Ifo Viewpoint No. 123: The Migration Storm

Hans-Werner Sinn
Munich, 7 June 2011

Why is there a perceived shortage of skilled workers in Germany? Many believe it is because of Germany’s much-trumpeted demographic problems. This, however, is not the case. To be sure, it is foreseeable that Germany’s workforce will decline in the mid-2020s when the baby-boomers born in the mid-1960s retire. However, the present shortage is due solely to the economic boom that Germany is undergoing in the aftermath of the financial crisis. More people are now working in Germany than at any time in its history. The new investment boom that we have been experiencing since last year is the result of banks and insurance companies having grown wary of foreign investments and offering their money at home, giving rise to a demand for labour in construction and industrial equipment . At the same time, it has led to an expansion in production capacity for which additional manpower is also needed.

A shortage may exist but this certainly does not mean that the country now needs to recruit immigrants from non-EU countries. Germany in any case will experience a new wave of immigration from Eastern European EU countries that will begin in early summer and gain considerable strength in the following years. As of May, workers from these countries, with the exception of Romania and Bulgaria, have the right to come to Germany. Unlike the United Kingdom, the Netherlands, Sweden, Denmark and Ireland, Germany made use of the option of starting to allow the free movement of labour for the new EU members only seven years after their EU accession. The home countries of these workers have a population of 74 million. Romania and Bulgaria, for whom the free movement of labour will be allowed as of January 2014, have an additional 29 million inhabitants. A certain percentage of these people will come to Germany in the coming years. The question of which of these newcomers Germany should accept does not even arise.

Ten years ago the EU commissioned expensive studies to dispel fears that there would be huge migration flows after eastward enlargement. The consensus among migration researchers at the time was that after the granting of the free movement of labour only about two to three percent of a new member’s population would migrate to the West over a period of 15 years. This was grossly underestimated, since Europe in the meantime has experienced a mass migration despite the limited free movement of labour. In less than four years, from the time of EU accession in May 2004 to the end of 2007, after the gates of some EU countries were opened to workers, two million Poles or a good 5 percent of the Polish population emigrated to other EU countries. The UK was the target country of most of the Polish emigrants, taking in some 720,000 people.

Because of the economic crisis in the UK, most Poles have returned home again and are now looking for work. Many of them will come to Germany. Also the 6 million migrants that went to Spain in the last ten years, whose population totalled only 40 million inhabitants, will seek out new horizons. Those who came to Spain from other EU countries, as many as 2.3 million, can now move freely within the EU. The “Golden Decade” that Spain experienced under the euro has come to an abrupt halt with the outbreak of the European debt crisis. Unemployment is now more than 20 percent – where it stood before the introduction of the euro. For the immigrants, the pressure is building and they will have to go somewhere. Even the relatively small Ireland, which took in about 650,000 migrants from 1999 to 2008 and is now in an economic crisis, will once again send out migrants to Germany.

The skilled worker problem will resolve itself completely as a result of migration. The British were impressed by the superior skills of Polish craftsmen and construction workers that entered the country. If these workers now come to Germany, they will provide a boost to the German economic upswing. The unevenness of economic developments in Europe after the financial crisis, from which Germany is now benefiting, will lead to an unevenness in labour market flows. Only if Germany induces its capital to flow abroad again to Europe’s southern countries by means of never-ending euro rescue packages will it manage to again subvert its upswing and also prevent the immigration of skilled workers.

In the meantime other completely different migration flows are possible, as Nikolas Sarkozy’s recent problematic “clean-ups” demonstrate. Gypsies came to France, not to Germany. This was because as Romanians they had a closer affinity to the French language, but the better economic situation in France under the euro before the crisis also played a role. Now at least some of these people will come to Germany. After all, Germany has a generous social welfare system that already serves as a magnet for less qualified immigrants today.

In coming years the immigration of people lacking employment will be especially problematic. According to the EU’s free movement of labour directive of 2004, which was converted into national law in Germany the same year, as of 1 January 2005 all citizens of EU states who do not have regular employment received the right to come to Germany – they enter the country either as unemployed or self-employed persons. In the first five years they have no claim to social benefits and must manage to support themselves. However, after five years they automatically have the right to permanent residence without further application and can take advantage of the tax-financed social services just like German citizens. In particular, this means that within the social welfare system they can be given a free apartment, free health insurance as well as cost-of-living support. The first of these immigrants have been able to claim these rights since 2010. Probably very few people have taken advantage of this since with the mass unemployment in 2005 the shadow labour market offered little work and as the immigrants were not aware of the new legal situation. Now news of the experience of the first immigrant generation will spread rapidly. Presumably, in addition to the anticipated immigration of workers, there will be a second wave of immigration of people not intending to seek long-term employment in Germany but who aim at drawing German social benefits after the five-year waiting period.

In light of the miserable economic situation in their home countries, this will be attractive particularly for older people from Romania and Bulgaria. In this way they can receive a retirement income that is much higher than labour incomes in their own countries – completely legally and without having to pay taxes. The migration of less-skilled workers that we likewise can expect in the coming years must also be regarded critically, as they too will benefit from the income redistribution that happens to be a feature of a welfare state. Many will pay no or very little income tax because they will join the lower half of German wage earners that also pay no income tax. At the same time they will benefit from the tax-financed system of government services – including free education, free use of the state-provided infrastructure and also social benefits – that are also available to workers. Since they are net recipients of government transfers, they receive de facto an immigration premium on top of the wages they earn.

Germany should make efforts to attract not these workers but better trained cohorts that pay more for government services than they use. A recruitment-oriented immigration policy can perhaps induce them to come. At some point the question may also arise of whether Germany should recruit more skilled workers from non EU-countries. But first Germany should wait and see how many skilled workers the impending storm of EU migrants will drive to its borders.

Hans-Werner Sinn
Professor für Nationalökonomie und Finanzwissenschaft
President of the Ifo Institute

Published as “Die kommende Immigrationswelle”, Frankfurter Allgemeine Zeitung, 14 March 2011, p. 12.