Welfare Magnet Hypothesis, Fiscal Burden, and Immigration Skill Selectivity

• Date: 01 April 2015
• Published date: 01 April 2015
• DOI: http://doi.org/10.1111/sjoe.12092
• Author: Assaf Razin,Jackline Wahba

Scand. J. of Economics 117(2), 369–402, 2015

DOI: 10.1111/sjoe.12092

Welfare Magnet Hypothesis, Fiscal Burden,

and Immigration Skill Selectivity∗

Assaf Razin

Cornell University, Ithaca, NY 14853, USA

ar256@cornell.edu

Jackline Wahba

University of Southampton, Southampton SO17 1BJ, UK

j.wahba@soton.ac.uk

Abstract

In this paper, we investigate the effect of welfare state generosity on the difference between

skilled and unskilled migration rates, and the role of mobility restriction in shaping this

effect. We utilize the free labor movement within the European Union plus Norway and

Switzerland (EUR) and the restricted movement from outside the EUR in order to compare

the free-migration regime to the restricted-migration regime. We find strong support for the

magnet hypothesis under the free-migration regime, and the fiscal burden hypothesis under

the restricted-migration regime, even after controlling for differences in educational quality

and returns to skills in source and host countries.

Keywords: European Union; migration; migration regimes; social benefits

JEL classification:H50; J24; J61

I. Introduction

In this paper, we revisit the social magnet hypothesis in international mi-

gration. We investigate the effect of the generosity of the welfare state in

attracting international migrants. We look specifically at the skill composi-

tion of migration patterns, highlighting the difference between skilled and

unskilled migration rates. The novelty of the paper is in looking at the role

of labor mobility restrictions in shaping the effect of the welfare state on

migration. In a free-migration regime, the effect on the skill composition

is expected to be negative. However, in a restricted migration regime, there

might be an opposite effect, because voters will prefer selective migration

policies favoring skilled migrants who tend to be net contributors to the

fiscal system.

∗We acknowledge financial support from the NORFACE research programme on Migration

in Europe – Social, Economic, Cultural, and Policy Dynamics. We would also like to thank

Michael Kearns for excellent research assistance.

CThe editors of The Scandinavian Journal of Economics 2014.

370 Welfare generosity and immigration skill selectivity

Tab le 1 . Immigration and aggregate social spending

Country of immigration Low educationaHigh educationaSocial expenditureb

Austria 47.5 12.7 26.01

Belgium 65.7 18.3 25.97

Denmark 44.8 17.3 27.08

Finland 48.7 23.8 28.95

France 74.6 16.4 27.59

Germany 65.9 21.8 25.84

Greece 44.5 15.0 17.49

Ireland 13.6 41.1 14.95

Italy 52.9 15.4 21.55

Netherlands 50.2 22.0 23.44

Norway 22.0 28.7 23.10

Portugal 59.7 18.6 15.95

Spain 28.7 18.5 21.15

Sweden 34.1 25.7 31.75

Switzerland 54.9 18.6 17.09

UK 34.1 34.9 18.42

Average EUR 46.4 21.8 22.94

Australia 35.3 40.3 15.68

Canada 29.6 58.8 18.69

USA 37.9 42.7 14.80

Average AUS/CAN/US 34.3 47.3 16.39

Source:aDocquier and Marfouk (2006); bOECD, Social Expenditure Database (SOCX).

Notes: Low education and high education are given as percent of total immigration in 2000. Social expenditure

is given as percent of GDP (average 1990–2000).

Public debate on immigration has increasingly focused on its effects on

the welfare state, amid concerns that immigrants are a fiscal burden. For

example, the average aggregate social spending as a percentage of gross

domestic product (GDP) for the 14 core European Union (EU14) coun-

tries (i.e., Austria, Belgium, Denmark, Finland, France, Germany, Greece,

Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and UK), plus

Norway and Switzerland (hereafter EUR), between 1990 and 2000, was

around 23 percent, compared to around 15 percent in the US, 19 percent

in Canada, and 16 percent in Australia. An interesting differential charac-

teristic of immigration between the EUR and US/Canada/Australia is the

higher relative skill composition of immigrants in the latter countries (see

Tab le 1 ). 1At f irst glance, this suggests that countries that have generous

welfare systems also have relatively more unskilled immigrants (i.e., wel-

fare state generosity acts as a magnet for unskilled migrants). However, the

skill composition of immigrants depends on many factors, and in particular

on the policy regime (i.e., whether migration is free or restricted). In other

1Docquier et al. (2012) classify host countries into five main groups based on their im-

migration policies. They argue that Europe has low restrictiveness in immigration policies,

while Western offshoots (US, Canada, and Australia) are more skill-selective.

CThe editors of The Scandinavian Journal of Economics 2014.

A. Razin and J. Wahba 371

words, the generosity of the welfare state might affect the skill composi-

tion of immigrants differently, depending on which immigration policy is

adopted. The generosity of the welfare state determines the self-selection

of potential migrants (supply-side mechanism) and the immigration policy

in the destination country (demand-side mechanism). In this paper, we take

advantage of heterogeneous bilateral immigration policies to identify and

quantify these two mechanisms. We investigate how the skill composition

of migration patterns differs between free- and restricted-migration regimes.

We test how the generosity of the welfare state affects the skill composition

of immigrants across these policy regimes.

There has been large body of research on welfare migration, although

with mixed results.2For example, Borjas (1999), Enchautegui (1997), and

McKinnish (2007) for the US and De Giorgi and Pellizzari (2006) for Eu-

rope3show how the welfare-state generosity works effectively as a magnet

to migrants. However, Levine and Zimmerman (1999) show that welfare

benefits have little effect on the probability of households headed by fe-

males (the recipients of the benefits) to relocate in the US. Also, Gelbach

(2004) finds strong evidence of welfare migration in 1980, but less in

1990, for the US. However, none of these studies controls for migration

regime.4Studies of migration between states within the US can help only

by providing evidence of a free-migration regime. However, studies that

employ samples confined to the policy-controlled migration regime, but

at the same time employ a model of the migrants’ choice of whether to

migrate and to which country, are evidently problematic. In this case, the

estimates convey little information about the migrants’ choices – and hence

about the welfare state as a magnet to unskilled migrants – but do give

some information on the migration policy choices of the host country. Fi-

nally, studies that refer to both migration regimes without controlling for

them are problematic because they do not disentangle migration policies in

the host countries from the individual migrant’s migration choices in the

source countries.

We use 14 core EU countries (old member states) plus Norway and

Switzerland to study empirically the policy-regime differential effect of the

generosity of the welfare state on the skill composition of migration rates.

Freedom of movement and the ability to reside and work anywhere within

2See Brueckner (2000) for a review of this body of literature.

3See also Khoudour-Cast´

eras (2008) who has studied emigration from 19th century Europe.

He finds that the social insurance legislation, adopted by Bismarck in the 1880s, reduced

the incentives of risk-averse Germans to emigrate. He estimates that in the absence of social

insurance, the German emigration rate from 1886 to 1913 would have been more than double

its actual level.

4Two exceptions are the unpublished paper by Cohen and Razin (2009), which we follow

and extend, and a very recent paper by Giulietti et al. (2013).

CThe editors of The Scandinavian Journal of Economics 2014.