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The Skill Composition of Immigrants and the Generosity of the Welfare State: Free vs. Policy-Controlled Migration

  • Alon Cohen
  • Assaf Razin

The paper analyzes the effect of the generosity of the welfare state on the skill composition of immigrants. We develop a parsimonious model in which the effect of an increase in the generosity (and taxes) of the welfare state on the skill composition of immigrants under free migration is negative. The reason is that welfare state benefits attract unskilled migrants because they contribute to tax revenues less than what they gain from benefits; and this generosity works to deter skilled immigrants, because they contribute in taxes more than in benefits. In sharp contrast, the effect of an increase in the generosity (and taxes) of the welfare state on the skill composition of migrants is positive if migration is controlled by policy. Being net contributors to the welfare state, skilled migrants can help finance a more generous welfare-state system; thus, they are preferred by the policy maker over unskilled migrants. We take the prediction of the model to cross-sectional data on source-host, OECD-EU country pairs in the year 2000. The identification strategy is to use the decomposition the source-host country pairs into two groups: one group, a "free migration" group, source-host country pairs within the EU, and another group, "policy-controlled migration" group, the pairs from non-EU countries into the EU. We find evidence in support of the predictions of the parsimonious model, that the generosity of the welfare state adversely affects the skill-composition of migrants under free migration; but it exerts a more positive effect under controlled migration, relative to the free migration regime.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14459.

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Date of creation: Oct 2008
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Handle: RePEc:nbr:nberwo:14459
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  1. Nicolas Péridy, 2006. "The European Union and its new neighbors: an estimation of migration potentials," Economics Bulletin, AccessEcon, vol. 6(2), pages 1-11.
  2. Phillip B. Levine & David J. Zimmerman, 1999. "An empirical analysis of the welfare magnet debate using the NLSY," Journal of Population Economics, Springer;European Society for Population Economics, vol. 12(3), pages 391-409.
  3. Terra McKinnish, 2005. "Importing the Poor: Welfare Magnetism and Cross-Border Welfare Migration," Journal of Human Resources, University of Wisconsin Press, vol. 40(1).
  4. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2003. "The Survival of the Welfare State," American Economic Review, American Economic Association, vol. 93(1), pages 87-112, March.
  5. Dolmas, James & Huffman, Gregory W., 1998. "On the political economy of immigration and income redistribution," Working Papers 9804, Federal Reserve Bank of Dallas.
  6. Storesletten, Kjetil, 1998. "Sustaining Fiscal Policy Through Immigration," Seminar Papers 664, Stockholm University, Institute for International Economic Studies.
  7. repec:ebl:ecbull:v:6:y:2006:i:2:p:1-11 is not listed on IDEAS
  8. Enchautegui, Maria E, 1997. "Welfare Payments and Other Economic Determinants of Female Migration," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 529-54, July.
  9. McKinnish, Terra, 2007. "Welfare-induced migration at state borders: New evidence from micro-data," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 437-450, April.
  10. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  11. De Giorgi, Giacomo & Pellizzari, Michele, 2009. "Welfare migration in Europe," Labour Economics, Elsevier, vol. 16(4), pages 353-363, August.
  12. Timothy Miller & Ronald Lee, 2000. "Immigration, Social Security, and Broader Fiscal Impacts," American Economic Review, American Economic Association, vol. 90(2), pages 350-354, May.
  13. Edward M. Gramlich & Deborah S. Laren, 1984. "Migration and Income Redistribution Responsibilities," Journal of Human Resources, University of Wisconsin Press, vol. 19(4), pages 489-511.
  14. Blank, Rebecca M., 1988. "The effect of welfare and wage levels on the location decisions of female-headed households," Journal of Urban Economics, Elsevier, vol. 24(2), pages 186-211, September.
  15. Ortega, Francesc, 2005. "Immigration quotas and skill upgrading," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1841-1863, September.
  16. De Giorgi, Giacomo & Pellizzari, Michele, 2006. "Welfare Migration in Europe and the Cost of a Harmonised Social Assistance," IZA Discussion Papers 2094, Institute for the Study of Labor (IZA).
  17. Razin, Assaf & Sadka, Efraim & Swagel, Phillip, 1998. "Tax Burden and Migration," Economics Series 59, Institute for Advanced Studies.
  18. Giovanni Facchini & Assaf Razin & Gerald Willmann, 2004. "Welfare Leakage and Immigration Policy," CESifo Economic Studies, CESifo, vol. 50(4), pages 627-645.
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