Immigration is a hot-button issue in the U.S. and Europe that draws opinions more often mired in emotion than logic. Tech entrepreneurs, like Facebook’s Mark Zuckerberg and Yahoo’s Marissa Mayer, have thrown their weight behind FWD.us, a lobbying group whose goal is to improve American immigration policy. With reform bills like the DREAM Act being debated in the U.S. Congress, and countries including Spain and Greece facing record-high unemployment, a key question for many is: How does immigration affect a country’s economic health?
The Organisation for Economic Co-operation and Development (OECD), an economic and social policy think tank based in Paris, recently conducted the first international comparative study of the fiscal impact of immigration. What they found doesn’t surprise Wharton experts: Immigrants basically have a neutral effect on government spending.
“It’s the usual kind of result,” says Wharton finance professor Franklin Allen. Many of these studies have found that immigration has little negative impact on federal expenditures, explains Allen. Adds Thomas Liebig, an OECD economist who worked on the global study: “Immigration is neither pain nor panacea to the public purse.”
Many of the studies in the past have looked at one country or one region. The OECD wanted to analyze the issue from a global perspective, according to Liebig, because a “lot of countries are looking to enhance labor migration. The natural thing to do is take a closer look at public finances and analyze the underlying rationale for how countries can take in more migrants.”
The Great Recession practically halted the migrant wave. Within the European Union, migration decreased by almost 40% during the global credit crunch after a steady rise of 15% in the boom years. “There’s a lot of uncertainty during economic crisis, so people tend to stay home,” Allen says.
When people start to move to a particular country in greater numbers again, it is often seen as an encouraging sign for that nation’s economic climate. One developing trend is that migrants are now largely deciding to move to a new country because they expect to improve their lifestyles. By contrast, poor immigrants from developing countries often choose to leave because they are seeking jobs, according to the OECD.
“On some level, we would like people to move freely to match skills to jobs. It’s complicated if that movement is across countries,” says Mark Duggan, Wharton professor of business economics and public policy. Southern European countries are seeing an exodus as many people move to other nations with better job prospects. For example, between 2011 and 2012, Germany saw a major influx of immigrants, including a 73% increase in Greeks moving to the country, a 50% increase in Spaniards and Portuguese, and a 35% increase in Italians.
That’s not necessarily a bad thing, notes Liebig. “If people are unemployed in Spain and [they are] going to Germany, it’s good for Spain and good for Germany. In Europe, the labor market disparity is very strong.” Germany has set up a program investing 140 million euros over three years to help unemployed young people from southern Europe find a job. The program includes language training and pays for their flight for a job interview. “That’s a good example of successful intra-EU mobility,” Liebig says. “In May 2011, Germany and Austria opened up to Hungary, Latvia, Estonia, Lithuania and Poland. Migrants could freely [leave to find] employment.”
How Migration Can Be Profitable
The biggest predictors of the financial success of an immigrant are age and educational level, according to the OECD. A highly educated immigrant who arrives at the beginning of his or her career provides more in taxes and social contributions than he or she benefits from schools, health care or pension programs. Young immigrants, who tend to have longer working lives, create a positive net fiscal contribution, according to the OECD report. Studies conducted in France, Belgium and Scandinavian countries demonstrated that migrants actually raise the GDP between 0.5% and 1.3% when they are employed at the same levels as native-born residents.
“Skilled immigrants in fields like technology are actually the outliers — they earn above the average, and they pay a disproportionate share of income and social security taxes,” notes Vivek Wadhwa, a tech entrepreneur and author of The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent. “This is a big advantage that the U.S. has over other countries — it is attracting the cream of the crop of scientific and technical talent from all over the world. If you segregated the groups into the highly skilled versus average [skilled], you would see the disproportionate contribution they make to GDP.”
The more educated the immigrants are, Duggan adds, the more benefit to a nation’s budget. “If you care about the U.S. budget, immigration reform is positive,” Duggan notes. Supporters of the Border Security Economic Opportunity and Immigration Modernization Act, which was passed in the U.S. Senate earlier this year and would allow immigrants with higher educational backgrounds to be fast tracked, say it will reduce the Congressional budget by $20 billion every year. According to Duggan, that sort of figure may not look like a “huge dent in the upcoming budget, but the fiscal impact is actually similar to the U.S. health care reform bill…. One complicated issue that hangs over the budget is [the argument that] letting immigrants in will make it harder for people in the U.S. to get jobs. But the effects on employment are pretty small [based] on my reading of figures. There will be an increased demand for services. It’s not exactly like there are a [static] number of jobs and people are going to snatch them.”
Many U.S. companies argue that they would like to fill certain jobs in the U.S., but they can’t find enough qualified applicants, Duggan notes. “They may move the jobs out of the U.S. Some high-tech companies will feel frustrated. It begs the question: ‘Should we do something special for high tech?’ If we make it hard for people to immigrate to the U.S., [companies like] Apple and Google may move somewhere else.”
Allen agrees that it’s not just the direct fiscal impact of immigrants that governments and businesses need to consider. “There are indirect effects as well. There are many entrepreneurs from India and China who create a wider impact on the business industry,” Allen notes. As Wadhwa puts it: “You have to look at the impact skilled immigrants have made on the tech economy in the U.S. to understand this. We found that the companies they have started just in the U.S. tech sector have generated billions in revenue.”
Carefully planned immigration policy also goes a long way toward stimulating economic growth, Liebig says. “With the growing focus on skilled-labor migration during the past two decades, one can be confident that recent migrants will produce more favorable results than preceding migrant waves, which often [included] low-educated migrants or humanitarian migrants [and] their families, particularly in Europe,” Liebig notes. “Also, in the past, labor-market integration was less a priority for policy than it is now.”
Another factor to consider, observers say, is that the children of immigrants have a profoundly beneficial financial impact on the countries in which they live. The OECD study found that no matter what the educational level of the parents, the children of immigrants generate a very strong financial gain — as much as $80,000 in present value terms. Shifting accumulated government debt to a larger future population could help spread the burden of debt, as well as make up for an aging workforce.
Challenges in the Current Crisis
The single biggest determinant of the positive fiscal impact of migrants is employment, experts point out. However, long-term unemployment is a challenge that more migrants have had to battle due to the global recession and lingering economic malaise in many countries, including the U.S. and some in Europe. In 2012, the number of immigrants out of a job for more than a year increased to nearly one in two, up from 31% in 2008, according to the OECD. Unemployment among immigrants rose by 5% between 2008 and 2012 compared to a three-point increase among the native-born population. The hardest hit were young people, which could potentially have untold negative social effects.
Another finding is that the scale of unemployment in North America versus the conditions in Europe is nearly incomparable. “While unemployment in Mexico is 5.6%, Greece is seeing figures of 27.6%, the highest it’s ever been,” Duggan says. “The number is as high as 65% for Greeks between the ages of 15 and 24. Europe is in kind of a tough place. What Greece should be doing is different from what Germany should be doing. The situation in Europe is more complicated.”
Job integration programs can help, observers suggest. Increasing the employment levels of immigrants to that of native-born residents produces higher fiscal gains than increasing the quotas for immigrants with desirable characteristics, reported the OECD. Governments “need to provide them with assistance in learning the language and culture and connecting them to potential employers. Immigrants become a burden if they are unemployed, so the best way to boost the economy is to boost employment — for immigrants and natives,” Wadhwa notes. However, as governments scramble to lift their nations out of recession, some countries are substantially cutting back on such initiatives.
This is more of an issue in the EU than in the U.S., Liebig says. “When people talk about integration policies, they think of expenditure. We need to do a [paradigm] shift from expenditure to investment. Migrants have been hard hit by the crisis. If countries don’t invest in integration, or disproportionately cut back on integration [programs], there will be long-term consequences.”
Governments need to work harder to overcome prejudice, the OECD report recommended. For example, one study found that job applicants with names that create the perception they could be immigrants typically send out twice as many applications as their peers before landing a job interview.
Disseminating the facts about the fiscal impact of immigrants is one way to battle unfounded stereotypes, the OECD noted. In reality, taxes and Social Security contributions minus welfare benefit transfers results in a net gain. With the exception of Germany and France, where the immigrants tend to be older and drawing pensions, most migrant households in Europe are net contributors, not benefactors. In fact, in the United Kingdom, Luxembourg and Hungary, immigrants are in a better financial position than native-born residents, reported the OECD.
Surprisingly, it’s pensions, rather than welfare benefits, that typically account for the largest slice of public spending. Pensions are actually the single largest government expenditure, costing 17% of the budget in most OECD countries. Moreover, the OECD points out that while immigrant households might obtain more in social assistance and housing allowances, they typically receive 50% less in pensions than native-born households due to a shorter working career.
“The underlying argument is that whatever you decide on the migrant outlook, it shouldn’t be the fiscal impact that is driving public policy. In the context of the U.S. deficit, we find virtually no differences [in terms of fiscal impact] between immigrant and native-born households,” says Liebig. However, Wharton experts agree that future government immigration policies can have a direct and beneficial fiscal impact on a country’s booming entrepreneurial sector as well as its GDP.