Block Benefits, Not Immigrants

Hans-Werner Sinn
Internet article by Hans-Werner Sinn, Project Syndicate, 16 Sept 2002

As EU enlargement approaches, people across Western Europe fear a flood of job-seeking immigrants from the postcommunist accession countries. Indeed, if all eight of the top East European candidates (excluding Bulgaria and Romania) join by the target date of 2004, the EU population's will soar by about 75 million people.

When Spain and Portugal joined the EU two decades ago, emigration to existing member states was lessened by the fact that many immigrants had arrived from these countries during Europe's go-go 1960s. But migration from Eastern Europe in those years was blocked by the Iron Curtain. Now the income gap between eastern applicants and the EU is three times as large as the disparity with the Iberian peninsula was. Munich's Ifo Institute expects about 2.5--3.3 million migrants to Western Europe during the 15 years following EU enlargement.

These are big numbers, but there is little or no reason for fear-not if today's EU members prepare. Unlike immigration from non-European countries, East European immigrants share a similar cultural background and will assimilate easily.

In principle, with flexible labor markets, migration creates welfare gains for all countries. Emigration countries gain because their nationals can earn an income in Western Europe that, for all but the most marginal migrant, is more than sufficient to compensate for the loss of domestic value added and the subjective and objective costs of migration. Immigration countries gain because all but marginal migrants produce more value added than they get back in wages. While blue-collar workers incur income losses, their losses will be overcompensated by the gains of landowners, capital owners, entrepreneurs and white collar workers.

Sadly, today's EU labor markets are too inflexible to achieve this result. If immigration countries suffer from chronic unemployment because wages are overly generous and rigid, as seems the case in most West European countries, migrants who find work will simply displace nationals from their jobs. Here migration will result in a welfare loss. Migrants gain. So, too, family members staying home who receive money transfers. But migrants produce no additional value added for the countries into which they immigrate, but incur migration costs and their contribution to domestic value added is missing.

The EU wants to solve this problem by limiting migration for a transition period of up to seven years. This is a second-best solution. The best solution is to make Western labor markets flexible by opening the system of collective wage bargaining, dismantling labor market regulation, and reforming the welfare state.

If workfare replaces welfare, wages will become more flexible enabling EU labor markets to absorb immigrants more efficiently. But even with these measures, social benefits may artificially increase the incentive to migrate.

If immigrants gain welfare benefits in addition to wages, more will be lured into coming than necessary, and marginal migrants would create welfare losses for the EU equal to the benefits. Given that immigrants usually enter countries that redistribute resources from above-average to below-average incomes, such benefits are likely even if immigrants work and pay taxes and social security contributions. Excluding taxes and contributions paid and transfers and public goods received, the Ifo Institute reckons that the average immigrant to Germany receives a net 2,300 euros annually.

One way to curtail this problem is to delay full integration of immigrants into the welfare system of a host country for a few years-a reform advocated by the Scientific Advisory Committee to Germany's Federal Finance Ministry. Immigrants could come and work, pay taxes and social contributions, and gain free access to the public goods of the host country. They could also receive the full contribution-financed social transfers that the welfare state provides.

But they would not be granted tax-financed social benefits. Temporary exceptions could include supplemental social assistance, housing benefits or the "export" of family benefits to children living in the home country. The exceptions would have to be tailored by each country so that the net cost of all transfers of public resources to and from immigrants is zero.

Politicians and lawyers may dislike this solution, because it undermines the EU's principle of social inclusion for employment and resembles arrangements that currently apply to EU citizens who live in other member countries without working there. Instead, bureaucrats and politicians prefer a quota system, whereby bureaucrats, not the market, select who immigrates.

Such a system may formally fit better with the idea of social inclusion, but violates the basic right of free migration granted in the Treaty of Rome. Only people that bureaucrats deign to select are fully included, while others who want to come but are not allowed to do so face discrimination.

A policy of partial, delayed integration is preferable to quotas, not only in view of the Treaty of Rome but also on economic grounds. It allows for fine-tuning and self-selection of migration flows, yielding far better results than even the most well-meaning bureaucrats could ever achieve. Moreover, it would reduce the fiscal burden on taxpayers in immigration countries, thereby preventing a competitive dismantling of West European welfare states driven by the aim of warding off expensive immigration.

Partially delayed integration rather than transition periods or quotas is a market-oriented solution that can maintain Europe's welfare states and enable it to grow and develop to its true potential.

Copyright Project Syndicate -