Addressing the Debate over the Economic Impact of Migration Remarks for the Conference on “Can Migration Work for All in Europe?”

Over the past year, we have been thinking about how best to respond to the rising criticism of globalization. Despite the many benefits for rich and poor alike, the downsides of globalization have generated a powerful political backlash. That has forced policy makers to ask how to address the discontent and what to do for those left behind by economic integration.

We face a similar conundrum over migration.  The issue has taken center stage here in Europe as tensions have risen over both the longstanding flow of migrants from Eastern Europe and the newer wave from the Middle East and Africa, including many refugees.

The politics and scholarship of migration are at odds.  While scholars have long debated the economic costs and benefits of migration, and there remain some disagreements, a consensus has emerged that it is beneficial—a point I will return to in a moment.

But the rising tide of populism in the U.S. and Europe over the past few years that has pronounced a negative verdict on globalization has also drawn a harsh judgment on migration. Over the last year, that tide has swept away leaders in a few countries and threatens others.

So just as with globalization, economists and policy makers ought to pause and consider why public opinion seems to reject the positive conclusions of research on migration. Some reconsideration may well help us develop a deeper understanding of the issues and the analysis, and better refine the policy response.

There are three possible explanations for the strong public reaction.  First, people may be placing less value on the economic benefits of migration, because they dislike the social and cultural change that they fear inevitably comes with immigration. Second, they may not be perceiving the real benefits that economists have shown to exist.  Or third, economists may not have figured everything out. Perhaps there is an element of truth to all three.

Surveys about migration tell us that the fear of crime and the threat to culture or national identify show up as powerful forces affecting public opinion. Political scientists tell us that the reaction to these perceived threats expresses a profound insecurity.   We, as economists, must not discount those aspects. At the same time, we do not have an easy way to factor them into our analysis.

What can we say about the economics? 

The economic argument that immigration is damaging comes largely from a simple observation: by raising the supply of labor, it exerts downward pressure on wages, harming native workers–at least those of similar skill levels. Popular antipathy to immigration most often relies on this perspective, which is essentially what economic literature would call the partial equilibrium view.  People see immigrants come into their communities, and believe they and others in their communities face worse job prospects accordingly. Many have particular experiences in the workforce that reinforce this view.

The economist’s response to that view is that the labor supply argument requires that all else be held constant, and that is surely not true.  Most arguments that immigration brings benefits point to one or more factors not held constant: in other words, to what we would call general equilibrium and dynamic effects. Among these factors:

  • Immigrant workers may complement, rather than substitute, for native workers.
  • Immigrants will surely spend much of what they earn and thus raise demand, including the derived demand for labor, thus boosting wages and creating new jobs.
  • Businesses will eventually invest to better equip immigrants with capital, raising productivity and reducing downward wage pressure.
  • And native-born workers will retrain and attain higher paying jobs, or move to places with stronger labor markets.

The literature has identified many such factors that, in theory, can generate benefits and has shown that, in practice, they actually do.

Regardless of the broad agreement among economists about the benefits of immigration, the partial equilibrium view has currency in the realm of public opinion. And this currency does not represent an entirely peculiar or isolated reaction. In fact, much of the skepticism on migration bears a striking resemblance to skeptical views on trade.  Those of us trying to understand the economics of immigration in order to shape policy proposals ought to reflect on the congruence of the debates over immigration and trade.

First, like trade, even if immigration brings net benefits to an economy, it may generate winners and losers.

Second, just as trade leads over time to specialization in line with comparative advantage, it may take time for the dynamic effects of immigration to take hold, as they depend on adjustment by businesses. So there may be many losers for a while.

Third, just as with trade displacement, effected natives may need to retool or move to become beneficiaries of migration.

And fourth, and perhaps most relevant right now, when many things are changing in the global economy, workers may not be able to discern which change is responsible for the decline in living standards they are experiencing.  We have come to recognize a paradox: while the political debates in the US and Europe place much of the blame for sluggish wage growth and rising job losses on the globalization of trade, we suspect that much of the impetus actually comes from the powerful and lingering effects of the global financial crisis and from the persistent incentives for labor saving technological change.

So this is my message: the economic benefits of migration are well established. But as we are doing in the broader debate around globalization, we also must recognize that more work must be done on the topic, particularly to obtain a clearer picture of who may be hurt by migration—and how we can mitigate the impact.

As we review what we have learned from the research and experiences of migration, let us be careful to sort out what holds in theory, what seems to hold in practice, and how confident we are about our conclusions.  As in the discussion of the globalization of trade, we should try to cast light on the subject, in order to guide policy makers in their tasks.  But as in the trade debates, we should also be frank about winners and losers, transition periods, retraining and relocation needs, and impacts on fiscal finances and welfare programs. In essence, we need to be frank about politics.

This admonition should hold for academics examining the rapid changes brought by migration in this century, as well as governments grappling with the policy challenges these flows have brought in their wake. It certainly applies to the work of the IMF.

The Fund has undertaken considerable work on the economic impact of migration in recent years. You heard this morning from my colleague on the implications for the “sending” countries in Eastern Europe. Let’s take a moment to review briefly our findings on the receiving countries.

Our own work aligns with the view that the economic impact of migration on receiving countries is generally positive.

For instance, we have found that immigration has significantly increased GDP per capita in advanced economies—because skill levels and complementarities boost labor productivity, and because in some places an influx of working-age migrants helps counteract labor shortages arising from demographic developments.

We also find that, although the top 10 percent benefit most, the gains from migration are shared across all income groups, Moreover, inequality does not increase as a result of the entry of migrants into the workforce.

And lastly we find no significant negative effects on the middle or lower income groups in receiving countries.

All of these are empirical results, thus based on information to date.  We—along with other researchers—need to be prepared to re-examine our findings, as experience accumulates, especially where there are huge new flows in Europe.

We will need to continue to re-examine our findings and look at new issues:

For example, we have concluded that both high- and low-skilled migrants can raise labor productivity in receiving countries. It seems clear that high-skilled migrants bring knowledge, increase innovation and boost the productivity of their native-born counterparts.  But lower-skilled migrants can increase efficiency by taking on jobs where applicants are in short supply.

Our studies also suggest that low-skilled migrants can benefit their native-born counterparts by prompting increases in skill levels across the board. We need to examine whether this effect is as certain or as significant as with high-skilled workers.

We know there are social and economic forces at work now whose impact may only become clear in a longer timeframe. For example, some studies in the U.S. show that migrants have negative wage effects on earlier generations of immigrants and native-born high school dropouts.  Others show that immigration reduces the number of hours worked by native-born teenagers. We ought to look at whether these effects are manifest in Europe as well.

The assimilation of migrants into receiving countries’ labor markets has been the topic of considerable research. This process of integration is critical if countries are to secure maximum economic benefits from migration. We already know that the Eastern Europeans, the focus of this conference, by and large have integrated rapidly. But policy makers will now need a clearer understanding of the assimilation experience of refugees and migrants from the Middle East and Africa.

We also need a clearer picture of how the second and third generations from earlier cohorts of immigrants are faring, particularly those from developing countries. There are comprehensive datasets from individual receiving countries—for example, Norway—but more work in this area could help determine which policies are most effective.

Beyond our research, we also want to help countries devise appropriate policies.  We know that governments can greatly affect the short and long run impacts of migration.  From selection criteria, settlement services, work rules, and educational opportunities, to related cultural policies related to assimilation, government policies may swing the balance between favorable and unfavorable economic as well as social experiences with migration.

While I do not have time to delve deeply into those issues today, let me say a few words about social welfare programs and government finances. Clearly, determining the right balance of social welfare policies to avoid moral hazard and welfare shopping will require a detailed understanding of migrant experience and the structure of incentives.

Social welfare policy is a sensitive subject for groups in the native-born labor force that believe their lives have become more difficult because of migration. There is anecdotal evidence that part of the backlash against the EU at the time of Brexit vote had its roots in a perceived misalignment of social benefits. Unemployed workers in the UK complained that they had to wait to obtain benefits after they lost their jobs while new migrants had immediate access to government support.

This is just one example of where a better understanding of the impact of migration on native populations could help redefine policies and even reduce social tensions. But that said, surveys and papers already suggest that there is a broader range of issues in which poorer natives feel that they are in direct competition with migrants for limited welfare resources—be they public transport, health care or overcrowded schools.

The message here is that, particularly in light of the current political context, it is essential to obtain a more granular understanding of the developments set in motion by increased migration—certainly in labor markets, but also in the broader economy. I can assure you that as a learning institution, the IMF would benefit from research in this area. And I can assure you we will continue to conduct our own.

Conclusion

These are all important issues that call for clarity. I speak as a policy maker who answers to a constituency—the 189 member countries of the IMF; a constituency that faces challenges from migration that in some instances have reached stress or even crisis proportions. Governments in Europe and elsewhere are making decisions now that will have repercussions far into the future.

It is our job to assist in these policy challenges in real time as countries take the steps that are necessary to bring migrants into the mainstream. But we also have the responsibility to help these countries chart a course that will bring economic benefits to all of their people—and deal with disadvantaged groups. As with the trade issue, that means taking stock of any negative impacts of migration and considering the proper policy responses. Thank you.

David Lipton, First Deputy Managing Director, IMF
Brussels, Belgium

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