Authors: Uri Dadush, Lauren Falcao
Originally published by the Carnegie Endowment for International Peace
Over 200 million people reside in a country that is not their birthplace. This “Diaspora Nation” outranks all but four other countries by the size of its population. Migrants, its citizens, make an immense economic contribution both to their host country and, primarily through remittances, to their countries of origin. About 82 percent of migrants originate in developing countries, and their remittances, which amounted to an estimated $305 billion in 2008, represent an essential source of foreign exchange, as well as a major instrument in the fight against poverty.
But migrants are also especially vulnerable to the financial crisis because―relative to workers in their host countries―they are disproportionately young, unskilled, and employed in the worst-hit sectors, such as construction and manufacturing. The large minority of illegal migrants has little legal recourse and, at best, only precarious access to social safety nets. But even legal migrants are often subjected to discrimination and arbitrary treatment, and the risk of this is highest when their employers confront tough times.
Politically stuck in the middle between their origin and host countries, migrants lack a voice in both. Thus policy makers are dangerously insulated from their concerns and insufficiently aware of their essential economic role.
Governments must recognize that migrants are an economic asset, rather than a liability, and thus shape their reaction to the crisis, including migration and social policies, accordingly. Failure to do this would result in economic welfare losses and would potentially prompt a disastrous escalation of social tensions.
Large Economic Benefits From Migration
It is widely accepted that migration has poverty-alleviating effects in the countries of origin. Migrants typically triple their real earnings by working overseas; and every 10 percent increase in per capita official remittances leads to a 3.5 percent decline in the share of people living in poverty. Remittances arm the recipient with a steady flow of income in the face of unexpected events, such as floods or illnesses. They are also associated with increased investment in education, entrepreneurship, and health in the recipient’s surrounding community. The macroeconomic benefits are also notable: in 2007, twelve countries received in excess of 15 percent of GDP from remittances, which have proven to be the most stable form of external finance in developing countries.
Less popularly understood are the economic benefits that accrue to host countries, though research has consistently indicated that they are positive. If migration from developing countries were to increase enough to boost the labor force of high-income countries by 3 percent (thus doubling the migrant population in industrial countries), the annual welfare gains―accruing mainly to migrants, but also to countries of origin and countries of destination―would be in the order of $356 billion a year, comparable gains to those from eliminating all barriers to merchandise trade.
In high-income countries, the gains from migration are derived in part from lower prices of construction and services. Unlike manufactures, these labor-intensive activities cannot be carried out with cheaper labor overseas and imported; either cheaper labor must be imported, or people must travel overseas to consume the services they need, as is beginning to happen with healthcare and retirement homes.
Migrants also indirectly raise returns to land, capital, and the many types of labor that are their complements in production (for example, a large swath of agriculture in Spain and in the United States would not be internationally competitive without migrant labor). Further, migrants are consumers as well as producers; by expanding demand in their host countries, they boost returns to all factors.
Competition for Jobs
The greatest concern about migration, and the issue that is most politically charged, relates to unskilled workers, and the increased job competition they represent for natives. This fear is premised on the assumption that migrant workers are adequate substitutes for native workers, and that native workers want to do the same jobs. However, both logic and empirics suggest that this fear is exaggerated. While the average low-skilled American worker has a high school diploma and speaks English, the average low-skilled Mexican migrant has six years of education and does not speak English. The two workers are clearly not perfect substitutes. Empirical studies confirm this, finding that migrants have had minimal impacts on native employment and wages in the United States and Germany.
Still, it is reasonable to ask: Does the competition for jobs between migrants and native workers intensify during recessions? Though there is very little research on this issue, one might expect competition to intensify, as natives become more willing to take lower paying jobs. But immigrants are also more likely to lose their jobs during downturns and are more likely to regain them on the upswing, serving (albeit to a limited extent) to smooth the employment cycle of natives. Further, natives may prefer to receive unemployment benefits rather than accept the most menial jobs.
The Effects of the Crisis: What Do We Know?
Data on the crisis’ effects on migration and remittances is still limited, but four broad conclusions can be drawn.
First, the crisis has coincided with a proliferation of anti-immigrant incidents―ranging from strikes at UK refineries over the hiring of foreign workers, to more serious attacks, including the lighting on fire of an Indian immigrant in Rome. In response, many countries, including the United States, the UK, Italy, Spain, and Russia, have tightened immigration restrictions. Perhaps the most salient example came last month, as Italy’s Chamber of Deputies voted to criminalize illegal immigration, opening the door to heavy fines and, under some circumstances, prison sentences for an estimated 650,000 migrants that reside and work in the country without authorization.
Second, the crisis has coincided with a sharp slowing in the rate of new immigration. Though tighter immigration controls have undoubtedly played a role, a more important cause of the slowdown appears to be anticipated and actual declines in available jobs. Thus, the data available so far is consistent with the view of migration as a natural stabilizer of labor market conditions.
Third, with some notable exceptions, such as Dubai, there is little evidence of migrants returning in large numbers to their countries of origin. The rate of unemployment among migrants has increased sharply, but only modestly more than that of the overall population. Migrants are showing their adaptability, moving quickly to sectors where demand for workers remains relatively resilient.
Fourth, remittances, which are driven by the stock of existing migrants rather than the flow of new migrants, have remained fairly steady. Valued at $305 billion in 2008, remittances are only expected to drop to $290 billion (with a worst case of $280 billion) in 2009. In the face of collapsing private capital flows and demand for exports goods, remittances are now relatively more important in many countries.
Policy
Policy makers in host countries have ample reason to reject calls for punitive measures on migrants. The set of first-best policies available to policy makers include strengthening the social safety net available to migrants (such as food subsidies, cash welfare payments, child support, unemployment benefits, and retraining) and refraining from enacting new immigration restrictions.
Second-best policies would involve tightening controls only on new migrants and incentivizing migrants’ return to their country of origin. These programs would still inflict economic damage in the long run, as the costs of enticing migrants to return after the crisis may be large. Still, these policies are not as damaging as those that criminalize illegal migration or force migrants out. These are policies that policy makers should eschew at all costs, for they have the potential to create irreparable economic and social disruptions.
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