Migration States and Welfare States: Why Is America Different from Europe?

Why is America Different from Europe?

A. Razin, E. Sadka

• Publisher: Palgrave Pivot
• Year: 2014
• ISBN:
  9781137443809
• Topic: Business
• Subtopic: Business General
• Index: Business

Over the last three decades, Europe's generous social benefits have encouraged a massive surge of 'welfare migration, ' especially of low skilled laborers. At the same time, the US has attracted many highly skilled migrants, which in turn promotes internal innovation.Restrictions on the international mobility of labor are arguably the largest policy obstructions for the international economy today. A variety of studies suggest that even a small reduction in barriers to migration will result in the growth of significant global welfare benefits. Migration States and Welfare States focuses on a central tension faced by policy makers in countries that receive migrants from lower wage countries. Such countries are typically highly productive and rich in capital. These attributes, coupled with the host country's welfare system, attract low-skilled migrants, who find a generous welfare state particularly attractive, while deterring skilled migrants, who recognize that welfare states likely have higher redistributive taxes.

1

Introduction

Razin, Assaf and Efraim Sadka. Migration States and Welfare States: Why Is America Different from Europe? New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137443809.0004.

Commodity prices vary across countries due to several reasons: different tax rates, market segmentation, different standards, transportation costs etc. However, the forces of free trade tend to narrow these differences. These forces are enhanced by multilateral trade agreements reached under the auspices of the World Trade Organization (WTO); by regional trade agreements, such as the North America Free Trade Agreement (NAFTA); or by other bilateral trade agreements, such as the one between Switzerland and the European Union (the EU), and the one between Norway and the EU.

In contrast, the wages for labor services of individuals with similar labor-market traits differ considerably across countries, especially between advanced and developing countries. Such high differences cannot persist under free migration; they exist mostly because sovereign states restrict migration. Among such states, there is no organization such as the WTO which can coordinate sustainable reductions in the administrative barriers to migration.

Restrictions on the international mobility of labor are arguably the single largest policy distortion that besets the international economy. A variety of studies suggests that even a small reduction in barriers to migration will result in large welfare benefits to the global economy.¹ Unlike international trade in goods or international financial flows, migration can change the decision-making policy in an economy. This is because the composition of the population in terms of income, age, etc., can alter the power balance between the native-born and the newcomers in a way that changes the political-economic policy of the state.

Nevertheless, despite the potentially large gains from the easing of restrictions on international labor mobility, countries do not pursue the liberalization of migration flows unilaterally, or through negotiations, in a way that international trade negotiations do.² Why is this? Because politicians face a backlash against immigration. Among several key explanations for this is the fiscal burden imposed by immigration on the native-born.

In this book, we focus on a central tension faced by policy makers in countries that receive migrants from lower-wage countries. The former countries are typically highly productive and capital rich. The resulting high wages attract both highly skilled and low-skilled migrants. Reinforcing this migration is the nature of the host country’s welfare state: low-skilled migrants find a generous welfare state particularly attractive. Such a welfare state may turn also to be a migration state. Low-skilled migration imposes a fiscal burden on the native-born. In addition, a generous welfare state may deter high-skilled migration because heavy redistributive taxes accompany them. Indeed, over the last half-century, Europe’s generous social benefits have encouraged a massive surge of “welfare migration”, that is, of low-skilled migrants. In contrast, over the same period, the US has attracted a major world portion of highly skilled migrants, boosting its innovative edge. While in the last two decades Europe ended up with 85 percent of all low-skilled migrants to developed countries, the US retains its innovative edge by attracting 55 percent of world-educated migrants. European migration thus exhibits a bias towards low-skilled workers, whereas the US attracts the majority of the world’s skilled migrants. At the same time, the welfare system in Europe is more generous than that of the US. This book describes an analytical framework that can explain the reason for the existence of these differences. Whether the member states of a union compete or coordinate their policies has an impact on the skill composition of its migrants and the generosity of the welfare system. This is this book’s main theme.

Another fundamental factor which is interrelated with migration and the generosity of the welfare state is the aging of the population. The old generally benefit from the generosity of the welfare state (for example, through its old age social security benefits and, in the US, Medicare). A welfare state is also keen to admit migrants, in particular highly skilled ones, as a way of alleviating its overstretched finances. On the other hand, the working young, who finance the welfare state through their payroll tax, are reluctant to support a generous welfare state. With respect to migration, the young are less keen on admitting migrants than are the old, because the young may be concerned about changes in the political balance in the future when they grow old, which could endanger the old-age benefits they expect to receive. It is interesting to note in this context that the current immigration debate in the US about “the path to citizenship” of the undocumented migrants is centered exactly on how they may tilt the political balance of power, once they become citizens, concerning the “role of government” (that is the generosity of the welfare state).

This aging factor is another source of difference between the US and the EU. In 2010, the proportion of people aged 65 and older constituted 13.1 percent in the US, whereas in the core EU countries it was significantly larger: 20.8 percent in Germany, 20.3 percent in Italy, 16.8 percent in France, and 16.6 percent in the UK (United Nations, 2013).

Although the population in the US is getting older, and its numbers are growing more slowly, than in the past, the demographic future for the US is younger than that of the core EU countries. In particular, the US population is projected to grow faster and age more slowly than the populations of its major economic partners in Europe.

This Palgrave Pivot book explains two key policy differences between the US and the EU, two otherwise similar economic unions: (i) the higher generosity in the welfare-migration system in the EU relative to the US, (ii) the skill and the wealth bias in the migration to the US relative to the migration to the EU, the US receiving a higher proportion of the highly skilled and rich migrants.

This work claims that the looser nature of the economic union in the EU, relative to the US, and the relatively more aged population contribute a great deal to our understanding of the above-mentioned policy differences.

Notes

  1   See Bhagwati and Hanson (2009) for a broad discussion of this issue.

  2   See Razin and Sadka (1997) for a review of the interaction between international trade and migration.

2

Welfare State

Abstract: In the EU there is no union-wide income tax, healthcare program such as Medicare or Affordable Care in the US, or social security scheme. Social expenditures in EU core countries and the US are significantly different: They are much lower in the US than in the EU.

Keywords: Social expenditures; welfare state; different institutions

Razin, Assaf and Efraim Sadka. Migration States and Welfare States: Why Is America Different from Europe? New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137443809.0005.

The United States of America has, since gaining independence over 200 years ago, organized its various states as a federation. The large expenditures incurred by the pre-independence states during the War of Independence, and the consequent inability of those individual states to repay the ensuing debts, triggered both the need and the opportunity to establish an integrated federal fiscal system. Congress then transferred the authority to levy taxes from the states to the federal government, which then bailed out the states and effectively assumed their debts. The 1790 Congress empowered the federal government to raise enough revenue to service the large government debt.

Another wave of state fiscal crises in the mid of the nineteenth century strengthened the federal government’s ability to take a leading role in financing infrastructure projects, allowing state governments to reduce their role. Following their debt crises, many states introduced some forms of balanced budget rules into their constitutions; see Sargent (2012); this increased the role of the federal government in the fiscal system. In the early 21st century, federal tax revenues constitute well over one-half of all the tax revenues (federal, state and local) in the US.

In contrast, at the time the European Union was formed, all the major constituent countries already had well-established solid fiscal systems, and none was at a risk of default. So the individual countries preserved their fiscal independence from the outset. Later on, treaties (such as the Maastricht Treaty of 1992) attempted to restrict the fiscal sovereignty of the individual countries; however, its restrictions applied merely to several aggregate variables, such as the budget deficit and the public debt, and each country was still free to set its total expenditure budget and their compositions. This means that each country effectively faced no restrictions on the level and composition of its social expenditures and taxes—key components of the welfare state. Furthermore, these treaties were not enforced, mainly because of the veto power granted to each country on important fiscal policies. In contrast to the US, there are no union-wide taxes or social programs in the EU—no EU-wide income tax, health care program (such as, in the US, Medicare, and Affordable Care), or social security payroll tax. The EU social expenditures budget amounts to no more than 1% of the GDP in the EU, but are significantly lower in the US, relative to the core EU member states. For example, in year 2000, total social expenditure amounted to USD 8618 in Denmark, USD 7583 in Germany, USD 8040 in France, and USD 8668 in Sweden, but only USD 5838 in the US (Data: OECD library).

3

Migration State

Abstract: Highly skilled immigrants are more attractive to destination countries than are low-skilled immigrants for a variety of reasons; for instance, highly skilled immigrants are expected to pay taxes in excess of the benefits provided to them.

Overall, and unlike the US migration, European migration exhibits a significant bias toward low-skilled migrants.

Keywords: European Union; United States as a Union

Razin, Assaf and Efraim Sadka. Migration States and Welfare States: Why Is America Different from Europe? New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137443809.0006.

In setting up a migration policy, the skill composition of immigrants is a crucial factor. Naturally, highly skilled immigrants are more attractive to the destination countries than low-skilled, for a variety of reasons. For instance, highly skilled immigrants are expected to pay more in taxes to the Fisc than the Fisc provides them with, and in addition these immigrants are expected to boost the technological edge of their destination country. In contrast, low-skilled immigrants tend to depress the low-skill wages of the native-born, and they are also deemed to impose a burden on the fiscal system.

However, if a migration policy that favors the highly skilled is coupled with a generous family-unification policy, then an influx of low-skilled migration takes place too.

3.1 The US

It was migrants from Europe (the Old World) that created the United States (the New World). Naturally, migration to this new world was not restricted. Mass migration to the United States accelerated from 1840 and peaked on the eve of World War I. There were about 300,000 immigrants a year in the mid-nineteenth century, peaking to about 3,000,000 a year shortly before WWI.

That war signaled the end of free migration worldwide. The League of Nations, formed after WWI, failed to provide any support for international migration. Many countries, especially those of the British Empire, insisted on their rights to limit migration, contrary to the wishes of countries such as China, Japan, and India, who were, unsurprisingly, all in favor of labor mobility. In the US, the 1917 Immigration Act had already excluded Asian immigration, but after WWI it introduced a series of migration-restricting acts: the 1921 Emergency Quota Act, which limited migration to 350,000 a year, and the 1924 Johnson-Reed Act, which cut the quota to 150,000 a year.

Immigration into the US fell to mere 50,000 a year in the 1930s, during the Great Depression. The US then gradually cut the quota to that same 50,000; see Goldin, Camero and Balarajan (2011). In the latter part of the twentieth century, however, the US tilted its migration policy, in favor of highly skilled migrants; the 1990 US Immigration Act increased the number of temporary visas to highly skilled workers.

In addition during those decades, the US universities and research centers—funded, significantly, directly and indirectly by the US federal and state governments—attracted talented researchers from all over the world. Many of them remained in the US after completing their original term of education, training or research. Many became citizens. By the mid-1990s, 30% of documented immigrants to the US were high-skill.

3.2 Europe

The birth of the welfare state took place in Bismarck’s Germany, in the late nineteenth century. In the twentieth century, after the two world wars, most European countries—those that later formed the European Union—demonstrated their own models of the welfare state. The reconstruction of continental Europe (Germany and France in particular) exhausted the native-born labor force. This induced continental Europe to invite guest workers from labor-rich countries in southern Europe, Turkey and North Africa. Exceptionally, France had introduced from the outset a legal immigration policy that permitted settlement of immigrant workers and their families from its colonies in North Africa. Germany, at the other extreme, always attemp...

Table of contents

• Cover
• Title
• 1  Introduction
• 2  Welfare State
• 3  Migration State
• 4  Free versus Controlled Migration: Analytics
• 5  Free versus Controlled Migration: Evidence
• 6  Principles of International Taxation
• 7  Intra-Union Competition
• 8  Intra-Union Coordination
• 9  Competition versus Coordination: the US and the EU
• 10  Aging and Migration: the US and the EU
• 11  Is the Net Fiscal Burden a Proper Predictor of the Political Attitude towards Migration?
• 12  Conclusion
• References
• Index