International migration and the welfare state: Asian perspectives

Abstract

Immigration is a controversial topic in Australia and some of its Asian neighbours. Given the potential impact on native welfare, such as effects on relative wages and unemployment, there has been political mobilisation on the immigration question. The presence of a redistributive welfare state in all major immigrant host countries creates yet another margin on which immigration affects native welfare. The focus of the paper is whether a large intake of immigrants leads to a reduction in welfare state effort. It is often argued that steady increases in immigration lead to public pressure for stricter immigration controls or for less generous publicly funded social expenditures. In terms of immigrants with similar employability and claims on the public purse to natives, it is hypothesised that the impact on welfare spending is neutral. These ideas are tested using detailed data for migration to developed countries.

Keywords:

• immigration
• welfare state expenditures
• panel estimates
• Asia-Pacific

Acknowledgements

The authors thank Sukai Farrell-Yamamoto and Jay Majtyka for assistance with data collection. Rod Falvey and Shravan Luckraz were generous with their comments.

Notes

1. In Australia, for example, since the mid-1990s, there has been a significant shift toward skilled migrants (and away from migrants entering under the family migration programme). This has been justified in the context of alleviating skill shortages in the labour market. Politically, it was also seen as necessary to ‘restore public confidence’ in Australia's migration programme (Khoo, 2002).

2. The fact that most migrants flow to a relatively small number of wealthy OECD countries is in stark contrast to the effects of liberalised trade, which are not so geographically concentrated.

3. Some of the material in this section is drawn from Gaston and Nelson (2011, 2012).

4. The issue is really whether, controlling for observable characteristics, immigrants’ rate of use of the welfare state is higher than that of natives. It is likely that immigrants from developing countries have traits that involve greater current transfers, i.e. they are young, poor, less-skilled and have relatively more children than natives. A different issue is whether immigrants are attracted to locations as a result of generosity of welfare systems, i.e. the ‘welfare magnet’ hypothesis. The link between welfare provision and immigration is a mainstay of open economy public finance theory (e.g. Wildasin, 1994). The empirical results here are quite mixed, clustering around a finding of no effect to small positive effects (Barrett and McCarthy, 2008).

5. Goto (2010) reports similar findings for Japan.

6. In general, if F(.) is unimodal and negatively skewed, then ρ > 1.

7. The social spending component of public expenditures is on the following benefits: old age, survivors, incapacity-related benefits, health, sickness, family, active labour market programmes, unemployment, housing and other social policy areas. The data are from the OECD SOCX database.

8. The 25 countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Japan, South Korea, the Netherlands, Norway, New Zealand, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

9. Standard panel unit root tests confirm that all variables in the model are stationary. Hence, we estimate the short-run relationships between the variables of interest. (Estimating an error correction model, which captures both short-run and long-run effects, would be inappropriate, cf., Gemmell, Kneller, and Sanz (2008)).

10. An alternative explanation is provided by Aghion, Algan, and Cahuc (2008), who show that there is a negative correlation between union density and the quality of labour relations as well as state regulation of the minimum wage. They argue that this is explained, on the one hand, by a ‘good’ equilibrium characterised by high union density and low state regulation, and a ‘bad’ equilibrium, characterised by distrustful labour relations, low union density and strong state regulation of the minimum wage (and impliedly, a stronger government intervention, in the form of welfare).

11. See also Dreher (2006) and Gemmell, Kneller, and Sanz (2008) for similar findings.

12. The data for average years of schooling are for the years of formal schooling received by adults over age 15. The data are from the Barro–Lee data set: www.worldbank.org/html/prdmg/grthweb/ddbarle2.htm.

13. Smith (2006) finds that legal migrants to the United States are ‘keeping up’ with native-born Americans in terms of educational attainment and wage outcomes.

14. The Razin, Sadka, and Swagel (2002) sample comprises Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden and the United Kingdom.