The EEAG Report on the European Economy 2015
Migration in Europe: Too Much of a Good Thing?
With lingering high unemployment in much of the EU, little growth of real incomes anywhere, and recent accession of low-income Eastern-European member states, anxieties surrounding immigration mount. The rise of anti-immigration parties across the political spectrum forces EU governments to harden their stance. But free movement of people within the Union remains an inviolable principle, enshrined in treaties. The feared negative economic effects of movements of people within the EU appear modest. The phenomenon may be temporary: migrant flows are likely to reverse after a few years. How much freedom of action do member states have within existing EU laws? How should they respond?
Another inconsistent trinity
It is an irony of Europe that, while there is too little labour mobility to support monetary union, there is too much for social harmony. The EU harbours three mutually inconsistent aspirations: free movement of people; generous welfare states; and enlargement of the Union to include poorer states in Eastern Europe. Something may have to give. Stagnation lingers, unemployment stays high and real incomes sag. Meanwhile fears have grown that migration from low-income members will threaten jobs and wages, put pressure on housing markets and public infrastructure and increase the burden on the welfare state. Anti-migration parties on the fringes of the political spectrum are taking votes from the mainstream and force a hardened stance on immigration.
The relationship between flows of people between states and attitudes to migration is complex. Eurostat publishes data on the "crude rate of net migration plus adjustment" – see Figure 1 below – the actual population change less the estimated natural change, which would occur in the absence of migration.1
The substantial net inflows into Germany following re-unification in the early 1990s provoked little opposition; neither did the strikingly large net inflows into Spain and Ireland in the boom years before 2008. The effect of the economic problems of "debtor Europe" can be seen in the net outflows from Ireland, Spain and Portugal since 2009, while the net flow into Germany continues to rise steadily. Immigration from Eastern Europe, as well as illegal immigration from North Africa and other places produced a sharp uptick in the net flow into Italy in 2013. Poland has experienced steady net emigration throughout, with a modest increase following EU entry in 2004. The net inflow into the UK looks very modest in this context. The UK labour market is also relatively flexible and unemployment is low. So what explains the anti-immigration fervour?
Immigration is feared particularly by the elderly and by low-skilled workers, who perceive even lower paid immigrant workers as a job threat. The empirical evidence on this issue is mixed. A large body of research on the effects of immigration on wages and employment of natives finds only modest effects, and not negative in every case (see, for example, Dustmann et al., 2008; Kerr and Kerr, 2011). A long report issued by the British government in May 2014 concedes as much (UK Government, 2014).
The welfare magnet
In principle, a generous welfare state financed by high and progressive taxes is likely to attract less skilled, low-paid migrants, who are likely to be net beneficiaries; a low-tax country with limited welfare is likely to attract high-skill, highly-paid, and more entrepreneurial migrants, an insight that goes back to the "welfare magnet" hypothesis of Borjas (1999).
While there is general agreement that the labour market effects of immigration are positive despite the distortion resulting from the welfare magnet, empirical studies show substantial international differences in the fiscal effects of migration. Analysing Germany's socio-economic panel, Sinn and Werding (2001) and Sinn et al. (2001) found that in 1997 the net fiscal costs of an immigrant resident in Germany for less than a decade were 2,367 euros per year, falling to 726 euros when long-term immigrants were included. In a widely recognised study also based on the socio-economic panel Bonin (2014) found that in 2012 foreigners paid 3,300 euros more than they received in terms of social benefits and free schooling, but he emphasised that the balance turns negative if all public expenditure is included. In fact, if such a broader approach is adopted, the balance turns out to be minus 1,800 euros per foreigner. Moreover, the author argued on the basis of a generational accounting study that a foreigner incurs an average net cost of 79,000 euros over his or her lifetime. By contrast, in a recent study of the United Kingdom based on indirect econometric observations, also including all government expenditure (widely reported in the media, and presented on VoxEU 2 ) Dustmann and Frattini (2014), found the fiscal effects of immigrants positive on the whole, with migrants from outside the European Economic Area proving among the exceptions. The differences may be due to the UK's less generous welfare system, which implies more skilled immigration. Better German data, and particularly the availability of actual accounting data from the socio-economic panel, may also be a factor.
EU treaties and laws
However it affects the finances of the welfare state, free mobility of persons is an unchallengeable principle of the EU since the 1951 Treaty of Paris. But it is not unqualified. While EU citizens who are workers have complete freedom of movement, others do not. Directive 2004/38/EC, which amends and consolidates earlier directives, grants an unqualified right of residence in any member state for up to three months 3. All Union citizens have a right of residence for more than three months if they are workers or self-employed; or if they have enough resources not to become a burden on the social assistance system and have comprehensive sickness insurance; or if they are students or family members of an EU citizen. EU citizens (and non-EU family members who have lived with them) automatically acquire the unconditional right to permanent residence in another member state once they have lived there legally for five years, and are entitled to all tax-financed social benefits and other local amenities just like a native. This means that immigration into the welfare system is possible without ever participating in the official labour market, subject to the constraint that no social benefits are available for the first five years.
The directive makes clear that an EU citizen's dependency on social assistance will not automatically lead to their being ordered to leave the country. If they are workers or self-employed persons, or entered the host member state to seek employment, they may not be expelled for as long as they can show that they are continuing to seek work and have a genuine chance of finding it.
Nevertheless, a case recently brought before the European Court of Justice has established that nationals of one member state who travel to another solely to claim benefits may be excluded from receiving certain social benefits during the initial five-year period 4. So although the treaties and directives limit the freedom of member states, they can still temporarily refuse certain benefits to people who may be classified as "welfare tourists".
What can be done?
From a purely economic point of view, freedom of movement in a union with national-level redistributive welfare states and widely differing real incomes may lead to excessive immigration of low-skilled workers into Northern Europe.
What might member states do within current EU treaties and directives to address the electorate's fears of immigration?
Such fears are likely to recede as income levels rise in the poorer member states. The Polish experience showed that many migrants returned to their countries of origin after a few years as income levels rose, or went to Germany when it allowed access to its own labour market. Instead of a permanent policy response, member states can make fuller use of existing freedoms to limit benefits to migrants who have not established a permanent right of residence.
At present welfare benefits are determined by country of residence, not origin. It may be possible to replace the residence principle for non-working migrants with a home country principle. It is compatible with free migration, as the welfare recipient would have the right to consume his or her benefits in any EU country. The home country principle also eliminates the incentive for countries attractive to welfare migrants to curtail social expenditure, inducing the risk of a "race to the bottom". Even if in some distant future EU countries were to become equal, with no net migration, the incentives to "race to the bottom" would otherwise bring about equilibrium with too little redistribution.
The alternative of harmonising social benefits across the EU is at present a utopian pipe-dream. It would be practically impossible to implement and do more harm than good, given the huge differences in living standards and productivities across the EU: swathes of the Union would suffer intolerable unemployment.
The insurance principle in welfare should be restored, and benefit payments more closely related to contributions. Such a scheme creates no distortions from the inclusion principle. Rights to benefits acquired in the states where a person had made contributions would be portable across borders, as is the case with social security pensions today. The cost of benefits would be borne by the states that received the contributions. If run centrally, such a scheme would require a vast amount of data collection across the EU and harmonisation of social security systems. However, centralisation is not necessary if claims can be directed towards the countries in which they were acquired, regardless of the country of residence.
Borjas, G. J. (1999), "Immigration and Welfare Magnets," Journal of Labour Economics 17, pp. 607–37.
Bonin, H. (2014), Der Beitrag von Ausländern und künftiger Zuwanderung zum deutschen Staatshaushalt, Bertelsmann Stiftung.
Dustmann, C., A. Glitz and T. Frattini (2008), "The Labour Market Impact of Immigration," Oxford Review of Economic Policy 24, pp. 477–94.
Dustmann, C. and T. Frattini (2014), "The Fiscal Effects of Immigration to the UK," Economic Journal 124, pp. F593–F643.
European Parliament and Council of the European Union (2004), "Directive 2004/38/EC of the European Parliament and of the Council of 29 April 2004," Official Journal of the European Union 47 , pp. 77–123.
Kerr, S. P. and W. R. Kerr (2011), "Economic Impacts of Migration: A Survey," NBER Working Paper No. 16736.
Sinn, H.-W., G. Flaig, M. Werding, S. Munz, N. Düll and H. Hofmann (2001), EU-Erweiterung und Arbeitskräftemigration: Wege zu einer schrittweisen Annäherung der Arbeitsmärkte, ifo Beiträge zur Wirtschaftsforschung 2; published in English under the title EU Enlargement and Labour Mobility – Consequences for Labour Markets and Redistribution by the State in Germany, Ifo Institute: Munich 2003; also published as Forschungsbericht No. 286 by the German Federal Ministry of Labour and Social Affairs, Bonn 2001.
Sinn, H.-W. and M. Werding (2001), "Immigration Following EU Eastern Enlargement, " CESifo Forum 2, pp. 40–7.
UK Government, Home Office and Department for Business, Innovation and Skills (2014), "Impacts of Migration on UK Native Employment: An Analytical Review of the Evidence," Occasional Paper No. 109.
1 Compared with a direct measure of gross immigration less gross emigration, this estimate replaces the errors introduced by inaccurate emigration data with population forecast errors, and may be the better estimate overall: emigration, which attracts little interest, is frequently recorded inaccurately.
2 C. Dustmann and T. Frattini (2014), "Positive economic impact of UK immigration from the EU," VOX.
4 Court of Justice of the European Union (2014), "Economically inactive EU citizens who go to another Member State solely in order to obtain social assistance may be excluded from certain social benefits," Press release No. 146/14, 11 November.