Migration State and Welfare State

What is the difference between the mobility of goods and the mobility of labor? How do advanced countries protect themselves from low-skilled migrants? What are the roots of the differences in migration policy between the EU and the US? These and other questions are answered by Friedman Professor of International Economics at Cornell University, Assaf Razin.

I would like to talk about migration, but not only about migration, but also about the welfare state. The welfare state is what we see around the world for the advanced economies where they have progressive taxation, and they distribute from the rich to the poor, from the young to the old. That’s the welfare state, which started many, many years ago by Bismarck in Germany in the 19th century. And it developed all the way to a very well functioning welfare state in Western Europe and in the US. So the topic is migration and the welfare state.

So let’s start with migration. So let’s start even earlier. Migration is a mobility of labor, but in economics there is also mobility of goods across borders. And you can think that, you know, the economic function of mobility of goods and of mobility of labor is relatively similar. But here is a problem. When you talk about commodity prices there are all sorts of trade agreements.

We know the WTO, and Russia brought into the WTO a few years ago. This is a multi-country setup where the tariffs and trade barriers are moved down consistently. And also regional trade agreements like NAFTA (the agreement between Canada, the US and Mexico). And in the European Union there are no borders in terms of the movement of goods.

So this movement – mobility of goods – was able to make commodity prices in one country not very different than the commodity prices in another country. But now you go to mobility of labor. And from the economics point of view, if you had free mobility of labor, which is like free migration, you would also expect that will tend the wages in one country to be relatively similar to wages in other country. But there is no free migration. So the wages in one country are completely different than in another country. For example, the developed countries versus the advanced countries. There is no similarity in wages for the same category of skills and all of that. In one case it is high, which is the advanced countries, in the other case it is low – in the developing countries.

So you ask yourself: what’s the problem? Goods are, according to international agreements, allowed to flow freely, but labor services are not. They’re basically restricted to the national borders. So why is that? From the economics point of view, it was a major question that went all the way to David Ricardo from the early 19th century, because he actually advocated free trade in goods. And if you ask him, he would be for free mobility of labor, because that would have equated wages, which is beneficial for the world economy.

The reason that labor services are different than goods is from the insight of Milton Friedman. Milton Friedman said that free migration and a generous welfare state are incompatible. And why did he say so? Because:

A generous welfare state will be a magnet for low skill, poor people to come in and take advantage of this welfare state.

But that will undermine the fiscal stance of this welfare state and that will basically make it collapse. So the problem is that every country is restricting migration. The US started to restrict migration in the early 1920s, and Europe was restricting migration all the way through from the 19th century to today.

So the most important part of it, except for political and ethnic reasons, and envying or hating the stranger and all of that (these are non-economic factors), but if you look at the economic factors, these countries are developing the welfare state and they cannot afford to have unrestricted migration.

So the question now that I’m asking is: how tight are these restrictions? What determines the policies of the country to restrict or not to restrict? And here is a big difference between the US and Europe. Europe is more liberal in its migration policy. And the result is that there is less screening of the migrants, so there are a lot of welfare migration migrants, low skill migration, poor people.

If you compare it to the US – the US is more screening in terms of migration. As a matter of fact, if you take the pool, the world pool of migrants and you ask how many of them will get to the US – it is 80%, because the US established universities and migration policies which are related to foreign students and how they get into the university, and then they have a pass to citizenship. So, they attract the skilled migrants. Whereas Europe is not. The US is also, if you compare the welfare state in the US to the welfare state in Europe, the European welfare state is much more generous.

So, why is that that Europe, say the EU – European Union – and the US are so different in terms of the composition of migrants and in terms of the generosity of the welfare state? So my book, that came out recently, gives this explanation. The explanation that has to do with the political structure of Europe relative to the political structure of the US. The political structure of Europe is a collection of national states, there is no fiscal union across the EU. The size of the Brussels EU Commission and the EU Parliament and all the institutions of the EU is about 1 % of the GDP of the entire EU economy. Whereas the size of the federal government budget is a big chunk of GDP in the US.

Historically the US developed in a very elaborate way over two centuries to become a very well functioning, coordinated welfare state. Coordination – I mean, there is the central federal government, there are the state governments, and the central government, the federal government is the coordinator. The EU is a new phenomenon, it’s completely not coordinated and it doesn’t have any tools of coordination in the hands of the EU wide institutions. So what’s the problem? It means that states, member states of the EU are competing one against the other. They are competing in terms of migration policies, they are competing in terms of their taxes, they are competing in terms of their social benefits. In the US all these policies are coordinated by the federal government.

We can explain the big difference, the key difference between the EU and the US as follows: it’s because of fiscal and migration competition within the EU.

The EU tends to be less screening in terms of its migration policy and it tends to be member state by member state a more generous welfare state. Whereas once you do the political coordination that is possible in the US, you get much more scrutinizing migration policy, states have no say about it in the US. And you get a more tight welfare state in terms of progressivity of the taxes and in terms of the social benefits that are afforded by the federal government.

So that is part of a project that me and my colleagues were doing to explain these major differences between the EU and the US. To sum up: take the economy of the EU, take the economy of the US – they look very advanced, almost to same degree advanced in terms of technology, in terms of GDP per capita. So they are very similar, but they are different in two key points: in terms of migration policy, in terms of how generous the welfare state is. And if you think like economists, you come to the conclusion that that is basically the difference between fiscal and migration competition which resides in Europe, as opposed to federal government coordination of migration and the budget for welfare, and the financing of the budget through taxes which is the case of the US.