Thursday 8 October 2015

Free movement, welfare tourism and refugees

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

Ian Preston Deputy Director of CReAM and Professor of Economics at UCL, puts forward the case for freedom of movement within the European Union. He explains how freedom of movement and economic migration is important for a dynamic and innovative economy, but it also brings with it redistributive considerations that cannot be ignored. At a time when many politicians conflate economic migration and asylum-seeking refugees, he argues that the two are perhaps not entirely distinct from one another – and discusses reasons why they shouldn’t be treated as one group.

Some economic advantages of free movement of labour

Free movement of labour, in the sense of absence of restriction on European citizens’ rights of location for the purpose of work, has been a longstanding goal of the European Union. But this goal has come under increasing attack, from a variety of directions. Critics include not only those hostile to European Union membership but also some who are professedly sympathetic to membership but who appear sceptical about the benefits or long term viability of unrestricted cross-border mobility of people in modern Europe.

Judged in economic terms, the case for free movement of labour, within or between countries, is strong since mobility of workers has compellingly positive aspects.

From the point of view of efficiency in production, free movement allows workers to migrate to where their skills are most useful. If particular industries are geographically concentrated or face local skill shortages then they can recruit labour from a wider area. If workers have talents which are undervalued where they live then they can move to where they can be put to better use. High wages in locations of labour shortage will offer the necessary signals to draw the migration required, allowing migrants to capture part of the social gain from improved production.

From the point of view of social protection, free movement provides insurance against locally specific labour market shocks. If demand intensifies unexpectedly in an area then labour can move in. If demand falls within an area then labour can move out. The effects of temporary disturbances are dispersed and variations in labour income are smoothed. When monetary integration of different areas removes the possibility of macroeconomic adjustment through exchange rate movements the importance of labour mobility as an adjustment mechanism is even greater.

From the point of view of growth, free movement allows ideas to spread as people move so that innovators can work close to where their ideas are most valued and innovations are therefore adopted widely. As they do so, fresh encounters generate further new ideas.

From the point of view of efficiency in public provision, free movement allows better alignment of tastes and public service levels. If individuals differ in preferences for the type or level of locally publicly provided goods then free movement allows a better matching of wants and provision. Individuals who are prepared to pay higher taxes for better services can move to localities where this is offered and those less interested can move to areas with lower provision. Public sector economists recognise this as one way that a sort of invisible hand can work to a limited extent even where goods are collectively consumed and therefore best provided through the public rather than private sector. Of course, much public provision is of privately consumed services and considerations here are more complex, as discussed below, but the point is not eliminated.

For all of these reasons, “economic migrant” has never been a pejorative term among economists. On the contrary, economic migration is seen predominantly as a force for good.

Some economic drawbacks of free movement of labour

Even outside circles of economists, considerations of this sort are taken for granted as regards migration within a country. It would be considered absurd and economically unwise to propose limitations on movement of British workers from Birmingham to London. And yet, at the supranational level, limitations on free movement within Europe are argued for and thought to attract political support.

Why? In large part, this is because the politics of migration is not about economics. Economic migration drives social change which attracts strongly different reactions from the culturally conservative and the socially liberal. Population movements are swelled by humanitarian crises which draw sympathy differently in different parts of the population.

Nonetheless, even in economic terms, free movement is not popular. Partly this may be because, despite persuasive reasons to think the better geographic distribution of labour that results is a good thing on average, not everyone gains. The principal beneficiaries are migrants themselves who move because they can earn better wages where they go to than where they come from. The picture for nonmigrants is likely to be mixed — beneficial undoubtedly for some but potentially difficult for those competing most closely with incomers or whose productivity would have benefited from the presence of outgoers. The best evidence suggests that such effects are small and probably temporary but they are what matter to the immobile and the immobile both outnumber the mobile and are politically better represented.

This is not the biggest economic issue though. Perhaps most prominent among the economic fears of what migration involves in practice is the concern that what prompts movement between countries may be exploitation of differences in generosity of welfare systems and other redistributive parts of public spending. Migrants, it is argued, arrive in richer countries to claim benefits to which they have not contributed, and to draw on health and education systems for which they have not paid.

Such problems rarely arise from movement within countries because, sensibly, redistributive functions are typically centralised. There is no different welfare system in different parts of the UK and resource allocation formulae attempt to channel funds for provision in kind fairly to different parts of the country. This is as it should be. While there can be advantages to differing local provision of goods consumed in common, as argued above, privately consumed services with a redistributive aspect cannot be decentralised without threatening to generate potentially self-defeating movement of people.  Reasons would be created for those most in need to move to the most generous areas and for those most able to pay to move away, defeating the feasibility of effective redistribution.

No similar centralisation of redistributive activities is politically feasible at the European level because insufficient cross-border social solidarity exists relative to the inequalities that would need to be addressed. So redistribution remains largely a country-level function and fears that differing national levels of generosity will prompt migration flows generate calls for limits on migration. Benefit tourism is one side of this just as tax tourism by the affluent is another; though rarely discussed together and attracting the ire of different people, they are really similar economic phenomena, just different kinds of redistribution shopping. Associated hostility to migration can cross the political spectrum. Fears that the national social solidarity that sustains what redistribution can be afforded by national governments will be undermined by free movement creates a left-wing case for concern.

These observations have some force at an abstract level. But they are no reason to pretend that the benefits to free movement detailed earlier do not exist and are not substantial at a European level. Also, their practical importance is an empirical question. To what extent do we actually see welfare-seeking labour migration? Evidence is tenuous. Migrants are, on the whole, predominantly young, well educated workers. At least in the short term and over recent years, within EU migration has, for example, benefited the UK fiscally even at a time of deficit when the average British born worker has been a fiscal burden. EU migrants to Britain are less likely to claim benefits, no more likely to use public health, no more likely to commit crime, and do not compromise the education outcomes of native speakers. This is not the full picture since that has to take account of long term implications as young migrants age and impose future costs on welfare and health services. But some of them will return to their place of origin and those who stay will raise children who will pay towards their costs so there is no obvious reason not to expect gains even considered in the long term. This positive picture is not a necessary outcome and may not be true for all receiving countries; however, the strength with which these concerns are voiced in the UK, for example, bears little relation to any strength of evidence for them.

Because concerns about welfare tourism do seem so strong, a case can be made for putting time limits on benefit claims by migrants, enforcing a minimum period of residence before migrants can draw on certain parts of benefit systems in countries of destination. What would be positive about this would be that it might assuage concern that threatens to provoke policy responses which would undermine real economic benefits. If migration is indeed not largely benefit-driven then it should do little to reduce flows. The economic cost though is that it would mean social insurance would be denied to those moving for work.

Free movement and refugees

The political threat to the future of free movement predates the current refugee crisis but has been exacerbated by it. Open borders within the Schengen area have already been temporarily suspended by countries struggling to manage the sudden size of the flows of people and doubts about whether free labour mobility is sustainable are voiced even more loudly.

Decisions about the offer of asylum are governed, or should be, by international humanitarian obligations. It is not clear that accepting refugees need in any case be economically harmful. While past effects of immigration may be a poor guide to the labour market and public finance impact since refugees’ characteristics may differ from previous flows in ways difficult to predict, there seems little reason to expect entrepreneurialism, initiative and preparedness to work to be any lower than in past inflows. The notion that the economic calculus of benefit receipt might suddenly be drawing large numbers to undertake life-threatening boat crossings so as to exploit European welfare systems also seems far-fetched.

Nonetheless the handling of short term difficulties of sudden large flows raises questions about free movement of refugees. Confining refugees to the first safe country which they reach, whatever its legal basis, ties the short term costs of receiving large numbers to accidents of geography. If those countries receiving heaviest flows in the first instance are also those facing greatest current economic difficulties then the costs are made to  bear most heavily on those least well-prepared to cope. A system of country-specific quotas is a popular idea for spreading the burden of adjustment in the short term but can only work as intended if restrictions on refugees’ subsequent mobility prevents movements which unravel the quotas.

Yet all the economic arguments made above for allowing long term free movement apply. Allowing refugees to choose to go to where they can best find work, where their skills and competences are most valued and where they expect to feel most welcome harnesses refugees’ own wish to find the best lives for themselves and their families to best economic advantage rather than letting the most alarmist economic fears drive policy.

There is an unhelpful tendency of some rhetoric to contrast refugee migration and economic migration. The suggestion that rigorous discouragement of economic migration is the only way to accommodate a welcoming policy towards those fleeing persecution should, for instance, be resisted. One is not deserving and the other undeserving, as if seeking a better life is politically tolerable only when the alternative is persecution. The potential for economic migration to promote positive outcomes should be celebrated for itself.

Ian Preston is the Deputy Director of CReAM and Professor in the Department of Economics at UCL.

Acknowledgement: This piece was published first at European Institute blog poston Free Movement 

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