Ifo Viewpoint No. 54: Germany, the Welfare Magnet

There will be more migration in Europe, but it will be "bad" migration as well as "good".
Hans-Werner Sinn
Munich, 20 July 2004

"Good" migration is driven by wage and productivity differences. "Bad" migration is driven by the generosity of the welfare state. Germany's new immigration law, adopted last week, makes it easier for highly skilled people from outside the European Union to immigrate. They would earn above average income and would not be a burden on the state. That is good migration. But the new draft EU constitutional treaty and the new EU directive on freedom of movement, which took effect on April 29 and will have to be implemented into national law within two years, could open the gates for the "bad" kind - welfare migration.

Until now, there have been only two significant types of welfare migration in Europe. First, immigrant workers have participated in the host country's redistribution of wealth from rich to poor. As low earners, their taxes and social security contributions have not covered the cost of the public transfers and the infrastructure from which they have benefited. Second, foreign workers have migrated indirectly into the welfare system by crowding out native-born workers, pushing them into unemployment. By providing unemployment benefits and welfare, EU states have fixed wages for simple labour above the market clearing level. That has stimulated excessive migration and prevented the decline of wages that would have created new jobs for the migrants. Native-born workers have preferred to sit in the chair the welfare state offered them instead of entering low-wage competition.

The directive on free movement will make a third type of welfare migration possible: the immigration of inactive people. Every EU citizen will have the right to a residence permit for up to five years in any member state. After that, he or she will receive the right to permanent residence, with full social protection. Although there are safeguards against welfare abuse in the first five years - migrants must prove they have health insurance and the necessary "resources" - there are none against claims after that period. At that point, migrants will have the right to permanent residence - and full welfare benefits - even if they have no health insurance or resources.

The country of residence will even make benefits available before the five years end if the immigrant falls on hard times for reasons out of his or her control. The directive makes clear needy people must not be expelled simply because they require welfare and welfare recipients should not be expelled unless they become an unreasonable burden on the state.

The extension of these rights has coincided with the accession of the east European countries to the EU, which is itself likely to affect migration flows. Today, the wage rate in these accession countries is one-seventh of the west German rate and between one-quarter and one-third of west German social assistance for a family of four - now €1,550 ($1,924) per month. This gap will not narrow quickly.

As a result, some countries, such as Germany and Austria, have opted to prohibit labour migration during a transition period that is initially set at two years but may be extended up to 2010. However, this ban does not apply to inactive people. Germany, which in the past has absorbed two-thirds of all east Europeans entering the EU, is likely to become the primary destination for the additional welfare migrants enabled by the new directive.

The resulting situation is grotesque: immigration of working people is made more difficult in Germany and Austria, while immigration of inactive people is made easier - two more reasons for western companies to relocate to eastern Europe or elsewhere.

The likely consequence of immigration via these three channels is that the welfare systems of west European countries will be eroded. Benefits will be cut because none of these countries wants to become a destination for welfare migrants.

This outcome could still be averted if EU member states adopt a "workfare" system - where, except for the disabled, welfare is redirected to those who work - and another constitution is agreed. This new constitution would limit the right to immigrate into the welfare system. It would allow workers to receive tax-financed benefits only after a delay, and oblige inactive migrants to receive welfare benefits from their home countries in perpetuity. The problem is that such an overhaul of the EU constitution is now possible only if the treaty is rejected by one or more countries.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published under the title "Europe faces a rise in welfare migration", Financial Times, 13 July 2004, p. 13; see also "Teurer Sozialmagnet", Capital, No. 15, July 2004, p. 3.