Labour migration: benefits versus costs analysis

Labour migration:
benefits versus costs

Alessandra Venturini
MPC, University of Turin

Executive Training
Migration in the EU and its Neighbourhood
www.migrationpolicycentre.eu MPC

• Labour migration takes place because
there is:

• an excess of supply of workers in the
sending countries
• an excess demand in the destination
countries
• Thus the effects should be positive but it
is not always so.

Robert Schuman Centre for Advanced Studies
Consortium for Applied Research on International Migration - CARIM

The effect in the sending country
This topic can be broken down into several issues:

• 1-the effect of immigrants on the aggregate economy:
• GNP (additional supply), flexibility, innovation;

• 2-the effect of immigrants on the destination labour market;

• 3-the effect of immigrants on the welfare state (health,
unemployment benefits, education, social protection publicly
financed);

• 4-the assimilation pattern of foreigners in the labour market;

• 5- and the social assimilation of immigrants. 24/01/2013 17:25
www.eui.eu/RSCAS Delphine Perrin 3

• The first relevant issue if the dimension of the
country of destination or origin (country or
region) and the dimension of the flows
• Reason to migrate: labour migration, family
reunification, refugees, student
• Type: permanent, temporary, seasonal,
• legal or nondocumented



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Effects in origin country
1. Population, age, sex composition, fertility, minorities
2. Growth, increase in physical capital per worker,
financial market
3. Brain drain and brain gain
4. Remittances and balance of payment, poverty, labour
force participation, school enrolment, liquidity
constraint;
5. Social remittances
6. Labour market Mismatch
7. www.migrationpolicycentre.eu
Welfare problem MPC 7


• Reason for migration of migration labour,
refugees, family members, students
• Type: permanent, tempory, seasonal, circular,
return migrants,
• legal or non documented
• Skilled or unskilled

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A- The effect of immigrants on the
destination labour market
Political issues:
• Immigrants should not damage native workers by reducing
their wages or/and replacing natives in their jobs.
• This result will create conflict, increasing the burden of
unemployment on the welfare state,
• and it is not economically and socially feasible.
Policies to implement:
• The migration policy should be selective in order to reduce
labour market competition which damages native workers.
• and passive labour market policies i.e. unemployment benefits
should alleviate the negative employment effect,
• and active labour market policies should retrain native workers
for future job offers.
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The policy issue is frequently
unclear.

• It is not clear if the policy issue is the
average native wage (and employment)
or only the wage of a single category of
workers, say blue collars.
• It is somewhat vague because it hides a
distributive problem difficult to solve
for policy makers.


The economic theory is very
clear
• Immigrant workers are defined as being
competitive or substitutes when they
have a negative effect on wages and/or
native employment levels, and they are
defined as complementary when the
effect is positive.
•


Competition or Complementarity by Categories
Competition between:

• A. regular immigrants and natives of equal skill level

• B. regular immigrants and natives of different skill level

• C. regular natives and nondocumented immigrants

• D. irregular natives and irregular immigrants

• E. internal mobility (USA, EU, South Europe)

• F. production decentralization


Portugal has a long history of emigration, with its overseas territories as
its main destinations in past centuries (Bagahna, 2003). Even after World
War II the main destination was still Brazil.

This picture changed during the 1960s: in 1965 illegal emigration ceased
to be a crime punishable by law and the literacy test was abolished. In
order to favour industrialization of the Lisbon area – against the interests
of the northern landowners and the traditional elites - the government
decided that emigration rationalized the labour market and contributed to
the country’s progress and development.

Emigration took off when the country started to grow. The Portuguese
were the last of the Southern EU populations to emigrate, but they
followed the pattern set by Italian and Spanish workers: first to France,
then to Germany and Switzerland.

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Little by little the Portuguese economy grew and emigration declined,
although it was still a possibility for many workers.
The average human capital of Portuguese workers was rather low,
and emigrants left the country for manual jobs abroad. When
Portugal joined the EU in 1986, the GNP per capita in PPP of
Germany was double the Portuguese one.

Germany experienced positive net immigration from Portugal,
although it is not very noticeable in the German data because
Portugal is a small country. After 1993, when free mobility by
Portuguese workers began and the GNP differential was still high
(about 40%), there was an increase amounting to 27,000 persons and
only 5,000 employees.

Permanent employment emigration was replaced by contracted
temporary emigration or Werkvertragsarbeiter. These workers were
employed by Portuguese companies operating in Germany and
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therefore did not show up in the statistics.


The demand for this type of worker declined when the German
government obliged foreign companies to pay German wages
and social security contributions, but it was a strategic means to
meet demand for income by the Portuguese workers and
demand for labour by the German economy.

And it was also a highly strategic solution for a country like
Portugal, which experienced rapid growth in the 1990s,
overtaking Greece and catching up with Spain in per capita
GNP.

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The political debate is imbued with ideas
derived from the simplest model.

• But the effects of immigration depend
upon the flexibility of the capital market,
• the size of the country – small and
therefore a price taker or big and therefore
a price maker –
• the flexibility of the equilibrium wage in
the labour market,
• and the available technology mix, which
conditions the options available to firms. 18
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a-traditional approach



Domestic labour supply can be elastic or rigid, usually man have a
more inelastic lavour supply while woman have a more elastic
labour supply.

For a moment we immagine that the demand is given in a close
labour market where nothing else change,

thus the effect of the inflow of immigrants will be only a wage
reduction in the case of a rigid supply

or a wage reduction and a voluntary unemployment increase in the
case of an elastic supply.



Job Displacement

• Unemployment duration of natives
• Probability of transition from unemployment
to employment of natives
• Probability of transition from employment to
unemployment of natives
• Turnover rate


7.00

Trentino-A.A
6.00

Veneto
5.00 Emilia-Romagna
Share of migrant workers

Friuli VG

4.00 Lombardy Lazio
Tuscany Marches

Abruzzo
3.00
Piedmont Umbria
Liguria
2.00
Campania Sicily
Puglia
Basilicata
1.00 Calabria
Sardinia
Molise

0.00
0 2 4 6 8 10 12
Transition rate (E-U)


7.00 Consortium for Applied Research on International Migration - CARIM

Trentino-A.A
6.00

Emilia-Romagna Veneto
5.00
Share of migrant workers

Friuli VG
Lombardy
4.00 Marches
Lazio Tuscany

3.00 Abruzzo
Piedmont Umbria
Liguria

2.00
Campania
Puglia
Calabria Sicily
1.00 Sardinia
Basilicata

Molise
0.00
10 15 20 25 30 35 40 45 50 55 60
Transition rate (unemployment --> new job)



• The conclusion changes if there are two
sectors and two types of labour and
migrants are only unskilled. Reduction
of unskilled wages and increase of
skilled wages in the short run and
average wage remain constant.
• Wage reduction in the unskilled sector
can attract capital and displace skilled
labour.


⃟Empirical tests use spatial correlation

The tests use individual earnings data explained by
individual characteristics (Xi at time t)
and many other variables at regional or sector level
(Da at time t), among which the variable of interest is
the share of foreign workers

logWi,a,t = a+ b Xi,a,t + γ Da,t + e



But the model just refers to a close labour market
i.e. Card 2001
⃟Fixed effects
The allocation of immigrants is not independent of permanent conditions in
the various areas. Amenities may be more abundant?

⃟Simultaneity . Imagine that migrants can choose where they settle.
They will tend to move where wages are, ceteris paribus, higher.

Bartel 1989 instruments



Assimilation
migrants receive the same remuneration and have the same
probability of finding a job than similar natives

Economic
Effect on the welfare
integration
reduction
is a pre-requisite

Social integration Public spending

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a-temporary versus permanent migration
duration of the temporary migration, contracted migration

b-skilled versus unskilled
selection of the supply, selection of the demand and policy
selectivity

c-assimilation in the labour market- duration of
employment
unemployment rate and turnover rate

d-assimilation in the labour market-wage
wage growth

e-discrimination
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4 Assimilation in the labour market: WAGE
Methodological problems

Political issue
Economic assimilation is a prerequisite for social assimilation
or integration, and in any case for peaceful lives of foreigner
in the destination country.
Policies to implement
Special integration policies, like language courses, special
training policies or selective migration policies to avoid non-
assimilating workers or, as in the case of refugees, special
schemes to reduce their welfare state dependency, which
also refer to specific localizations in the country.

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c-assimilation in the labour market: WAGE

• Reference group
• Selection of the migrants (probability of
remaining)

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c-assimilation in the labour market: WAGE
In the case of the USA, the debate mainly centres on the work of Barry Chiswick,

George Borjas, La Londe and Topel, but there are many other relevant contributions.

The estimated equation uses as explanatory variables for the wages of workers (i): a

vector of socio-economic characteristics Xi, the worker’s age as a proxy of his

experience Ai, a dummy Ii which specifies whether the worker is an immigrant, and a

variable yi which indicates the number of years the worker has been resident in the

destination country, which is of course 0 for natives.

LogWi =a Xi + b1Ai + b2Ai² + g°Ii + g’yi + g”yi² + εi

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Barry Chiswick in his pioneering work of 1978, using a cross section
drawn only from one census, identified a negative coefficient for g° -
which indicates the percentage difference between immigrants and
natives at the time of arrival – and a positive coefficient for g’ – which
identifies the rate at which wages grow with respect to those of the
natives- while g” increases at a decreasing rate

The conclusion tended to support an “over” assimilation of
immigrants. In that, in the short-term they are able to catch up with
and overtake corresponding natives.

The causes of this result were not attributed to the lack of specific
human capital in the receiving country at the time of arrival but to
the fact that these people possess a greater propensity to risk and
possess more human capital, which came to the fore over time.

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Wage

Foreigners

Native

Experience

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George Borjas in his 1985 research came to a different conclusion.

Using two censuses he showed how the different wages structures of two
cohorts can be missed in a single cross section analysis, while a longitudinal
analysis reveals a phenomenon of “under” assimilation

which can be attributed to the lower ‘quality’ of the most recent cohorts,
therefore, a higher g° and a lower g’.

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The different quality of cohorts at the time of immigration is imputed to
different factors:

changes in the immigration policy which chooses individuals with
different characteristics,

different economic conditions in the destination country which changes
the national mix of the immigrants; thus causing changes in the
productivity of the workers.

It can also depend on changes in the composition of the cohorts due to
non-casual repatriation.

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Using longitudinal data would simplify the problem because
the error due to different qualities of cohorts would be
eliminated.

Since than panel data are used, but also with the panell
analysis some problems remain: the self selection or attrition.

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A controversial situation is the case of Germany.
The empirical study carried out by Dustmann (1993) uses the individual data
panel of GSOEP and shows lower earnings for foreign workers during all
their working life and such a finding can be traced to the temporary nature of
the migratory flow.

This conclusion is contradicted by an analysis of the same dataset by Schmidt
(1993) which shows that a foreign worker’s earnings are equal to a native
worker’s earnings after a period of 17 years.

Pischke (1992) finds that there is no difference in the rate at which incomes
grow between foreigners and natives in comparable jobs, even though
foreigners never reach the same wage level as the natives.

The different findings depend on the reference group with which the
foreigners are compared and as Dustmann has used all natives, white collar
and blue collar workers, the lack of convergence can be explained by the low
skills of the foreigners. However, the small number of recent immigrants in
the sample makes it difficult to study wage trends.
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Language

• Language knowledge can be a limitation in
the search for job not only in the upgrading
• Policy intervention: language courses
• Institutional intervention: language exam to
acquire permanent residence status
• Chiswick B.R. 1980, The Earnings of White and Colored Male
Immigrants in Britain, Economica n.47, pp.81-87
• Dustmann C. et, 2003, Labour market performance of
immigrants in the UK labour market, Home office online Report
5/03.
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Location and community effect
• Local community can favour economic
integration (initial job matching)
• or by discouraging the linguistic proficiency
can reduce it.
• The enclave literature
* Policy intervention: Danish Dispersal Policy
1986-1998 Anna Piil Damm, Michael Rosholm, IZA
DP.925,2003, Employment Effects of Dispersal Policies on Refugee
Immigrants, Part II: Empirical Evidence

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Change in the economic cycle
When the worker enter in the labour market has a set of
options: in period of expansion has more options in period
of recession less.
Policy intervention: Training courses

Rosholm, Scott and Husted (2000) found both in Sweden and Denmark that from
1985 to 1995 the job opportunities for male immigrants got worse.

They used a panel of administrative data showing that the worsening situation
was independent of the different market trends in the two countries,
but was due to the structural changes taking place in the markets where the
demand for labour was for workers with high interrelation and communication
abilities, which meant that immigrants were at a disadvantage.

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Figure 2 Effect of increasing labour market experience on the log wage profiles for foreigners and
natives at entrance in the labour market

3.50
Log daily wage

3.00

2.50

2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Years

Foreigners Foreigners+ corr. return migr. Natives

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Segmentation and segregation
In the economy of destination countries there are jobs
which do not provide career
Policy intervention: the selection at the entrance

Institutional setting: favouring temporary workers for
low skilled jobs with contracts which grant them
pension rights

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Figure 7. Experience- log wage profiles for foreigners, and locals, blue collars males in
manufacturing in north west entering in the labour market at age 16 by type of jobs

5.5
Log weekly wage

5.0

4.5

4.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Years of experience

All Foreigners Foreigners in Immigrants' jobs
Locals always in Immigrants' jobs Locals starting in Imm. Jobs & then moving
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Locals NOT in Immigrants' Jobs Delphine Perrin 24/01/2013 17:25 46

Possible Institutional Solution
• Temporary workers for unkilled and no career
profession.
• Production reorganization
• Temporary contracts which include pension (revision
of the portability legislation for seasonal or
temporary migrants)
• Favour return home
• Solution which favour the interest of the destination
country but also the interest of the sending countries
because it reduce the negative side of emigration
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Labour migration: benefits versus costs analysis

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