Are immigrants a burden for the state budget?

There is a long-standing debate on the fiscal impacts of immigration and its effects on the welfare state. Proponents of relatively uncontrolled migration suggest that migration can help to resolve recent and future fiscal problems; migration is thus presented as a critical factor in the survival of the welfare system. Opponents claim that immigration breaks  the very logic of the welfare system as a closed system with an important role of membership: they would argue for an exclusionary stance towards immigrants. In public debates immigrants are commonly blamed for burdening state and local budgets and for negatively affecting welfare payments and other services enjoyed by non-migrants.

Most empirical studies available conclude that immigrants use social welfare more than natives. Most of those differences, however, disappear when accounting for the structural characteristics of immigrants, and particularly for their labor market status. The overall net fiscal position of immigrants depends to some extent on their socio-demographic characteristics (age, skills, marital status, family status etc.). However, their status is also strongly system dependent: in countries with more flexible labor markets and relatively less generous welfare systems immigration affects the welfare system in a positive way. Empirical evidence proves that the problem often lies not in immigration itself but rather in the construction of the welfare system. Sometimes welfare systems are responsible for weak incentives to be economically active and for the creation of entry barriers into the labor market for immigrants through upward pressure on minimum wages. The structure of immigration and migration strategies influence the net fiscal position of immigrants (and at the same time they are shaped by the structure of the welfare system). Generally, the net fiscal impacts of immigration are small (+/- 1% of GDP) and they cannot explain the very heated  public debate on that issue.

A review of the theoretical and empirical literature concerning the effects of immigration on welfare reveals a number of issues that are important in the policy–making context. First, many European countries will need more immigrants to sustain their welfare systems. Second, immigration policies need to be more selective (and not only with respect to age and skills) if countries want to maximize the positive impact of any inflow. Third, steps for legalization are critically important in improving the net fiscal position of immigrants. Fourth, labor market absorption remains one of the most important factors shaping both immigrants’ well-being as well as their net fiscal contributions. Last but not least, it is necessary to improve the efficiency of welfare policies, which often tend to put immigrants in the “poverty trap” rather than assimilating them out of the welfare.

This blog post is based on the new EUI Working paper “Are immigrants a burden for the state budget?” (Pawel Kaczmarczyk).

Pawel Kaczmarczyk, Former Robert Schuman Fellow at the Migration Policy Centre and Vice director of the Centre of Migration Research at the University of Warsaw

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The EUI, RSCAS and MPC are not responsible for the opinion expressed by the author(s). Furthermore, the views expressed in this publication cannot in any circumstances be regarded as the official position of the European Union.

Selected readings:

Boeri, Tito. 2010. Immigration to the Land of Redistribution. Economica 77(308): 651-687.

Borjas, George J. 1995. The Economic Benefits from Immigration.  Journal of Economic Perspectives 9(2): 3–22.

Boeri, Tito, Hanson, Gordon and Barry McCormick (eds.). 2002. Immigration Policy and the Welfare System. Oxford: Oxford University Press.

Collado, Dolores, Iturbe-Ormaetxe, Inigo, and Guadelupe Valera. 2004. Quantifying the Impact of Immigration on the Spanish Welfare State. International Tax and Public Finance 11: 335-353.

Dustmann, Christian, Frattini, Tommaso and Caroline Halls. 2010. Assessing the Fiscal Costs and Benefits of A8 Migration to the UK. Fiscal Studies 31(1): 1-41.

Hansen, Jorgen and Magnus Lofstrom. 2003. Immigrant Assimilation and Welfare Participation: Do Immigrants Assimilate Into or Out of Welfare? The Journal of Human Resources 38(1): 74-98.

Nannestad, Peter. 2007. Immigration and Welfare States: A Survey of 15 Years of Research. European Journal of Political Economy 23(2): 512-532.

OECD. 2013. The fiscal impact of immigration in OECD countries. In: OECD. International Migration Outlook. Paris: OECD.