Pieter Emmer

Could Europe do without immigration?

Christian Dustmann

The cycles determining which skills are needed for national economies are getting shorter, so it is increasingly difficult for a national education system to react to the demands of the labour market. There is always a lag between the moment when signals are being sent to young people, indicating in which sectors they should specialize, and the moment they are ready for the labour market. In order to be competitive in a globalized economy, European countries will need to use migration as a possibility to overcome such shortages in order to keep up in the race for world markets.

Wiemer Salverda

What is your view on the future trends in migration: where will the migration come from? What type of migration will it be, more educated than before? What about the possible implications, particularly for the labour market and the economy? You recently did some research on the implications for the wage distribution in the UK, could you elaborate on this? Could you give your view on the differences between European countries in that respect?

Christian Dustmann

There seems to be some understanding that only a skilled migrant is a good migrant. I think that it is very wrong and it is also not compatible with what we have seen in terms of immigration into the European countries over the last 50, 60 years. Mass migration into Northern Europe started in the late 1950s and ended in the year 1973 with the first oil crisis. During that time, migration was predominantly unskilled. In Germany, the stock of immigrants in the total population increased from below 1% in 1958 to above 6% in 1973. Most of these people were recruited by industry for jobs that did not require skills. This migration was important for the expansion of industry and manufacturing. Currently, in other countries, the situation is different. Australia has preferred a point-based system, which is very likely to be implemented in the UK, and I would expect that other European countries pick up on that too. It is a system that favours skilled immigration, and the Australian policy makers believe that it will work well for their economy. The demand for skilled migration or unskilled migration depends very much on the cycle, on the particular structure of a particular national economy and on the particular skill shortages. I don’t think a general statement in that respect is possible. In all countries that are receiving countries in terms of migration we observe a kind of mix of unskilled immigrants and skilled immigrants. For example, agricultural migration is a migration which is not necessarily unskilled but which performs tasks that don’t require any further skills. Most European countries, both in the North and in the South, have agricultural migration schemes and their agricultural industry depends on migrants. At the same time, European countries need workers at the high end of the skill distribution.

Wiemer Salverda

What about the consequences for the national economy? In your recent research you show that, in the UK, the effects of immigration on low-pay native workers were negative, but at the same time they were rather positive for native workers with higher levels of income: their wages went up.Reference Dustmann, Frattini and Preston¹ Maybe this is not a consequence of immigration, but it certainly occurred at the same time. You also show that immigrants have pretty high levels of education but take jobs or are forced to take jobs below their levels of education. This is a process that affects the immigrants themselves but also has wider implications for the labour market. I suppose that many low-skilled workers in the UK must have suffered from this in terms of employment chances and perhaps also then in terms of the wage levels that they could obtain. Is that correct?

Christian Dustmann

Not entirely. Let me start by giving more details. One of the most important questions in the research on immigration is what immigration does to the native labour market. And, in particular, does immigration bring down wages of native workers? Does it have negative employment effects, at least in the short run? The empirical literature is not entirely clear on that. The empirical literature on wages has looked predominantly at average wages. In the work that we have done for the UK or wages across education groups, we looked at the distribution of wages: we wanted to know if workers suffer from immigration, and if this is the case, then where do we find these negative effects along the wage distribution scale? Economic theory would give us some indication of what we should expect and it would tell us that if we have many types of labour and we have capital, and we keep the stock of capital constant, then immigration – if it changes the skill mix of the native labour force – will lead on average to a decrease in wage level but at the same time it will produce a surplus. This surplus goes to the factor that is not flexible, which is capital. For a very long time this has been the assumption in the literature (in a very simple model with only one industry). And it seems to us that that assumption is overly restrictive in a country like the UK, and that we cannot assume, even in the short run, that the stock of capital is constant. Capital is not constant and it reacts very quickly to where its return is highest.

If we give up that assumption then, again, immigration will have effects on the distribution of wages. Let us take an extreme example of the stock of capital being perfectly elastic. Immigration will create a surplus again, but if the composition of immigrants differs in terms of skills from the composition of the native labour force, that surplus will now go to native workers. In that scenario, on average, wages will increase. However, that does not mean that every group of workers will benefit from migration. Some will lose and some will win.

Those that will lose are the ones who are in direct competition with the immigrants and who are working in parts of the distribution of skills where we have the highest density of immigrants. Those who will win are those who are not in direct competition with immigrants and are working in parts of the distribution where we have a lower density of immigrants. That is what we have found for the UK. If we look at recent immigrants in the distribution of native wages, we find that they are predominantly allocated at the low end of the wage distribution, and if we look at the wage effects, we see that they tend to mildly depress wages at the very low end of the distribution, below the 20th percentile, and have a positive effect on wages further up the distribution.

Wiemer Salverda

Imagine that immigration moves up to higher levels of education as many seem to advocate. Would these negative effects then be more concentrated at a higher end?

Christian Dustmann

You are perfectly right that this argument should hold theoretically and also empirically for skilled migration. We do actually have skilled migration into the UK. Migrants on average have higher levels of education than native workers. This has been the case for quite a long time, and the trend has been maintained over the last decade. However, it is not the case that a skilled migrant, if we measure skills in terms of number of years of education, is a perfect substitute for a native worker with the same number of years of education.

There are many problems in the transfer of particular knowledge to a particular labour market of the receiving country. Language is one problem. A particular education has to be transferred to meet the needs of the new labour market. So what we see in the UK, for instance, is actually migration that is relatively highly skilled, but migrants do not work where we would expect them on the basis of their education. Immediately after immigration they considerably downgrade and work in much lower parts of the distribution.

Another good example for that is Israel, where we had a huge immigration of highly skilled workers who, however, worked at very low ends of the labour market. Eckstein and WeissReference Eckstein, Weiss and Ben-Bassat Avi² nicely documented that in their paper.

Wiemer Salverda

Would that also perhaps negatively affect incentives to develop human capital within the native population?

Christian Dustmann

How can we summarize, in a single parameter, the incentives individuals need to invest in human capital? It is the inequality in a particular country. The more wage inequality there is, and if wages are in direct correspondence to the skills individuals have, the more difference there is between having a good education and a poor education, and the higher the incentive to acquire education. How does immigration affect this process? When I talked about the wage effects of immigration, I should have mentioned that we do find slightly negative effects at the low end of the wage distribution and positive effects at the high end of the distribution. They are not dramatic at all if we look at the wage increase in real wages in the UK over the period. Nevertheless, if we take these numbers at face value, any migration that brings down wages at the low end and increases wages at the high end leads to a widening of the distribution. Therefore, with the argument I put forward before, such migration should increase incentives to acquire education. Any migration that does the opposite should decrease incentives to acquire education. However, let me stress again that, based on our work and other work I am familiar with, the effects of migration are very small and I don’t think they constitute a major factor in creating incentives and disincentives for a native population to acquire education.

Pieter Emmer

What is the future of migration? Could you suggest changes that should be made in the infrastructure of receiving immigrants in the EU countries in order to avoid some of the pitfalls we have experienced, in relation to migration, in the last 30 years? In your view, would we need to change our social security systems in the EU countries, would we need to adopt a special rotation scheme for the unskilled who, in the past, made a disproportionate use of government subsidies and social security benefits in many European countries, especially Western European countries? Do we need to introduce short-term work permits without the right to benefit from social security? What solutions do you see?

Christian Dustmann

In general, in the past, immigration policy is something we never had in Europe, because European countries never considered themselves as immigration countries, despite some of them having stocks of immigrants that are actually higher than those in the United States.

I think it is extremely important that such policy is created, and it has to be seen to deliver benefits for the receiving populations. Immigration policies, which are basically charity, are not good immigration policies in the long run, because the receiving populations will understand that they lose out by redistribution. I do believe that many of the immigration movements we have seen in Europe benefited the receiving populations. But we have, also seen policies that were not measuring up on that particular objective. For example, the strong anti-immigration attitude we now see in the Netherlands is a result of an immigration policy that did not really take care of the receiving population benefiting from the particular type of immigrants who came to the Netherlands.

Many of the institutional features we have in place in Europe are actually working well. I wouldn’t think that, at large, immigrants in Europe are free-riding on the benefits system. There is no evidence for that. But there are always groups that may want to do that and these are the groups attention is focused on. However, we have to be careful when we look at research and data that try to document that. Of course, people in higher categories of the income distribution contribute more to the tax system because, on an individual level, they pay more taxes. If we have unskilled migration, then it is perhaps not appropriate to compare those immigrants’ contribution with the average contribution that, for example, a Dutch citizen makes towards the tax system. It is also not quite clear what we should count on the benefits side, and what we should count on the costs side. Thus, when we read studies claiming that immigrants free-ride on the benefits system, we need to look carefully at what they measure and what they don’t measure.