Two possible reasons behind the reluctance of low-skilled workers to migrate to generous welfare states

This paper provides two possible explanations for the mixed evidence regarding migration by low-skilled workers to generous welfare states. Using a model of unrestricted migration to a developed, destination country, which provides a direct and equal social benefit to all its residents, we study the impact of the benefit in a country on the size of its low-skilled immigrant population under the assumption that migration is driven by an international difference in returns to skills, employment opportunities in the destination country, and by the generosity of the benefit in that country. We find that the social benefit affects the size of the country’s low-skilled immigrant population not only directly, via the difference between the benefit and its cost in the form of taxation, but also via two indirect channels. The benefit incentivizes taking up low-skilled jobs among the destination country’s native residents, which adversely affects wages of low-skilled workers in that country, and it increases the risk of unemployment of low-skilled workers therein. Prospective low-skilled migrants view these side effects of the benefit as “stay away” factors. Simulation of the model based on 2018 data for EU-15 economies without Luxembourg highlights the importance of indirect channels in curtailing the inflow of low-skilled migrants to a generous welfare state. When only direct channels are accounted for, semi-elasticities of the size of the low-skilled immigrant population with respect to the social benefit are between 0.2 and 0.54. When indirect channels are allowed to play their roles, the positive relationship between the social benefit and low-skilled immigration is significantly reduced; the semi-elasticities range from 0.13 to 0.4. At the level of the model’s fundamentals, the variation in semi-elasticities between EU-15 countries is largely explained by differences in the size of the welfare state and in efficiency of the labor market across these countries.