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How will refugees affect European economies?

What’s at stake: The continuing wave of refugees arriving at the borders of the European Union has sparked discussions all around Europe on how to deal with it, and what the impact will be on the European economies. We review the blog discussions on the economic impact of the refugees, and the challenges that they raise.

By: and Date: October 19, 2015 Topic: European Macroeconomics & Governance

The impact on public finances

The Economist points to a study in the OECD’s International Migration Outlook, which estimates the net fiscal contributions of migrants in 27 advanced countries. The net direct contribution of migrants tends to be smaller than that of native-borns, but this is because they pay less taxes, not because they claim more benefits. The main reason behind them paying less taxes is lower levels of employment, especially among women. The net fiscal contributions of migrants could therefore be increased by increasing their labour force participation. Their overall conclusion is that migration is “neither a significant gain nor drain for the public purse”

Mark Schieritz looks into the debate of how much refugees will cost Germany and cites estimates from RWI Essen, which amount to 10 bn EUR for 2015, and should be even higher for 2016. This is similar to the estimates from the German government, which estimates costs to amount to 12000 Eur per refugee per year. Nevertheless, despite the extra-spending related to the refugee crisis, the German budget surplus will rise from 0.3% of GDP to 0.6% of GDP in 2015. Schieritz explains this by stating that the extra-spending does not vanish in a black hole, but is actually stimulating internal demand in Germany. To what extent refugees will then be able to contribute to the sustainability of the welfare state in Germany will depend on many factors, including their ease of access to the labour market.

Holger Schmieding expects a small stimulus to aggregate demand. Extra spending on migration-related issues may amount to 0.3-0.4% of annual GDP in Germany and perhaps a few other places. Some further countries will likely quote it as a reason to exceed fiscal targets. On balance, the result could be a near-term stimulus to demand of some 0.2% of Eurozone GDP for 2H 2015 and probably 2016.

The impact on labour markets

After the wave of refugees arriving in Europe this summer, Lidia Farré, writing in the blog Nada es Gratis, reviews the existing literature on the labour market effects of migration. Most studies conclude that immigration’s effects on the wages and employment of native workers are either small or nonexistent. There is some evidence (Foged and Peri, 2015) that immigrants, who usually have a lower level of education and experience, displace native workers towards occupations with less manual work, and a higher amount of specialisation and possibly remuneration. Lidia Farré also quotes a couple of studies that indicate a complementarity between immigrant workers and qualified native women: many immigrants find jobs in the services sector, and in particular in the caring of children and the elderly. This increase in the labour supply in the domestic service sector allows qualified native women to substitute unpaid domestic work hours for paid work hours, and thus progress in their professional career.

Hans Werner Sinn, in an interview in Die Zeit discusses the winners and losers of the refugee wave and states that the intake of low-skilled workers will put the wages of domestic low-skilled workers under pressure (as an example, he cites the case of the United States). This is especially relevant for people who already have a migration background. Winners will be high-skilled workers, who will benefit from falling costs on simple tasks. The minimum wage hinders the integration of the refugees into the labour market. Hans Werner Sinn proposes to decrease the minimum wage generally, and to compensate for this with individual subsidies to wages (in the form of ‘activating social assistance’). This measure would allow people to work, and would cost the public less than subsidies for unemployment.

The impact on health care systems

On the perceived costs of migration on health care, and the specific claim that migrants increase waiting hours, Osea Giuntella, Catia Nicodemo and Carlos Vargas-Silva use micro-data from the United Kingdom and find no evidence that immigration increases waiting times in A&E (accident and emergency) and elective care. In fact, higher immigration in an area actually reduces waiting times for outpatients there.

Muenz, Straubhaar, F. Vadean and N. Vadean published one of the most comprehensive studies on the effects of European immigration and find that: (i) on demography and ageing, immigration has a positive effect, but will not be a silver bullet against population ageing; (ii) on wages and employment, the impact of immigration is on average negative, but very small. This suggests that the potential downward effect is offset by additional creation of employment due to economies of scale and spillovers (which increase productivity) as well as higher demand for goods and services (due to population growth through immigration: (iii) on public finances, the impact depends strongly upon the original ‘gate of entry’ or way of admission, the labour market access and – as a result of the former – the socio-economic characteristics of the immigrants; (iv) on balance of payments and trade, immigration has a small but positive impact on trade relations  between migrant receiving and migrant sending countries, as shown in the UK and Spain. The remittances represent a drain on the balance of payments, although they might support EU exports of goods too. (v) on growth, the impact of immigration strongly depends on the labour market performance of the migrants.

Experiences from other economies coping with immigration

Massimiliano Cali in a post on lavoce.info asks whether the wave of refugees is economically sustainable for European countries, compared to what has happened in countries like Lebanon, Turkey and Jordan, which are close to Syria and have seen massive immigration in recent years. As an example, the number of asylum seekers in Europe amount to 1.8 million, from 2012 to today. In the same period, more than 1.1 million syrian refugees registered with UNHCR (United Nations High Commissioner for Refugees) only in Lebanon. Massimiliano Cali points out that the economies of Lebanon, Turkey and Jordan continued to grow since the arrival of refugees. The Lebanese real GDP is estimated to increase by 2.5% this year, notwithstanding the negative effects that the war in Syria has caused in terms of investment and tourism in the neighbouring countries. A World Bank study shows that the wave of refugees has contributed significantly to Lebanese growth, increasing the demand for local services, financed through work salaries, savings, remittances and international humanitarian aid. Regarding the labour market, another World Bank study on the Turkish experience shows that Syrian refugees have somewhat substituted the local work force in the informal and part time sectors. However, employment rates of the Turkish workers increased in the formal sector, contributing to higher average wages. Fiscal sustainability can be increased through a better access to the labour market. He concludes that overall the experience in those countries shows that the European Union, with more coordination and solidarity, might be well equipped to absorb a number well above the one currently accepted.

The migration expert Hein de Haas told the Huffington Post in an interview that when it comes to the impact on European economies, a lot of research has shown that migration increases GDP because migrants add to the workforce. There’s very little real evidence to support the claim that migration is crowding out labour or bringing down wages. In public debates, the negative or positive effects of migration are generally exaggerated by adversaries or proponents of migration. He states that

“It would be outrageous to suggest that migration is either the cause of structural unemployment, which is one example, or the precariousness of labor. Or, on the other hand, to propose that migration is a panacea for structural problems like aging.”

More generally, Hein de Haas points out that what is really missing is an understanding that if you create societies that are wealthy, open and de-regularized, then you also create much more demand for migrant labor. These societies inevitably attract migration, and if you close the door, we know what you get — you get more smuggling and more irregular migration because there are no legal channels to match the labor demand.


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