What if More Austerity Meant More Immigration?

Since January 1^st, citizens from Romania and Bulgaria can freely access the labour markets of all EU member states, including the United Kingdom. Fed by the threat of UKIP and a tabloid press that doesn’t really bother with facts, both Tories and Labour are up in arms in the face of a potential “invasion” of Romanians and Bulgarian who are going to swamp Britain to take advantage of its generous welfare state and its great weather. On January 1^st, MPs Keith Vaz (Labour) and Mark Reckless (Conservative) were at Luton airport to “welcome” (pronounce “deter”) Romanians arriving in Britain. Before the new year, the government promptly applied restrictions on access to welfare benefits drawing on the idea that “benefit tourism” is a main driver of migration flows. A report which showed that these fears were unfounded was duly shelved before Christmas because it was “too positive” about the impact of immigration on the British economy.

What is striking about this debate is that the political actors who are the most vocal against immigration are also the most vocal about fiscal retrenchment and reductions in welfare spending. However, nobody ever mentions that cuts in welfare spending may actually foster immigration rather than diminish it.  The common story is that retrenching the welfare state will deter immigration by making the country less attractive for migrants. At best, the welfare system may play no role at all, and at worst, retrenching the welfare state may actually increase immigration because the retreat of the state creates a demand for low-cost private services, for instance in care work, where migrants are over-represented.

First, it must be borne in mind that even if the welfare system was a driver of immigration, the British welfare state is not particularly attractive as compared to most other European countries. The thing is, in the UK it is completely possible for opinion-makers to ignore everything that is taking place “overseas” because nobody really cares. However, most available international data indicates that out-of-work benefits in Britain are actually much lower than most other countries of Western Europe (see also a comparison of net replacement rates for unemployment benefits here). The NHS is a different case because of its relatively universal access (this has been restricted for foreign nationals though) but is a service-based scheme that does not provide the cash transfers that could cause this so-called benefit tourism. If you were a benefit tourist, would you really come to a country with free healthcare but very low unemployment benefits?

Now, available evidence tends to indicate that welfare state generosity has no real impact on immigration flows. The opening of the labour market to Eastern and central European countries in 2004 offered a nice natural experiment: only three countries chose to open their labour markets right away to citizens of new member states: the UK, Ireland and Sweden. The Swedish welfare state is arguably one of the most extensive in the world, and if welfare provision was really the main driver of immigration, Sweden would have faced a much bigger flow of migrants than Britain. However, this did not happen. Between 2004 and 2011, Sweden received an average of 5000 Polish migrants per year, while the UK received 45’000. Immigration did increase after 2004, but nowhere near the proportion its big welfare state would suggest. Independently of welfare protection, demand for labour and wage differentials seem to play a much bigger role.

In theory, there are some valid reasons to believe that an extensive welfare state actually reduces the demand for foreign labour rather than stimulate it. First, to pay for an extensive welfare state such as that of Sweden or Denmark, you need fairly high taxes, which makes labour in general more expensive. Extensive collective bargaining coverage and strong trade unions makes it difficult to bypass this for employers, which means that it is more difficult to employ cheap low-skilled foreign labour in a profitable manner. Since a smaller proportion of the wages paid are actually determined by the individual characteristics of the workers, but rather by a whole set of non-market regulations and agreements which lift up wages, the lower wages that migrants may be ready to accept make a smaller marginal difference: taxes and collectively agreed wages have to be paid anyway. Moreover, since labour is expensive, employers have an incentive to invest in it. The workforce tends to be more qualified and there is a smaller demand for low-skilled cheap labour than in a more deregulated labour market. In short, this type of institutional arrangement tends to create a “race to the top” in skills and social protection, and there are therefore fewer low-skilled, cheap jobs that are typically left to immigrants. In Sweden, however, employers have sought to break this by using posted workers formally employed in other countries. This is pretty much what the much debated Laval case was about. Hence, if you reduce welfare and deregulate labour markets, you actually make it more profitable to employ migrants rather than natives, assuming that migrants are really willing to accept lower wages. More welfare, fewer migrants.

The second mechanism whereby welfare retrenchment may increase immigration is through the replacement of subsidised public social services by cheap private services that only migrants are willing to provide. In many ways, if the state cannot provide subsidized public services at a low cost, individuals will seek to buy them privately at a low cost as well, which often means from migrant workers on low wages. In  countries where the state was unable to cover needs for care for the elderly, such as in Italy, this task is already assumed to a large extent by migrant, mostly female, workers employed on an informal basis. In Britain, funding for social care has been cut by about 20% between 2010 and 2013. Since most of the care is not provided directly by the state but by private or non-profit providers that the state pays, this concretely means greater pressure on these providers on deliver the same level of service but for less money. The only way to do it is to reduce wages. In November, it was revealed that almost half of the firms delivering elderly care have been paying their workers below the minimum wage, and infamous zero-hour contracts are widespread. Unsurprisingly, this sector relies heavily on migrant workers. Research pointed out that half of the workforce in the care  sector in the London area was constituted by migrants. As working conditions in these sectors deteriorate as a result of spending cuts, they are bound to increasingly rely on migrant workers because they are the only ones willing to accept them. This is why the government’s policy stance about welfare and immigration is simply startling: like an arsonist calling the fire brigade, they are blaming a phenomenon that they are causing in the first place.