Immigration in Western Europe

Gianmarco I.P. Ottaviano, Giovanni Peri 17 April 2008

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Western European workers are ageing, Western European women are increasingly participating into the labour force, and young Western European generations have significantly increased their level of schooling. As these three tendencies continue, Western European economies will increase their demand for services once provided by women at home and young workers with low education (such as the care of children and elderly, cleaning, cooking, preparing food, driving, landscaping, building and similar services), while the supply of workers willing to provide them will shrink. Just as there is a secular tendency of rich countries to shift their productive specialisation from agriculture and manufacturing into services, there is also a shift in the productive specialisation of western economies within the service sector. As education and average age increase, rich economies specialise in services intensive in managerial and analytical skills rather than manual and physical ones. Nonetheless, as income per capita increases, rich economies still demand personal services using manual and physical skills.

At the same time, close neighbours of Western Europe, such as countries in North Africa, the Middle East and in part of Eastern Europe, have younger, less educated labour forces potentially attracted by the higher productivity and wages of Western Europe. The possible ‘gains from trade’ look obvious here: Older educated Western Europeans should specialise in human capital intensive services (education, finance, health care, business services and research) and ‘outsource’ some of the personal, manual-intensive services (health aides, personal care, food preparation, transportation, construction) to younger, less educated foreigners. The issue is that, as those services are ‘non-traded’, such outsourcing would require less educated, younger foreigners to be allowed to work in Western Europe. Immigration, in a word, would be the way to reap the benefits from specialisation. But even the mention of greater mobility across borders produces very strong and alarmed reactions – not from just a few eccentric politicians but the general public in most of Western Europe (see Table 1).

Table 1. Attitudes on trade and immigration

     Italy          France     UK   
Precentage saying "trade is good for the country" 68% 78% 78%
Precentage in favour of stricter immigration policies 87% 68% 66%

Source: Pew Global Attitude Survey, 4 October 2007.

Interestingly, in the next few years the European Union agreements will enforce free mobility between Western and the new EU members in Eastern Europe. Research, including our own work, argues that the recent experience of immigration from the East highlights the opportunities of immigration as well as the limits of Western European labour market institutions to deal with it. Ultimately, the increased demand for ‘protection’ from Western European workers (from trade, immigration and globalisation) may well end up hurting the Western European economies as well as their workers.

The role of labour market institutions

When analysing the impact of immigrants on European labour markets, Joshua Angrist and Adriana Kugler concluded that, rather than providing ‘protection’, the labour laws favouring insider workers, by increasing the cost of firing them and granting high unemployment benefits, were ‘counter-productive’: they reduced the flexibility of the market and the ability to absorb new workers, increasing job losses and unemployment for natives.

In a recent study2 of the effect of immigration on employment and wages of West Germans in the period 1987-2001, we find that, while scarcely affecting the wages and employment levels of German nationals, immigrants competed mainly among themselves. In particular, they induced relatively large increases in the unemployment of previous immigrants and experienced themselves much larger unemployment rates than natives (see Figure 1). This limited labour market integration, combined with generous unemployment benefits and the fact that most immigrants (being Eastern German or Ethnic Germans) could access those benefits, meant that natives transferred resources to immigrants by funding the unemployment benefits. More inclusive labour market institutions allowing for easier integration of immigrants would have been beneficial to natives: natives would have suffered only very limited wage losses, and lower overall unemployment would have reduced required welfare transfers.

Figure 1: The evolution of unemployment in Germany

 

The strong protection of insiders in the German labour market resulted, instead, in high unemployment levels and low economic integration of immigrant workers, in spite of their ethnic and linguistic similarity to West Germans. By contrast, in the UnitedStates the inflow of Mexicans (much less educated, ethnically and linguistically differentiated and sometimes undocumented) has been absorbed by the labour market to a much greater extent. Indeed, immigrants have lower unemployment rates than natives and the average US citizen, as worker and investor, benefits from the contribution of these immigrants to the provision of a large share of the manual services described above.

Integration and welfare transfers

The lack of integration of immigrants in Western Europe is the source of several problems from the ‘banlieus’ of Paris to the suburbs of Rome. A major cause of insufficient integration is likely to be the strong protection of insiders in labour markets. Accordingly, more flexible and inclusive labour market institutions seem essential to allow Western Europe to take advantage of the economic opportunities associated with immigration. In particular, several recent studies have shown that countries (and states within the United States) with more generous welfare transfers tend to have larger shares of their rich and educated constituency against immigration.3 The fear of redistribution makes those who would benefit economically from the services of immigrants less willing to accept them. A selective reduction of welfare transfers would, therefore, have the impact of reducing aversion to immigration. Neither labour market reforms nor rethinking the welfare system, however, seem particularly popular with Western European citizens, making them likely to remain ill-equipped to take advantage of the opportunities of immigration.

The challenge of extra-European immigration

Immigration from Eastern Europe will not be the continued source of immigration pressures it has been during the last decade of transition. Eastern European countries have a highly educated labour force, they are catching up economically, and they have already undergone the demographic transition so that their young cohorts are quickly shrinking in size. Future immigrant pressures are likely to come increasingly from North African and Middle Eastern countries (Turkey, Morocco and Algeria) characterised by younger populations and larger income differentials with respect to Western Europe. This would complicate the economic case for immigration as issues of cultural differences and national security may become central. To understand assimilation of Muslim populations and whether this constitute a relevant issue, it would be very interesting to follow and study the case of Spain, where over the period 2000-2006 immigrants increased from 4.6% to 10.8% of the population and many of them were from North African countries. Some dispassionate economic analysis and serious research is badly needed to inform the very passionate and still largely uninformed debate on European immigration.

Footnotes

1 Angrist, J. and A. Kugler (2003). “Protective or Counter-Productive? Labour Market Institutions and the Effect of Immigration on EU Natives”. Economic Journal (113), 302—331.

2 D’Amuri F., G.I.P. Ottaviano and G. Peri (2008) “The Labour Market Impact of Immigration in Western Germany in the 1990s” CEPR discussion paper 6736, March 2008.

3 See Gordon Hanson, Kenneth Scheve and Matthew Slaughter (2007) “Public Finance and preferences over Globalization StrategiesEconomics & Politics 19(1); 1-33, and Anna Maria Mayda, 2006. "Who Is Against Immigration? A Cross-Country Investigation of Individual Attitudes toward Immigrants," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 510-530, 04.

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Topics:  Labour markets Migration

Tags:  unemployment, welfare state, immigration, integration, labour market institutions