Migrating towards prosperity?

Finding qualified personnel is a significant obstacle for economic growth in European economies, a situation expected to be further exacerbated by demographic change and aging populations. Hiring difficulties can persist even amid corporate downsizing due to a mismatch between needed and existing skills. The unprecedented pace of technological change, the shift to greener technologies, and disruptions in globalization and trade amplify the challenges.

How can modern economies address these challenges?

One widely debated policy measure is increasing migration to attract much-needed global talent. Researchers at the German Institute for Employment Research (IAB) estimate that Germany requires an annual net inflow of 400,000 migrants to offset the retirement of the baby boomer generation in the coming years. At the same time, migration waves over the past decade have sparked significant backlash against immigrants in many European countries, partly because refugee migration (of persecuted individuals seeking shelter and asylum) and economic migration (of, partly, highly qualified individuals who based their migration decision on economic returns) are often mixed up. Another reason is that the visible costs of receiving migrants, such as housing scarcity and media focus on immigrant crime, overshadow the delayed and often unnoticed benefits of immigration.

Learning from German history

To understand the long-term economic consequences of immigration, Antonio Ciccone from the University of Mannheim and I studied the post-WWII relocation of about 12 million ethnic Germans from Eastern Europe to Germany’s new borders. Organized by the Allied Forces, this large-scale migration exacerbated housing scarcity and faced severe backlash from the local population, despite the migrants sharing language and education with the locals. Naturally, this historical context differs from modern immigration but offers valuable insights.

Determining whether immigration causes economic growth is challenging. Sometimes, migrants select to settle in areas that would develop favorably regardless, creating a false positive correlation. Conversely, sometimes migrants are restricted to deprived areas, creating a false negative correlation. Ideally, researchers would randomize immigrant locations, but this is impractical.

Luckily (from a researcher’s perspective), the post-WWII relocation of ethnic Germans to Germany provides a natural experiment that comes close to actual randomization. During the short occupation period, refugees could settle in most parts of post-war Germany, except the French occupation zone in the South-West. Prior to the war, there were no differences between locations to the north and south of the border that later divided the US and French occupation zones. After the occupation zones were dissolved in 1949, both areas belonged to the same federal state (Baden-Württemberg) and were subject to the same policies.

This allows us to study economic effects of refugee arrivals by comparing neighboring municipalities on either side of the former border. Refugee arrivals increased the local population by about 20 percent in the former US zone, while there were no arrivals in the former French zone.

In the long run, these stark differences in population density led to higher worker productivity (13%), wages (8%), and rents (12%) in areas with refugee settlements. (While other differences between the US and French occupation zones could potentially explain the economic growth, our research thoroughly examines alternative causes and concludes that the effects are indeed due to refugee arrivals.) An important result of our research is that the positive long-term effects of refugee settlements did not occur immediately. Despite the similarity of refugees to the local population, it took over a decade for the economic benefits of refugee arrival to materialize. The Wirtschaftswunder – which drastically increased labor shortages, mainly in the manufacturing sector – eventually spurred economic growth in regions hosting refugees, highlighting the delayed impact of immigration on economic growth.

Our historical analysis shows that refugee arrivals can have positive long-term consequences, though these benefits are often delayed. The focus must thus shift to the question of how policies can foster and accelerate successful integration.

Integrating for growth

Most European countries have strong labor market institutions that provide social protection to insiders but, due to their inflexibility, often hinder adjustments and impede access for new arrivals. Should entry barriers be reduced to make European labor markets more flexible, or should exacting standards regarding, for example, certification, licensing, and language requirements, be maintained despite making it more difficult for newcomers to enter the labor market?

To partly address this question, Felix Degenhardt, doctoral student in the Berlin School of Economics, and I examine the effect of the gig economy – one of the most flexible forms of employment – on the labor market integration of refugees. We find that gig jobs initially accelerate job finding for refugees. However, in the medium term, refugees without gig job options catch up and secure higher-paid jobs. The availability of low entry-barrier gig jobs prevents many refugees from investing in their human capital, through, for example, language classes, training programs, or more intense job search. More research is needed, but our findings suggest that successful integration requires balancing incentives for quick employment with incentives to invest in skills needed in the host country. This poses a major policy challenge given the large number of refugees and migrants in Germany and Europe. Maybe, however, demographic change and worker scarcity will once again drive better integration of migrants into the labor market, leading to higher economic growth.