Do the fiscal effects of EU migrants vary across European countries with different welfare states and labour market institutions?

February 26, 2019

By Marcus Österman, Joakim Palme, and Martin Ruhs

Free movement has benefited millions of EU citizens but its consequences have also been the subject of intense public and political debates in many EU countries, especially since the economic crisis in 2008. The fiscal effects of intra-EU migration have been a central concern in these discussions. A particular focus of debate has been on questions about the consequences of granting EU workers unrestricted access to the host country’s welfare state, such as whether free movement encourages so-called “benefit tourism” – an often-used but ill-defined term – and whether generous welfare states function as “welfare magnets”.

Despite the high salience of the issue in public policy debates in many European countries, research on the fiscal effects of EU migrants, especially comparative analysis across different countries, has been very limited. Our REMINDER colleagues Pär Nyman and Rafael Ahlskog recently published the first comparative cross-country estimates of the fiscal effects of intra-EEA mobility in almost all EEA countries for the period 2004-2015. They found that the net-fiscal effects of EEA migrants are positive in the vast majority of European states, but that there are some considerable variations across countries.

In our new paper we build on the approach and analysis of Nyman and Ahlskog to develop an institutional perspective on the fiscal effects of intra-EEA mobility. Specifically, we explore whether variations in the fiscal effects of EU migrants are associated with cross-country differences in welfare state and labour market institutions. In public debates on free movement, it is often claimed that different national welfare and labour market institutions across Europe result in considerable cross-country differences in the fiscal effects of EU migrants, e.g. the idea that more “generous” welfare states might lead to lower net-fiscal contributions than less generous welfare states, or that welfare systems that have strong “needs-based” components might be more costly than systems with stronger contributory elements. Our analysis focuses on the fiscal effects in the host countries and do not consider the fiscal effects of emigration in the sending countries.

There are theoretical reasons why one can expect specific national institutions to affect the fiscal effects of immigration – e.g. because the institutional design of the national tax system and welfare state affect the taxes that migrants (and non-migrants) pay, and the particular types of welfare benefits they receive. However, the multidimensionality of national institutional regimes (involving combinations of a range of different tax and welfare policies as well as labour market institutions), and the fact that institutions do not only shape the fiscal effect of migrants after they have entered the host country but also the characteristics of immigration (e.g. the mix of high- and lower-skilled migrants), make it difficult to formulate strong theoretical expectations. The question of whether and how different institutional regimes are linked to the fiscal effect of EU migrants is, therefore, an important issue for empirical analysis.

In our new paper, we distinguish and analyse how the fiscal effects of EEA migrants (as estimated by Nyman and Ahlskog) vary across five different “institutional regimes”, covering 29 EEA countries:

  • Basic security regime: Ireland, Malta, and the UK
  • Continental corporatist regime: Austria, Belgium, France, Germany, The Netherlands, and Switzerland
  • Mediterranean corporatist regime: Cyprus, Greece, Spain, Italy, and Portugal
  • State insurance regime: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia
  • Universal regime: Denmark, Finland, Iceland, Norway, and Sweden

We study how the net fiscal impact of an average EU migrant household differs across these institutional regimes – considering public revenues from sources such as taxes and social security contributions as well as public expenditures related to, for example, welfare benefits and public services. Our findings suggest that the main cross-regime difference in the net fiscal impacts of EU migrants can be found between the “State insurance regime” in East European countries and the other four regimes in the EU15 countries plus Switzerland, Malta, Norway, and Iceland. The fiscal contribution of EU migrants in the State insurance regime is significantly lower than in the other regimes. However, since the number of EU migrants in the countries belonging to the State insurance regime is small, the aggregate effect of EU migration on the public budget is still limited in these countries.

Our key result is this: We do not find any evidence of statistically significant differences in the fiscal impacts of EU migrants across the regimes in the EU15 countries, despite the fact that some of these regimes, e.g. the “Basic security regime” (in Ireland, the UK, and Malta) and the “Universal regime” (in Denmark, Finland, Iceland, Norway, and Sweden), are often depicted as diametrically opposed in terms of welfare state and labour market institutions. In other words, we do not find any evidence in support of the common idea that migrants generate a greater fiscal burden in more generous welfare states. While expenditure per EU migrant household is higher in the Universal regime than in the other regimes, this is more than compensated by higher revenues from these households.

You can read the working paper here.


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