Does immigration grow the pie? Asymmetric evidence from Germany

Abstract

We provide empirical evidence suggesting that net migration shocks can have substantial demand effects, potentially acting like positive Keynesian supply shocks. Using monthly administrative data (2006–2019) for Germany in a structural VAR, we show that the shocks stimulate vacancies, wages, house prices, consumption, investment, net exports, and output. Unemployment falls for natives (dominant job-creation effect), driving a decline in total unemployment, while rising for foreigners (dominant job-competition effect). The geographic origin of migrants and the education level of residents matter crucially for the transmission. Overall, the evidence implies that the policy debate should focus on redistributive strategies between natives and foreigners.

Introduction

The Alternative für Deutschland party in Germany, the UK Independence Party, and the Front National party in France, all gained prominence with anti-immigration platforms. Similar positions have underpinned the Brexit vote and policies of the Trump administration. The perception that newcomers adversely impact natives in the labor market is one of the most common arguments in favor of immigration restrictions. Understanding the aggregate and distributional effects of migration is fundamental to curb the rise in xenophobic movements and to design effective policies.

While a large literature has analyzed the impact of immigration with disaggregated data (see, e.g., Borjas, 2014), macroeconometric research is more limited partly due to a lack of high-frequency data. Based on municipal registers, monthly data on the arrivals of foreigners by country of origin is available since 2006 for Germany, the second-largest destination after the United States.¹ Immigration is a key determinant of changes in labor supply and, currently, the only source of population growth in the country. The German economy forms an ideal laboratory to investigate the effects of mixed migration flows, defined as “complex migratory population movements including refugees, asylum-seekers, economic migrants and other types of migrants” (Richard and Redpath-Cross, 2011). The German data enables us to study the potentially heterogeneous impact of migration from OECD and non-OECD countries, and the potentially asymmetric effects on natives’ and foreigners’ unemployment by education levels. This is the first paper that jointly explores these channels.

We identify net migration shocks in a structural vector autoregression (SVAR) model using a recursive scheme. Our analysis places a special focus on the response of unemployment. Contrary to the traditional view that migration causes slack in the receiving labor market, this response is in fact theoretically ambiguous. On the one hand, migration may intensify job competition among the unemployed due to the increase in labor supply (job-competition effect). On the other hand, migration may lead to the creation of additional jobs (job-creation effect). Jobs can be created directly by self-employed immigrants or entrepreneurs and indirectly by immigrant innovators. Also, immigrants may boost technological adaptation, foster occupational mobility, and raise consumer demand.² What also potentially matters is how fast migrants enter the labor market and whether they do so as employed or job seekers.

The first contribution of the paper is to provide new evidence on the potentially dominant demand effects of net migration shocks, which remain largely unexplored so far. Typically, sign restrictions schemes impose that job-related immigration shocks on impact increase participation and decrease wages (see, e.g., Furlanetto and Robstad, 2019). Focusing instead on the wider notion of mixed migration and leaving the two variables unrestricted, we obtain the opposite outcome.³ We also find that migration shocks boost job openings and reduce unemployment, in line with the inverse relation of the Beveridge curve.⁴ The fact that participation does not increase even for OECD migration (the response is non-significant), along with the rise in wages and vacancies, seem to imply that the transmission of migration shocks occurs predominantly through the demand side of the economy.

Consistently, we find that net migration shocks are expansionary, increasing industrial production, per capita net exports, and tax revenue. A mixed-frequency SVAR exercise further documents increases in per capita GDP, per capita investment, per capita consumption and house prices. The short-run decrease of CPI inflation that we uncover for total migration masks an inflationary demand-type effect of OECD migration shocks and a disinflationary supply-type effect of shocks from less developed areas of the world, such as Africa and Syria.⁵ In the latter case, migration is predominantly low-skilled and often political in nature (including refugees). Based on the notion that demand is endogenous and affected by the supply shock, Guerrieri et al. (2020) define Keynesian supply shocks as supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the inflationary effect of OECD migration shocks may represent a feature of positive Keynesian supply shocks, which offers a novel perspective in the immigration literature.

The second contribution is to shed light on the asymmetric labor market responses between natives and foreigners. Unemployment falls persistently for natives (dominant job-creation effect), driving the decline of aggregate unemployment, while it increases for foreigners (dominant job-competition effect). This finding goes against the common perception that newcomers adversely impact natives in the labor market. It also goes one step further by showing that the adverse impact falls upon the previous cohorts of immigrants. In addition, we demonstrate that the rise in foreigners’ unemployment is stronger in the case of migration from Syria or Africa. To the best of our knowledge, this paper is the first to bring this evidence in the literature. Intuitively, if domestic and immigrant workers are imperfect substitutes in production, increased migration inflows exert stronger competition on previous immigrants than on natives.⁶ Results from the mixed-frequency SVAR confirm that a decrease in foreigners’ participation drives the decline of aggregate participation, while for natives the response is positive. Concerning employment, we obtain symmetric (positive) responses between natives and foreigners.

The third contribution is to investigate potential sources of heterogeneity in the previous effects. Even if the unemployment response is, on average, negative for natives, it is still possible that some sub-groups are impacted by a dominant job-competition effect. To investigate the distributional impact, we consider unemployment rates by education levels. We find that the asymmetric response of unemployment between natives and foreigners is confirmed for medium-skilled workers — the largest subgroup for natives and the second-largest for foreigners.⁷ Yet, we also find that OECD migration shocks increase unemployment rates of high-skilled natives, while decreasing those of low-skilled foreigners. Migration from Africa or Syria, on the other hand, entails an almost nil effect on high-skilled natives and a dominant job-creation effect for low- or medium-skilled natives. We thus conclude that only the high-skilled among the natives may be susceptible to migration. This happens in the case of flows from developed economies, which normally include more high-skilled migrants, and hence stronger job competition, relative to flows from non-OECD countries.

In a nutshell, a clear insight that emerges from the paper is that immigration, like trade, enlarges the aggregate economic pie. The rise in wages, vacancy postings, house prices, investment, output – and inflation and net exports for OECD migration shocks – along with the reduction of unemployment, point to substantial positive demand effects. Importantly, the distribution of the economic benefits warrants attention from policymakers since immigration entails, on average, a dominant job-creation effect for natives but a dominant job-competition effect for foreigners. Moreover, the geographic origin of migrants and the education level of locals introduce some heterogeneity in these effects. Policy debates should thus shift focus from immigration restrictions to the design of redistributive strategies.

The paper contributes to the growing literature on the macroeconomics of migration.⁸ The most relevant strand for our work has used SVAR models (see Schiman, 2021 for Austria, Furlanetto and Robstad, 2019 for Norway, Smith and Thoenissen, 2019 for New Zealand, d’Albis et al., 2016 and d’Albis et al., 2019 for France and for a panel of 19 OECD countries respectively, and Kiguchi and Mountford, 2019 for the United States). Below, we discuss the first two studies, which are more closely related to ours.

Regarding the labor market responses of natives and foreigners, Furlanetto and Robstad (2019) find a symmetric (negative) response of unemployment to job-related migration shocks from developed economies. Instead, we demonstrate for OECD migration shocks that the aggregate unemployment response is positive for foreigners and also masks heterogeneous impacts by education. Similarly, we show that the negative response of natives masks a positive response of the high-skilled. We emphasize that the unemployment effects of OECD migration shocks are substantially different from the effects of shocks from less developed areas, such as Africa or Syria.

Abstracting from potential asymmetric effects on unemployment or participation, and educational or geographic sources of heterogeneity, Schiman (2021) finds an asymmetric response of employment between foreigners and natives. For foreign employment, the response is restricted to be positive, while for native employment is left unrestricted. Positive sign restrictions are also imposed on the foreign to domestic employment ratio and the unemployment rate. Leaving (un)employment variables unrestricted, our results indicate a stronger positive response of employment for foreigners than natives and a decrease in total unemployment.

With respect to demand effects, Furlanetto and Robstad (2019) and Schiman (2021) show that immigration shocks and labor supply shocks, respectively, might have medium-run inflationary effects. In Schiman (2021), the response of vacancies to foreign labor supply shocks is not significant, while it is not examined in Furlanetto and Robstad (2019). Overall, we provide robust evidence for a substantial demand impact of migration shocks on a variety of variables, as mentioned above.

Differences in the notion of migration and in the macroeconomic data play an important role in the differences in findings with those two papers. First, we use a wider notion of migration flows, namely “mixed” flows, capturing various types of migrants, instead of just job-related migration. Relative to Norway and Austria, migrants in Germany come from a wider set of countries and migration flows are more heterogeneous. Second, there are different features of the macroeconomic data, namely Germany is different from Norway and Austria. For example, unemployment in Norway moves little, in Austria it increases, while Germany exhibits a large decrease over the sample considered (see Figure A.1 in the Appendix).⁹

Another strand of the macro-labor literature has performed steady-state analysis with search models for the U.S. immigration. If there are two markets, skilled natives are insulated from competition by unskilled immigrants and can experience a fall in unemployment through a rise in their marginal product of labor (Liu, 2010). In Chassamboulli and Palivos (2014), the firms’ job-creating response increases natives’ employment. Under non-random hiring, Albert (2021) finds that the job-creation effect of undocumented immigration decreases unemployment and raises wages for natives. For Germany, Iftikhar and Zaharieva (2019) find that the 25% immigration increase of 2012–2016 had a (moderate) negative effect on the welfare only of low-skilled workers in manufacturing. While abstracting from separate wage effects due to data limitations at high frequency, our paper analyzes empirically the dynamic job-creation and job-competition channels for natives and foreigners, respectively.

Finally, our results for the German economy are consistent with recent studies on the economic benefits of (historical) immigration in the United States. Tabellini (2020) shows that European immigration to U.S. cities between 1910 and 1930 increased natives’ employment, spurred industrial production, and did not generate losses even among natives working in highly exposed sectors. Similarly, Sequeira et al. (2020) find that U.S. counties with more historical immigration have higher income and less unemployment, while Azoulay et al. (2021) argue that immigrants act as net job creators.

Section 2 lays out the data and econometric model. Section 3 discusses the baseline findings. Section 4 performs a subsample analysis for migration flows by geographic origin and examines the impact of the refugee wave. Section 5 studies the response of unemployment by education level. Section 6 reports the results of a mixed-frequency SVAR. Finally, Section 7 concludes.