What a surprise! Taking in refugees isn’t detrimental to society

Back in 2015, Germany, recognising the humanitarian crisis in Syria agreed to allow any refugee that had made it to another EU country to file claim asylum in Germany. Inevitably, this resulted in a large influx of refugees – roughly one million were registered at German borders in 2015, with a further 400,000 or so registering in 2016.

Equally inevitably, this was met with howls of protests from those who wanted to “protect their borders”. For example, claims regarding the level of crimes committed by refugees and immigrants littered the likes of the Daily Mail and the Express, despite the fact that said crimes accounted for an infinitesimal proportion of all crimes in Germany during that period.

However, until now there hasn’t been a systematic study of the impact of Germany’s decision to accept large numbers of refugees – a paper by Gehrsitz and Ungerer fills this gap.This paper looks at the impact of the number of refugees on local crime rates; domestic and refugee success in the job market; and domestic attitudes to refugees and immigration.Although there have been some studies that find that immigration / refugees are detrimental, but those studies are either methodologically flawed (e.g. the one by Piopiunik & Ruhose) or written by biased fools such as Borjas.

Given the fact that large numbers of refugees were accepted into Germany, if accepting refugees was detrimental to any of these areas, then those effects would be almost certain to show up in this analysis. However, the study indicates that accepting large numbers of refugees is not detrimental to the local population.

In order to do so, the study makes use of the fact that refugees were allocated to different German states simply based on what accommodation spaces were available, creating a pseudo-random distribution of the number of refugees across the different German states.In essence, provided that these allocations were not correlated with factors such as the initial (and trend) income, unemployment etc across the different states, this provides a natural experiment by which the impact of the number of refugees on the domestic population can be estimated. Importantly, the paper finds that there is no correlation between a state’s initial labour market conditions, demographics, crime rates etc. such that the inferences resulting from the analysis are highly likely to be valid.

The paper then looks at the impact of the number of refugees that entered a particular state during the 2015-2016 period on a state’s 1) change in crime between 2013 and 2015; 2) change in unemployment rate between 2013Q1 and 2016Q1; and 3) change in share of the vote obtained by the anti-immigration “Alternative fur Deutschland” party between the federal election in 2013 and the state elections in 2016, while also controlling for other factors (such as state GDP per capita, demographics etc.) that vary across the German states.

Perhaps unsurprisingly, the paper finds that refugee inflows have:

  • no negative impact on the rate of domestic unemployment in a state (in fact, the results suggest that an increase in refugees actually decreases domestic unemployment, but slightly increases unemployment among non-German workers likely because the refugees themselves start to show up in the unemployment figures);
  • a tiny impact on crime rates – a large increase in refugees does not lead to an “explosion” in crime, but merely increases reported crimes by only 1.5%, with the majority of this appearing to come from an increase in fare dodging on public transport;
  • no impact on support for the anti-immigration political party – in other words, having more refugees in an area does not seem to lead to people in those areas voting in favour of decreasing immigration.

Now, one potential issue with some studies that find “no effect” of a variable is that this finding of no effect is driven by the coefficients being estimated imprecisely – this is usually indicated by standard errors that are improbably large. However, in the case of this study, the standard errors do not appear to be overly large, such that there is no reason to believe that the findings of no effect are due to imprecise estimates of the coefficient.

Hence, there is strong reason to believe that accepting even a large number of refugees is not detrimental to the local population in terms of crime or unemployment (or other factors that might drive local people to vote for an anti-immigration political party). Although these results do only refer to short-term effects (i.e. those occurring within 6-12 months of a large influx of refugees), there is no reason to believe that the long-term effect would be any different. Indeed, many studies (e.g. Foged & Peri, the IMF) find that the domestic population actually benefits from taking in refugees and immigrants in the long-run.

In other words, arguments that taking in refugees will harm (or be at the expense of) the domestic population are highly likely to be false.

The cost of Brexit (part 2 of who knows how many)

In response to the Treasury’s report on the costs of Brexit (and, obviously, to my blog post covering that report) a group calling themselves “Economists for Brexit” published a pamphlet which they claim contains a more reasonable estimate of the impact of Brexit on the UK economy.

Unsurprisingly, they find that, contrary to the Treasury’s report (and, indeed, the vast majority of economic reports published on this issue), that Brexit would benefit the UK economy by increasing GDP growth by about 0.5% points per year on average (with the majority of this increase coming in 2020, the final year of their forecast).

Equally unsurprisingly, their estimate is fundamentally flawed. In an impressive attempt to hide these flaws, the report contains only a two page summary of the model they have used to obtain their results, but even then the numerous flaws are apparent.

First, the report assumes that leaving the EU would mean that the UK would be able to remove EU-set trade barriers to non-EU countries, but would still keep the same terms-of-trade it currently has with EU countries. Moreover, it assumes that all trade barriers will reduce by half over the next five years. These assumptions drive the report’s “finding” that Brexit would increase UK living standards by 3.2% by 2020. However, the report does not provide any evidence to support the validity of either of these assumptions. Indeed, there is plenty of evidence to suggest that they are not valid – for example, they assume a rate of decrease in trade barriers not seen since the 1960s.

Second, the report assumes that the 0.8% GDP net saving from the UK not having to contribute to the EU budget would be passed-on entirely to taxpayers in the form of an income tax cut. This is extremely unlikely to happen – due to the current government’s austerity policies, any savings from Brexit are likely to be used to reduce the government deficit rather than hand out a (potentially politically damaging) tax cut.

Third, not only does the report assume that there would be a reduction in regulation if the UK were to leave the UK (which is an unproven assumption), the report then assumes that this reduction in regulation would have exactly the same effect as a 2% point decrease in the employer rate of NI. One hopes that those writing the point must have released how barmy such an assumption is – the report doesn’t contain even a passing attempt to justify how a decrease in regulation would have exactly the same impact as reduction in employer NI. Indeed, it is barely possible to conceive how anyone could think this was a reasonable assumption.

Anyway, moving on. Finally, the report assumes that the government deficit is unchanged due to the aforementioned assumptions resulting in the government’s revenues not changed. However, this fails to recognise the possibility that some of the money that was spent on EU goods and services previously could now be spent on UK goods and services, thereby potentially increasing tax receipts. Conversely, the report also assumes that non-UK people and businesses won’t decide to move away from the UK, which would result in a decrease in tax revenues.

And all of this is to say nothing of the fact that the report has excluded countless other factors that could be detrimental to the UK. For example, the report does not even mention the potential impact Brexit could have on immigration (note that the vast majority of studies find that immigration is beneficial for the country to which immigrants relocate and this is even true for low-skilled workers in that country). Nor does it cover the costs associated with the uncertainty that would be created and persist for a number of years regarding exactly what form of agreement between the UK and the EU would be put in place post-Brexit.

In essence, the study published by the “Economists for Brexit” group is so full of holes it is no surprise that they were only able to find eight professional economists to support it. Contrast this to the almost 200 economists (including yours truly) that are signatories to a letter in the Times stating that “[l]eaving would entail significant long-term costs.” That in itself should be damning enough.

The cost of Brexit

How much does the UK’s membership of the EU actually cost? And, in fact, does being in the EU represent a net economic benefit, rather than a net cost?

If you were to believe the information provided by Vote Leave, you might think you’d know that the answer. Vote Leave has claimed that membership of the EU costs the UK about £18 billion per year, the equivalent of about £280 per person per year. However, this figure does not include the substantial rebates and public/private sector receipts that the UK receives from the EU – once these are taken into account the actual direct budgetary cost of the UK’s membership of the EU is about £8.4 billion, or £131 per person, per year (i.e. less than half of the original Vote Leave claim).

Moreover, the Vote Leave figure only includes the direct budgetary costs of being part of the EU. Importantly, it does not include, nor does the Vote Leave campaign attempt to include, any “indirect” benefits that result from EU membership. Such indirect benefits include, for example, any jobs or exports resulting from trade with EU countries that would not otherwise occur absent EU membership. If membership of the EU increases UK output above what it would have been if the UK was not part of the EU (which is likely to be the case), then leaving the EU would result in a decrease in UK output.

This could happen for such wide-ranging reasons as EU consumers have more diverse tastes than just those in the UK allowing a larger number of different firms to flourish in the UK and export their output to the EU than would otherwise prevail if the UK left the EU and UK firms would have reduced demand from EU countries; or collaboration between EU and UK firms enables a wider spread of technology that would not be possible after Brexit such that UK productivity is higher than it would be outside the EU; or membership of the EU encourages investment not just from EU firms but from firms located in the Rest of the World that would not occur if the UK were to leave the EU. There are plenty of other potential mechanisms through which EU membership increases UK output.

Importantly, although Vote Leave has not attempted to include such factors, the Centre for Economic Performance (CEP) has done so and finds that leaving the EU would reduce the UK’s output by at least £850 per household per year. That is the best case scenario for the Vote Leave supporters. Note, too, that this only includes “static trade consequences” – i.e. the impact that can be attributed just to losing the ability to trade freely with EU countries; it does not include any of the costs associated with reduced migration, technology transfer, investment etc that would also result from leaving the EU. In fact, once these factors are taken into account, the cost of leaving the EU could be as high as £6,400 per household per year.

As such, the £850 figure likely underestimates the true cost of leaving the EU.

Nonetheless, that is not to say that every part of the CEP analysis is beyond criticism. For example, the study assumes that intra-EU trade costs will continue to fall as they have done in the past, but does not provide any evidence to suggest that such an assumption is reasonable. If, in fact, intra-EU trade costs were to fall less quickly than assumed by the study, then the costs to leaving the EU would be reduced.

Moreover, little information is provided regarding how the estimates of the cost of leaving the EU that account for the aforementioned “dynamic” factors (such as migration and investment) are obtained. Given that those estimates are likely to be based (at least in part) on complex (albeit commonly used) statistical methods, a higher level of transparency regarding the approach used would be welcome so as to enable a higher degree of confidence that the estimates have been obtained via a reasonable approach.

Overall, therefore, although the Vote Leave figure regarding the benefits of leaving the EU is an egregious over-estimation, and it is actually highly likely that there would be a large net cost to leaving the EU, it is unclear what exactly the cost per household per year is. However, this uncertainty regarding the exact cost should not detract from the fact that the cost to leaving the EU is large.

Immigration and global output

A recently published IZA working paper by Clemens and Pritchett has provided an interesting development regarding the assessment of “optimal” rates of migration. Previous studies tended to focus on the impact of migration on income distribution in the countries that were being migrated to. The Clemens and Pritchett paper is part of a developing literature that, instead, examines the impact of migration on (global) efficiency).

Previous studies looking at the impact of migration on income distribution essentially assessed the extent to which migration affected wages in the countries/areas in which migrants were settling. These often produced mixed results – for example, Borjas found that increases in migration to a country were associated with decreases in wages in that country, whereas Ottaviano & Peri find that immigration actually increases wages in migrants’ destination countries. Just to confuse matters, Card finds that wages are completely uncorrelated with migration.

Hence, there is a need for an alternative way of looking at the impact of migration, which is where these recent developments in terms of the “global efficiency of migration” come in.

The basic idea is that the productivity of labour is low in the countries from which people migrate, but high in the countries to which migrates move. This means that moving people (i.e. labour) from a low productivity country to a high productivity country increases the mean global productivity of labour, such that global output increases.

Consider the stylised example set out in the table below, in which 50 people move from the low productivity country to the low productivity country – the rows indicate whether the situation is before or after this migration occurs. The second and third column of the table indicate the productivity of one unit of labour in, respectively, the migrants’ origin country (the low productivity country) and their destination country (the high productivity country). Columns four and five indicate the number of people in each country, while the fifth and sixth column indicate output in each country (simply each country’s labour productivity multiplied by the number of people in the relevant country).

The final column sums the output in each country to obtain total global output. Comparing this column before and after migration indicates that people moving from the low productivity country to the high productivity country can increase global efficiency. Empirical studies have found that, via this mechanism, global output could be increased by 50% – 150% if restrictions on migration were lifted.

Good case

However, a modification of this mechanism could mean that migration actually reduces global output. Specifically, it could be the case that people moving from low productivity (origin) countries to high productivity (destination) countries actually “bring” some of their low productivity with them, such that the productivity of all workers in the destination country is reduced. If the productivity of labour in the destination country is reduced by a sufficient amount, this could mean that migration reduces global output. In the previous example, it was assumed that the productivity of labour in each country (the second and third columns of the table above) remained unchanged after migration.Such “transference” of low productivity could occur via migrants bringing their cultural or institutional norms with them and potentially being slow to “assimilate” in their destination country.

The table below presents a revision of the previous example in which the only change is that labour productivity in the destination country is reduced by migration (note, however, that productivity in the destination country is still higher than that in the origin country). Even though everything else from the previous example is unchanged, if migration reduces productivity in the destination country, this could mean that migration actually reduces global output. This theory, called the “Epidemiological Model”, has been espoused by the likes of Borjas.

Bad case

Clemens and Pritchett’s working paper tries to bridge the gap between these two opposing mechanisms by modelling the impact of “transmission”, “assimilation” and “congestion” on the rate of migration that maximises global output while eqaulising labour productivity. In this context:

  • transmission refers to the extent to which migrants’ low productivity travels with (i.e. to what degree do migrants actually “bring” any cultural and institutional low productivity with them when they migrate);
  • assimilation is defined as the proportion of migrants that “convert” to being high productivity (i.e. of those that migrate, how many obtain the same high productivity as workers in the destination country); and
  • congestion refers to the impact of un-assimilated migrants on the overall productivity in the destination country.

As such, the model constructed by Clemens and Pritchett trades off the gains of moving labour from a low-productivity country to a higher-productivity country against the reduction in the productivity in the high-productivity country resulting from un-assimilated migrants. Hence, the model embodies the two opposing potential mechanisms by which migration can imapct global output as described above.

The model’s results indicate that optimal migration is higher when:

  • transmission is lower – i.e. if cultural and institutional low-productivity does not “travel” well;
  • assimilation is higher – i.e. if migrants easily and predominantly obtain the same high productivity as workers in the destination country; and
  • congestion is lower – i.e. un-assimilated migrants do not substantially reduce the productivity level in the destination country.

Although these results might seem relatively obvious given the description above, the paper then goes on to use estimates of  the rates of transmission, assimilation, and congestion to obtain an estimate of the “optimal” rate of migration from the perspective of maximising global output. The paper finds that this optimal rate is substantially higher than the actual rate of migration, with the implication that global output could be raised by reducing the current restrictions on migration.

However, there are some flaws with the paper. First, the model of global output that is used to determine the optimal rate of migration only includes labour as an input – i.e. it does not include capital (machinery, infrastructure etc.) as a determinant of output. This is despite the fact that most basic models of output do include capital. The absence of capital from this model is not a problem if migration does not affect incentives to invest in capital, but if migration does affect those incentives, then the results of the model are unlikely to hold in reality.

In particular, if migration increases investment (by reducing labour productivity, thereby making investment more attractive relative to labour), then increased migration increases output such that optimal migration would be higher. Alternatively, if migration reduces incentives to invest, then increases in migration could lead to reductions in capital, potentially decreasing global output. Although the paper tries to cover this off in a single paragraph towards the end of its results, this is far from sufficient (the paper only mentions the first potential impact of capital and sues that to claim that its results are conservative).

Second, the paper notes that the rates of assimilation, transmission, and congestion are relatively unknown yet it does not include a rigorous assessment/estimation of the true value of these parameters. Instead, in order to obtain empirical estimates of these rates, the paper relies on very simple regressions that appear far too basic to capture the various determinants of these rates. For example, the estimates of the rates of assimilation and transmission are based on regressions where the dependent variable is a person’s wage yet the paper only includes controls for age, education, and gender as well as the immigrant status of a person (the variable of interest), despite the fact that estimating the determinants of wages is a highly complex exercise.

Finally, the paper assumes that changes to productivity only flow in one way (i.e. that low productivity workers reduce the productivity in the destination countries but productivity in the origin country is unchanged despite the potential for technology transfers or stimulation of foreign direct investment) and claims that is conservative. In other words, the paper claims that ignoring this possible transfer means that their estimate of the optimal rate of migration is actually lower than the truly optimal rate.

However, this fails to take into account the fact that if such productivity changes flowed both ways, then the productivity in the low-productivity origin country would increase in future, thereby reducing the productivity difference between the high and low productivity countries (i.e. reducing the positive impact of labour moving from the origin to the destination country). This could have the effect of reducing the future optimal rate of migration, but is further complicated by the fact that raising productivity in the origin country might also mean that any reduction in productivity in the destination country through migration is ameliorated somewhat. However, the paper just glosses over this complex dynamic aspect.

Nonetheless, despite these flaws the paper does provide a useful framework and some novel insights regarding how the assessment of restrictions on migration can be developed in future.