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Citi GPS: Migration and the Economy

Citi Global Perspectives and Solutions (Citi GPS)

September 5, 2018

Citi GPS: Migration and the Economy

Economic Realities, Social Impacts & Political Choices

Former UN Secretary General Ban Ki-moon defined migration as "an expression of the human aspiration for dignity, safety and a better future. It is part of the social fabric, part of our very make-up as a human family". In recent years, however, and especially in the aftermath of the global financial crisis, immigration has become a toxic issue in election campaigns and the political debate in many advanced economies, with politicians and other interested parties trading insults and soundbites but leaving a proper evaluation of the real impacts of migration on the economy and society often absent from the noise.

Migration has defined humanity. In recent years, however, immigration has become a toxic issue in election campaigns and the political debate in many advanced economies. In this report, we have sought to take a detailed and balanced perspective on the impact of immigration on advanced economies, and particularly on those in Europe and North America where the popular concerns regarding migration appear to be especially acute. The originality of this report is both in providing fresh evidence of the implications for economic growth and also in our consideration of the fiscal costs and benefits of migration in terms of taxes and expenditures. In addition, we have assessed the political debate around migration through reviewing much of the available literature and opinion polls to see where and how the fault lines have occurred in the public discourse on migration. We have been careful to highlight areas of acknowledged academic or public dispute in the narrative on migration.

The report is focused on economic migrants who have not been compelled to migrate either as refugees or through force. To produce this report, Citi Research has partnered with Professor Ian Goldin who not only has worked with us for over 5 years through our research partnership with The Oxford Martin School but who is also a specialist on migration and who is an author of the highly acclaimed 2011 book Exceptional People: How Migration Shaped our World and Will define Our Future.

Over time, a distinction needs to be made between the long and short term impacts of migration; between the headline GDP impact (scale), the per capita impact and the per worker impact; and between migrant characteristics, particularly differences in migrant skill levels. We review the evidence across all three of these distinct areas throughout this report. Considering the interplay of these forces is critical to a balanced understanding of the impact of migration on economic growth.

The global stock of migrants has grown materially since 1990 but still only accounts for around 3% of the global population. Within this, skilled migration has grown in particular in recent years, although skilled migrants are especially concentrated in certain countries and urban centers, with the United States, the United Kingdom, Canada and Australia constituting the destination for nearly 70 percent of all skilled migrants on recent data. Overall, there is little evidence that migration is an unrelenting flow which rebuts much of the nationalist rhetoric in many countries that portrays migration as an unstoppable tsunami. We show in this report that even at times of acute crisis, economic migration does not increase materially while notions of benefit scroungers and associated, excessive migration are not borne out by our analysis of the Schengen zone.

Our overriding conclusion is that migration is conducive to native and aggregate prosperity, especially over longer time frames. Throughout the report, we explore much of the recent literature on migration and present new estimates of some of the recent growth effects of migration. We find that migration is likely to generate greater prosperity on an aggregate, per capita and per worker basis, though the associated distributional effects of this are uneven. As such, any skewed impacts within countries need to be addressed by governments through policy (such as appropriate tax and transfer systems) and in the creation of a more positive narrative around migration itself.

Actual localized outcomes of migration are nuanced due to two main sets of factors. First, domestic labor market outcomes depend on how substitutable (or complementary) migrants are to domestic workers. Second, wage and employment outcomes depend on how the broader economy adjusts which also depends in turn on wider institutional variables including the educational attainments of natives, the strength of unionization, minimum wage levels and the degree of broader welfare support. Ironically, the existing workers who are consistently most exposed to further migration are migrants themselves.

We have modelled the direct contribution of migration to historic growth. In Germany and the U.K., for example, we estimate that if immigration had been frozen in 1990, real GDP in 2014 would have been around €155 billion and £175 billion lower in both economies respectively. In the U.S., too, migration has made a substantial contribution to recent economic growth, especially since the financial crisis. We also show that migration supports the participation of native women in the economy, largely by substantially reducing the costs of care services that can otherwise inhibit female labor force entry. The effect of this seems to be particularly extensive among highly skilled women, increasing the overall economic impact.

As regards fiscal impacts, we show that migration generally creates a substantial positive boost to fiscal balances but with some short-term and localized negative variation. As such, managing the fiscal costs of migration can optimally require redistributing tax receipts proactively to address the excess burden placed on particular local and regional authorities. In most cases we find that migrants consume fewer benefits and receive less from the public purse in comparison to natives in similar circumstances, although the level of migrant inactivity often varies dramatically from one expatriate group to the next. In many cases, migrants generally return home in older age which further improves the fiscal equation but which is often missed in economic modelling.

Migration will be essential to alleviate demographic headwinds. Migrants are on average much younger than host country populations and this has a very significant impact on the costs and benefits associated with their migration. The ageing trend is global and will lead to a doubling in the number of people over 60 from 962 billion today to over 2 billion in 2050. Migration will play an increasingly vital role in coping with this transition and easing the burden on care and social security systems.

Skilled migration drives remarkable innovation in destination economics but also "brain-drain" consequences in sending countries that need to be managed. We identify four key mechanisms in this report by which migrants drive innovation, with some of the contributions to innovation being through second-order effects. We also show that an immigration policy which restricts the supply of skilled migrants can have the inadvertent effect of promoting the development of competitive industries overseas. As regards sending countries, emigration can create a principal economic risk, especially where the proportion of tertiary-educated citizens is already low. However, a closer look at why and how brain drain happens recasts it as a problem to be managed through migration policy rather than stopped altogether.

Given much of the evidence presented in the report, the challenging public attitudes to migration, and the deployment of increasingly restrictive immigration policies by some governments, need to be better understood. The chapter in the report on public attitudes to migration reviews much of the available literature and opinion polls to assess where and how the fault lines have occurred in the public discourse on migration. We argue that attitudes to migration can be distilled down to two interacting factors: cohesion in social values; and the degree to which individuals see resources such as jobs, or public services, as under pressure. Austerity may have also played a more specific, recent role in fueling an acute sense of scarcity in public service provision, driving anti-immigrant sympathies. Moreover, across Europe, multiple opinion polls have shown that the public at large perceives migration to be generally very much larger (between 2x and 4x) in comparison to the population than the reality and migrants as much less productive in labor market terms than is in fact the case. The evidence suggests that the growth of anti-migrant views (and parties) at a political level has been primarily driven by changes in elite party politics rather than broader social attitudes. Immigration, and a specific framing of immigration in terms of national identity, has been central in this process.

Migration is a multi-faceted issue with many different dimensions each of which could be emphasized or de-emphasized. The fact that it has become increasingly articulated as a value based issue not an economic one in the public debate is a product of choices made by political parties and the electoral incentives facing them. The growing politicization of migration on a value basis, rather than an economic one, is thus making it difficult to properly highlight the economic case for migration. Failure to discuss the economic importance of the issue is increasing the risk of destructive policy errors at a time when the benefits of high skilled migration, in particular, are becoming less secure for those economies that have thus far been enjoying them.

In addition to building an evidence-led debate, governments must be more responsive to re-distributing the benefits of migration to those communities bearing costs, including by relieving any pressure on public services, while at the same time deploying policies across tax and welfare systems, in education and through training that benefit citizens and migrants alike.

Alongside the risk that the fiscal debate around migration is skewed by other political agendas, an aging population and high public debt levels risk making fiscal missteps of scale costly. An intense global competition for talent also risks more extensive consequences of even small mistakes in migration policy. Balance and perspective needs to be brought to the debate.

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