5 September 2019

Concerns about the impact of immigration was a major factor in the United Kingdom’s Brexit decision. Likewise, the issue will surely feature in upcoming US Presidential campaigns. To be sure, it is an emotive topic: raising issues of cultural identity, public finances, and the impact on local labour markets. The large-scale international migration of people is often viewed as a central aspect of globalisation. Public discontent about immigration, therefore, has contributed to the recent backlash against the long-term trend towards the increasing integration of the world-wide economy. Despite its many benefits, it is beyond doubt that the era of globalisation has been associated with an undesireable, unsustainable increase in income inequality in virtually every developed country.

But, while the populists may have diagnosed an important problem, their prescription is faulty. Restoring public confidence in globalisation requires that the benefits are more widely shared (e.g. rising income inequality must be reversed). In this blog, I will deal with some of the links between immigration and local labour markets (other issues will be addressed in the future). Overall, immigration has a benign impact on the host countries’ economy. Under some conditions, however, international migration can contribute to greater income inequality. But, just as the populists’ remedy of protecting local workers from the competition posed by international trade is misguided, shielding the local labour force from the pressure posed by immigrants is not the answer. The remedy lies in dramatically improving the education and training of the native workforce, especially in low-income households. While each country’s circumstances differ, the solution is the same. Preserving faith in globalisation will require immediate policy action.

Immigrants and Asylum Seekers: Who Are They?

Immigration poses policy challenges in most developed countries, but important differences exist between nations. In the United States, the 45 million foreign-born residents represent roughly 14% of the total population, and new immigrants totalled just over 1 million last year. Despite the high-decibel political debate, Chart 1 illustrates America’s immigrant community accounts for the about the same share of the overall population as is in other large OECD nations (Germany and the UK are larger). That is, America’s experience is not exceptional compared to its partners. Recently, moreover, the number of new immigrants into the USA is well below most European nations (as a share of the local population).

Of America’s 45 million foreign-born population, 75% are authorised residents. The Pew Centre estimates the number of unauthorised migrants now living in the USA has declined from from 12.2 million to 10.5 million during the past decade. In this category, the share of Mexicans has been falling, and is now below 50%. The number arriving from Central America is rising (up 50% over the past decade) — now representing nearly 20% of unlawful immigrants living in the USA. Of the 35 million authourised residents, 25% were born in Mexico, while China, India, Vietnam, and the Philippines account for another 20%. Nearly two-thirds of the foreign-born population reside in just six states California, Texas, Florida, New York, NJ, and Illinois.

The distribution of immigrants varies considerably in Europe. Switzerland, Scandinavia, Austria, and Germany have relatively large foreign-born populations. On the other hand, Eastern Europe hosts few immigrants. Perhaps surprisingly, given the importance of the topic in domestic politcal debate, the immigrant population in Italy is below the regional average. And, perhaps in reaction to the 2015/16 refugee crisis, the level of immigration (as a percent of the local population) in the Mediterranean nations Italy, France, Spain, and Portugal is well below many regional neighbours in recent years.

Immigration in Japan is very low, which is unfortunate for reasons we will soon discover.

Asylum seekers and refugees are a particular category of the immigration issue. But, the Chart above makes a few important points. Following the European refugee crisis, the number of asylum seekers has declined sharply, although the total has increased 10% again in 2019. Nevertheless, it is worth noting, that even though the USA ranks highest for asylum seekers, Europe in total is the top destination. (In addition, the 30% approval rate of applications in Europe is double that in the USA). Moreover, despite the recent sharp decline in applications in Europe, the number remains well above the 2010 level.

This pattern illustrates an underlying demand for emmigration to Europe. The chart above illustrates that political crises have contributed to the surge in EU asylum seekers, especially from Syria, Iraq, and Afghanistan. Even though the impact of these situations have eased, the numbers remain high. Sadly, there will always be crises, and now Iran, Venezuela, and Libya are adding to the inflows. Over the medium term, however, the underlying rise in applications from Africa, South Asia, and the rest of the world will pose serious policy challenges for Europe in coming decades.

Immigration: Problem or Solution?

We economists are simple people. We believe a nation’s long-term growth potential is determined by the amounts of inputs (labour and capital) and the effiency of their usage (e.g. productivity growth). It’s hard to argue, therefore, that immigration does not boost long term GDP growth potential, as it adds directly to the labour force. The Chart above illustrates the valuable role foreign workers have played in boosting labor supply in recent decades. In the USA, for example, foreign-born workers accounted for nearly 50% of new jobs since 2005. In Europe, many nations have been even more reliant on migrant workers. Over half of new jobs were filled by foreign-born workers in Switzerland, Austria, the UK, and others. (In the UK, the large share of jobs filled by immigrants from other EU nations, in particular, gave rise to the Brexit backlash). At the extreme, in Italy and Spain, employment by native workers has actually declined since 2005, while jobs for immigrants expanded ( the numbers would be even more dramatic, but many foreign workers left Spain and Italy during the recession).

Focusing on just the past few years emphases the valuable potential contribution of foreign-born workers. The Chart above illustrates the native-born population has been declining since 2104 in Germany, Italy, Spain, Hungary, Poland, Portugal and Greece. In Germany, Italy, and Spain, immigration more than offset the impact of a shrinking local population (the other 4 nations have experienced outright declines in population). The situation is better in France and the UK, but increases in the foreign-born population exceeded that of the native-born residents since 2014. US demographic trends are healthier, but the foreign-born population is adding handsomely to the population gains. Meanwhile, the shrinkage of Japan’s population is the most dramatic without the benefit of immigration.

But, are foreign workers simply displacing local employees? There is little evidence of that. The Chart above illustrates the employment rate of only the native-born workforce by gender. If local workers were being displaced, local employment rates would be trending lower, but that is not ocurring. In Europe, employment rates for men actually were trending higher until the GFC and Euro crises. Moreover, UK and German employment rates are now above pre-recession levels. Moreover, the job rates for European women continued to rise through the economic slump. The slippage in US employment rates for both men and women (surprisingly) can be attributed to the GFC and the aging population, not immigration. The Chart does make the point that poorly educated workers are especially vulnerable during economic dowturns.

Sustaining Globalisation: Education is Vital!

The other way immigration effects a nation’s long-term GDP growth potential is via its impact on productivity. The Chart above illustrates the recent slowdown in effiency gains in OECD nations in recent decades, especially following the GFC. There are several ways immigration influences labour efficiency. First of all, the competition posed by international migration may inspire the local population to work harder. Moreover, if immigrants are highly educated, their entry into the labour force would boost productivity directly. And, even if the newcomers are poorly educated, their arrival could free local workers to pursue higher value-added positions.

So, if immigrants both add to the labour force and boost productivity, what’s the problem? The Chart above illustrates the vital role of education in achieving maximum benefits from immigration (I concede the graph has lots of info, buts it warrants careful scrutiny!). Starting with the most straight-forward country experiences. In Spain and Italy, the educational level of the foreign-born population is particularly low. Unfortunately, a very large share of the native-born population is also poorly educated. As a result, immigrants and the local population are in direct competition for low-paying jobs. No wonder immigration becomes an explosive political issue. In Italy, furthermore, the segment of the popuation with university degrees (tertiary level) is low compared to other nations. Clearly, education is a key solution both to the intense competition faced by low-income families, as well as to the poor productivity and GDP performance in recent decades.

France experience is similar, but less extreme. Immigrants are poorly educated, but the share of the local population that’s low-skilled is less than in Italy and Spain — although it’s considerably higher than in the US, UK, and Germany. Likewise, the share of the population with a university degree lags the UK and USA.

The UK is an interesting case, as its foreign-born population is comparatively well educated. Despite a high share of native-born university graduates, these workers face intense competition from well-trained immigrants. At the other end of the spectrum, the deficiencies of the UK education system are evident, as a large share of the native-population is poorly educated. These workers are pressured by a better-trained foreign-born labor force.

In the USA, the native-born population is considerably better educated than the immigrant community. Competition is intense in the low-income poorly-educated population. However, the share of native-born American society in this segment is low compared to other nations.

The Chart above illustrates why immigration is so politically explosive. In all countries, at the low-end of the education spectrum, the employment rate is much lower for the native-born population compared to the hard-working immigrant community. Amongst university-educated workers, on the other hand, the locally-born population is able to compete successfully. In other words, low-income, poorly educated workers — especially young people — are the most exposed to arriving migrants. Education and training are crucial to equip native-born workers with skills required for higher value-added jobs.

Policy Challenges and Implications

• In order to pushback on the populist challenge to globalisation, the benefits must be more widely shared. Investment in education and training are vital to limit the potential pitfalls associated with international trade and immigration.
• While the immigration debate is particularly vociferous in the USA, demographic trends are favourable compared to Europe and Japan. And the number of new immigrants is comparatively low (as a percent of the overall population). However, challenges exist to improve skills, especially at the low and middle segments of the educational spectrum.
• Europe’s asylum crisis has eased. However, a more robust regime is needed. The African Development Bank estimates that the African workforce will rise by 300 million by 2030 (3% annually). Even if the relatively favourable GDP trends continue, it is estimated that an additional 100 million young people will become unemployed. This represents both a challenge and opportunity for Europe. Currently, the coastal Mediterranean countries bear too much of the burden (asylum applications must be submitted in the country of arrival). Likewise, assistance in improving the business climate in Africa would reduce the incentive to migrate. However, the Chart illustrates African immigration can offset worrisome Europan demographic trends.
• Italy’s employment and GDP growth crisis reflects poor productivity trends. Low-income families are facing intense competition from foreign-born workers. Educational reform at all levels (especially amongst the low-skilled) are urgently needed, not Quitaly. In reality, Italy’s immigrant community is not large compared to other nations.
• Brexit is a distraction. UK productivity lags well behind key trading partners. Encouragingly, the UK government has identified the need to boost investment in education. While immigration triggered Brexit, the UK attracts relatively well-educated newcomers. Priority must be given to educational reform, especially to enhance skills amongst low-income UK families.