement in the demographic ratio of working-age to total populations, thus reducing the dependency ratio, i.e. the number of people aged 65 and over as a percentage of 20- to 64-year-olds. Hence, foreign-born, permanent migration flows increase GDP per capita in all of the OECD countries.

Migration also changes the age structure of host countries because migrants tend to be concentrated in more active age groups compared to natives. Furthermore, there is evidence that migrants tend to be complementary to natives, freeing some locals to devote time to more productive jobs. Lastly, skilled immigrants may contribute to research and boost innovation and technological progress. The positive effect on productivity growth comes, as it were, as a bonus.

So, immigration is good for you. Just relax a bit and let your country open the door a bit wider.

Ekrame Boutane, Jean-Christophe Dumont and Christophe Rault, Immigration and Economic Growth in the OECD Countries 1986-2006, CESifo Working Paper No. 5392

Other CESifo Working Papers by Christophe Rault
Other CESifo Working Papes dealing with migration