Migration Policy and Welfare State Policy: A New Political Economy Approach Assaf Razin June 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 Basic Demographic facts

4 נתונים דמוגרפים בסיסייםBasic Demographic facts

5 נתונים דמוגרפיים בסיסייםBasic 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 נתונים דמוגרפים בסיסייםBasic Demographic facts

7 Source: Center for Immigration Studies, נתונים דמוגרפים בסיסייםBasic Demographic facts TFR in The U.S.TFR in Home CountryCountry Mexico Philippines China India Vietnam Korea Cuba El Salvador Canada United Kingdom Average 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) נתונים דמוגרפים בסיסייםBasic Demographic facts Age Distribution, Foreign-Born Population Who Entered the U.S and Native-Born Population

9 נתונים דמוגרפים בסיסייםBasic Demographic facts

10 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

11 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

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

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

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

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

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

18 Skilled and unskilled labor No savings 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 Unskilled labor force Population Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

20 Tax Reflects transfers per worker as a function of immigration Note: higher immigration increases the burden upon working population when Tax revenues as a function of immigration Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

21 Majority voting: Young skilled are majority Young unskilled are majority Old are majority Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

22 Sincere voting equilibrium, namely, when people vote according to their true preferences, without strategic considerations Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

23 Strategies profile in a sub-perfect equilibrium: 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) Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

24 Tax rate chosen by unskilled: Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

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

26 Wage complementarity between skilled and unskilled Welfare State Policy and Migration Policy in An Inter/Intra-generational Model Skilled is majority Unskilled is majority Old is majority Young is majority, s is small Skilled is majority, s is big old is majority

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

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

29 Revised fiscal leakage Take immigration quota and immigration composition as given. More unskilled composition of Immigrants create more desire for redistribution Welfare State Policy and Migration Policy in An Inter/Intra-generational Model

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

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

32 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 Empirical Support in the Absence of Immigration Restrictions

33 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) Empirical Support in the Absence of Immigration Restrictions

34 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 Empirical Support in the Absence of Immigration Restrictions

35 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 We use lagged average values of 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 Empirical Support in the Absence of Immigration Restrictions

36 Welfare benefits per capita has a negative effect over the skill composition of immigrants This result is robust to different measure of welfare Empirical Support in the Absence of Immigration Restrictions

37 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 Empirical Support in the Absence of Immigration Restrictions

38 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 Empirical Support in the Absence of Immigration Restrictions

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