How immigration makes us richer

Giovanni Caccavello // 18 January 2017

Over the last few years, European politics has been profoundly shaken by the emergence of nationalist and populist parties. The rise of anti-immigration rhetoric, coupled with the widespread perception of a declining West, is putting at risk European political and economic cohesion. Even the Schengen area, one of the most visible signs of European integration, is now under attack.

 

As our Head of Research wrote in a 2016 Briefing on France, the new European political and economic divide is quickly moving away from the mainstream battle of left versus right. The contest that now matters is open versus closed.

 

A central issue in recent debates around European integration regards immigration. As Legrain (2016) writes for the Institute of Economic Affairs , immigration was a key reason why 52% of Britons voted to leave the European Union in June 2016.

Immigration was also a central theme of Donald Trump’s electoral campaign. Now it looks like EU-wide migration policies – notably the allocation and integration of Middle East migrants – will play an important role in the forthcoming Dutch, French and German elections.

 

The most worrying feature of current discussions of migration is the extent of misinformation. Whilst it is true that from 2000 to 2014 the foreign-born population as percentage of the total EU/EFTA population has increased by around 5%, on the other hand, people still greatly overestimate the immigrant share of the population . Italians think there are three times as many foreign-born individuals in their country as the actual figure. In most European countries, people overestimate the immigrant share of the population by a factor of at least two.

 

Moreover, too many people still wrongly believe that openness to migration harms Europeans’ job prospects, burdens public finances and services and makes housing prohibitively expensive. In other words, migrants are often blamed for the major public concerns of citizens.

 

What is less known by the general public (mainly due to political and media failure) is that openness to migration brings big economic benefits, especially in the long-run. Thanks to their diverse attributes, skills, perspectives and past experiences, migrants tend to complement the ever-changing needs of local workforces.

 

As several recent studies demonstrate (Ortega and Peri, 2014; Alesina et al. 2016 and Jaumotte et al. 2016), immigration has a net positive effect on both income per capita and labour productivity in the host advanced economies. For example, estimates from Jaumotte et al. (2016) suggest that a 1%-point increase in the share of migrants in the adult population can raise GDP per capita by up to 2% in the long-run. This positive effect is generated via two different channels: the first being the increase in the ratio of employment to total population; the second being the rise in labour productivity .

 

These data confirm Legrain’s main thesis: migration is, in effect, a form of international trade which similarly raises productivity and living standards. By raising the diversity of skills and ideas at the economy’s disposal and spurring entrepreneurial activity, migrants enhance economic dynamism.

 

A good example of such dynamism comes from the UK, where 25 per cent of British start-ups have been founded by non-UK EU nationals and 45 per cent of UK start-up employees come from non-UK EU countries (Legrain, 2016). This simply means that migrants do not only complement host country workforces by incentivising natives to specialise in what they do best; but also, that – as soon as they start integrating – they set up new businesses, effectively boosting employment opportunities for natives, stimulating productivity growth and paying into government coffers. A 2014 UCL study found that EU workers in the UK paid £20bn more in taxes than they took out in benefits. That’s twice the UK’s net contribution to the EU budget.

 

In the long-run, gains from migration tend to be broadly shared across the population. According to Jaumotte et al. (2016), openness to migration increases the average income per capita of both the bottom 90% and the top 10% of earners. High-skilled migration tends to benefit primarily top earners, but it also raises the standards of living of the lower and middle class. Contrary to conventional wisdom, the studies reported here show that migration leads, over time, to a win-win situation in all advanced economies. Thanks to the influx of newcomers, the population as a whole is better off.

 

All these macroeconomic issues are also related to another important aspect: ageing populations in most rich economies. According to the United Nations, without further migration flows, the working-age population will shrink in many advanced nations over the next few decades. In countries like Germany, Italy and Spain the share of the population over 60 will be around 40% by 2050, compared to around 25% in 2015 .

 

Moreover, as OECD data reveals , as of today, foreign-born people constitute around 10-20% of the adult population in the majority of rich economies, while in other developed nations such as New Zealand, Australia, Switzerland and Luxembourg, their percentage is well above 25%. It should come as no surprise that comparative statistics put these countries among the most productive, freest and most dynamic economies in the world.

 

Increasing the share of migrants will tend to rejuvenate populations, which will increase the productive capacity of economies and help to finance public services.

 

Immigration is bound to play an increasing role in determining the economic success of developed economies, as indeed it already does. A 2014 OECD discussion paper  illustrates that since the mid-2000s, migrants accounted for 70% of the increase in the workforce inEurope, that they contributed significantly to labour market flexibility and that they affected positively the human capital development of receiving nations.

 

Thus, as Legrain (2016) states, migrants contribute to the economy in many ways: as workers of all skill levels, innovators, entrepreneurs, taxpayers, consumers and investors. Their efforts help create jobs, raise the productivity and wages of local workers, lift returns on capital, stimulate international trade and investment, and boost innovation. On net, migrants make us richer.

With populists and nationalist parties calling for illiberal policies, including the drastic curtailment of immigration, all liberal minded people need to stand together and defend the liberal order and the economic opportunities that it creates.

 

Main references:

 

Alesina, A, J Harnoss and H Rapoport (2016) “Birthplace diversity and economic prosperity”, Journal of Economic Growth, 21(2): 101–38.

 

Legrain, P. (2016) “Free to Move”, IEA Discussion Paper.

 

Ortega, F and G Peri (2014) “Openness and income: The role of trade and migration”, Journal of International Economics, 92(2): 231–51.

 

Jaumotte, F, K Koloskova and S Saxena (2016) “Impact of migration on income levels in advanced economies”, IMF Spillover Note, Issue 8, October.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).