migration policy and welfare state policy: a new political economy approach assaf razin june 2008...

Migration Policy and Welfare State Policy:

A New Political Economy Approach

Assaf RazinJune 2008

Based on Razin, Sadka and Swagell (2002), Sand and Razin

(2008), Cohen (2008), and Suwankiri (2008)

2

Talk Plan:

• Presenting basic demographic facts• Theory (political-economy models):

– The effect of immigration over the welfare state policy, given an intra-generational conflicts (rich vs. poor)

– Welfare state policy and migration policy under inter-generational conflict (old vs. young)

– Welfare state policy and migration policy under inter-generational and intra-generational conflicts

• Empirical Aspects:– The effect of welfare state policy over immigration

without immigration restrictions

– The effect of welfare state policy over immigration with immigration restrictions

3

An increase in the total net-immigration into OECD countries Net migration rates, OECD countries, 1956-2003

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

All countries

Net migration as a percent of the total resident population

Source : Labour Force Statistics, OECD, 2006.

Basic Demographic facts

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Basic Demographic factsנתונים דמוגרפים בסיסיים

5

נתונים דמוגרפיים בסיסיים

Basic Demographic facts

6

Immigrants-Emigrants ratio, by education

attainment (stock data, 2000)

• France, Belgium and Germany have the highest immigrants-emigrants ratio among the low-skilled;• Sweden and Switzerland has the highest ratio among the medium and high skilled group


7Source: Center for Immigration Studies, 2002.


CountryTFR in Home CountryTFR in The U.S.Mexico2.403.51

Philippines3.222.30

China1.702.26

India3.072.23

Vietnam2.321.70

Korea1.231.57

Cuba1.611.79

El Salvador2.882.97

Canada1.511.86

United Kingdom

1.662.84

Average2.322.86

TFR of immigrants in the U.S. compared to the TFR in their home countries

8

Working age rate is higher among immigrants than natives

Source: U.S. Census Bureau, Census 2000 Special Tabulations (STP-159)


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0- 4 5- 9 10- 14 15- 19 20- 24 25- 34 35- 44 45- 54 55- 59 60- 64 65- 74 75- 84 85 +

Age

Precentage

Foreign-Born Population

Native Population

Age Distribution, Foreign-Born Population Who Entered the U.S. 1990-2000 and Native-Born Population

9


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The Effect of Immigration over the Welfare-State Policy

• Assume that immigration is set exogenously to the welfare-state policy within the host country

• On one hand, higher immigration increases the political power of the pro-generous welfare state coalition

• With intra-generational conflict between the rich and poor, the poor-immigrant coalition become stronger, since both these groups benefit from redistribution

• This effect assumes immigrants have some political power, and that they are low skilled, as well as the poor natives group

• Of course, often immigrants has no political power

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• On the other hand, the entrance of low-skilled immigrants increases the burden upon the host country’s welfare system

• The marginal benefit of taxation for natives becomes lower, as larger portion of their tax proceeds is granted to immigrants, who are net-beneficiaries of the tax-welfare programs (the “fiscal leakage” effect)

• Thus the natives would respond by lowering taxes, reducing thereby the scope of the welfare state

• This effect exists whether the median voter is a domestic low-skilled or high-skilled

• This can explain the surprising negative correlation between immigration rates and the welfare state, within developed countries

The Effect of Immigration over the Welfare-State Policy

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• What happens if immigration is not exogenous to the host country?

• This question arises especially in light of the known argument, that immigrants, who are usually in working age, have a positive contribution to the social security system: Simon (1995).

• On the other hand, other researches have concluded that this positive contribution to the social security system is negligible: Lee and Miller (2000); Storesletten (2000)

Welfare State Policy and Migration Policy in an Inter-generational Model

13

• Target:• Examining the influence of immigration over the

pension system (PAYG), specifically in light of population aging

• Namely, how do immigrants effect the conflict of interests between old and young regarding inter-generational transfers

• Sand and Razin (2008) use a dynamic model to explore how do two policy decisions are adopted, under median voter mechanism: the tax rate which funds the PAYG pension system and immigration quotas

• The work relies on political-economy models of pension systems: Cooley and Soares (1999), Boldrin and Rusthicini (2000), Froni (2007)


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• The assumption is that immigrants do not effect the fiscal-system only economically, as a working force;

• They also effect by their ability to vote and influence future policy

• Voters are rational thus take this element into account, and choose the policy strategically

• Another assumption – immigrants fertility rate is higher than for the aging native population


15

• Equilibrium:

• Immigration policy with restriction is opted for by a young median voter

• This strategy replaces the identity of the median voter in the following period, from young to old

• Thus, when the current median young voter becomes old and in need of pension benefits he will be the median voter


16

• Main results:• In comparison to “no migration” model, in periods

with young majority, immigration can pose a threat to the stability of the pension system. This despite the fact that immigration increases the total pension payments per worker

• Explanation: the young majority is interested in an old median voter to support the continuation of the pension system in the future, when he becomes pension receiver. Young immigrants might support cutting down their due pension payments


17

• As expected, population aging increases openness to immigrants and reduces the total pension payments per worker, since immigration increases the total pension payments per worker

• Unexpectedly, despite that the wage of the young median voter is adversely affected by the increased labor force due to immigration, he is not cutting down migration to zero. The voter is forward looking to the period when will need pension benefits, in which he could use the larger labor force he approves today


18

Skilled and unskilled labor

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Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

19

Immigration

Immigration quantity

young skilled immigrants %

domestic skilled labor %

Skilled labor force

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Tax

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Reflects transfers per worker as a function of immigration

Note: higher immigration increases the burden upon working population

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Tax revenues as a function of immigration


21

Majority voting:

•Young skilled are majority

•Young unskilled are majority

•Old are majority

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• Sincere voting equilibrium, namely, when people vote according to their true preferences, without strategic considerations


23

Strategies profile in a sub-perfect equilibrium:

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Old are majority (Lauffer point)

Unskilled are majority (below Lauffer point)

Skilled are majority (no social security)

Young are majority, s is small (maximum skilled immigration)

Skilled form a coalition when s is big

Old are majority (maximum skilled immigration)


24

Tax rate chosen by unskilled:

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25

• Fiscal leakage effect:• More skilled immigrants enable higher inter-

generational redistribution• When wages are fixed, more skilled immigrants

increases inequality, thus the demand for income redistribution is higher

• More unskilled immigrants increases the fiscal burden, thus the majority of unskilled voters reduces current welfare state policy below the Lauffer point


26

Wage complementarity between skilled

and unskilled

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Skilled is majority

Unskilled is majority

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Young is majority, s is small

Skilled is majority, s is big

old is majority

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• Incentives driving preferences are from two channels—wage and transfer.

• Transfer channel similar to fixed wage model.• Wage channel: unskilled benefit from

complementarity with skilled: unskilled young prefer even more skilled immigrants.

• Due to the wage channel, Skilled young prefer unskilled immigrants due to complementarity and shun skilled due to substitution.


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• Skilled young prefer unskilled immigrants because of the wage effect, but prefer skilled immigrants whose children (inheriting their skill) help support the welfare state.

• In addition, young cohort try strategically to place its older self as the majority next period.


29

Revised fiscal leakage

Take immigration quota and immigration composition as given.

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More unskilled composition of Immigrants create more

desire for redistribution


30

• Fixed Transfer Level T:• Exogenous wages • Increasing the skilled/unskilled ratio of

immigration lower the tax pressure on native workers.

• If immigrants net contribution is higher thenper capita benefits, then immigrants lower tax burden; otherwise they raise fiscal burden.

• a fall in native birth rate, put strains on financing of T. this raises the tax on working young.


31

Empirical Support in the Absence of Immigration Restrictions

• Immigration policy (other than quotas) can be hard to measure

• Nevertheless, in some environments, neglecting migration policy as a determinant of migration in equilibrium, is reasonable

• For instance, within the EU-155 old member states. Since the Paris treaty (1951), gradually, including Norway and others by the European Economic Area agreement and Switzerland by its bilateral treaties with the EU.

• Among all those countries, it is agreed that people are free to relocate, immigrate and work, with specific equal treatment clause, prohibiting discrimination between natives and immigrants in the labor market

• In which case, immigration equilibrium is supply determined

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• What is the effect of the welfare-state over immigration?

• We need to separate unskilled immigrants from skilled immigrants

• Unskilled immigrants are drawn to countries with generous welfare benefits (the welfare magnet effect).

• The reason is obvious: welfare state policy reflects redistribution of income, benefiting the low income individuals


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• There are evidences for welfare migration:• Gramlich and Laren (1984)• Blank (1988)• Enchautegui (1997)• Borjas (1997)• Meyer (1998)

• And there are evidence to the contrary:• Levine and Zimmerman (1995)• Walker (1994)


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• High-skilled immigrants, on the other hand, who usually enjoy high wages, are deterred by generous welfare states, since they are the ones who finance it

• Thus welfare state policy induces negative self selection among immigrants

• There are no conclusive evidence for that, however, in the literature


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• The model:

• The sample includes bilateral immigration among the U.K, Austria, Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, Finland, Greece, Ireland, Portugal and Spain

• The dependent variable: the skill-differences of the immigrants stock rate in 2000

• We control for per worker GDP in the source and host countries, distance, common language and the dependent variable in 1990.

• We use lagged average values of 1974-1990 to capture aggregate social benefits per capita

• This skill differences model neutralizes the effect of omitted variables whose impact on migration is skill invariant, as well as time invariant variables


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• Welfare benefits per capita has a negative effect over the skill composition of immigrants

• This result is robust to different measure of welfare

high - low med - low high - medcommon language 0.057 0.095 -0.045

(0.076) (0.150) (0.111)distance 0.049 0.044 0.017

(0.053) (0.101) (0.072)GDP per worker (host) ~ 0.349 0.342 0.073

(0.222) (0.313) (0.169)GDP per worker (source) ~ 0.039 0.079 -0.026

(0.292) (0.423) (0.301)benefits per capita (host) ~ -0.182 -0.237 0.046

(0.068)*** (0.106)** (0.088)benefits per capita (source) ~ -0.008 -0.019 0.009

(0.068) (0.105) (0.088)high - low~ 0.573

(0.088)***med - low~ 0.565

(0.084)***high - med~ 0.600

(0.060)***home dummy -0.645 -0.156 -0.398

(0.434) (0.790) (0.539)Observations 256 256 256R-squared 0.605 0.750 0.824Robust standard errors in parentheses* significant at 10%; ** significant at 5%; *** significant at 1%in logs; ~lagged


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• This result reoccur also using IV (coverage rate of collective bargaining)

• Although, the effect here is more substantial, which may suggest a possible upward bias in the former regression due to the fiscal leakage effect

high - low med - low high - medcommon language -0.006 0.067 -0.087

(0.098) (0.228) (0.174)distance 0.080 0.099 -0.012

(0.060) (0.121) (0.089)GDP per worker (host) ~ 0.718 0.759 -0.046

(0.272)*** (0.439)* (0.248)GDP per worker (source) ~ 0.078 0.313 -0.205

(0.361) (0.472) (0.408)fitted benefits per capita (host) ~ -0.371 -0.398 0.031

(0.115)*** (0.185)** (0.140)fitted benefits per capita (source) ~ -0.023 -0.088 0.057

(0.113) (0.122) (0.105)high - low~ 0.598

(0.088)***med - low~ 0.563

(0.114)***high - med~ 0.580

(0.083)***home dummy -0.245 0.522 -0.687

(0.406) (0.755) (0.577)Observations 225 225 225R-squared 0.647 0.750 0.785Robust standard errors in parentheses* significant at 10%; ** significant at 5%; *** significant at 1%in logs; ~lagged


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• This result is also based upon a different estimation approach, using the micro-economic decision to emigrate

• We estimate it using a conditional logit model, which enables the individuals to decide whether to emigrate and if so, where to, based on the possible utilities in each country


39

• The challenge: estimating policy rules of migration and welfare, as a function of macro-economic and demographic variables, according to the above theory of political economy

• This estimation assumes that immigration reflects a demand side determined equilibrium, as set by quotas, and not according to the choice of the immigrants

• This requires simultaneous estimation of both policy rules as endogenous

Empirical Support with Immigration Restrictions

migration policy and welfare state policy: a new political economy approach assaf razin june 2008...

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