European Department

THE REFUGEE SURGE IN EUROPE: ECONOMIC CHALLENGES

Bergljot Bjørnson Barkbu European Investment Bank Institute

February 16, 2016

European Department

CONTENTS Facts Numbers in Perspective Institutional Framework

Economic Impact Labor Market Fiscal Effects GDP Growth Age-Related Spending

Policies Labor Markets Product Markets Housing and Mobility Fiscal Policy

2

European Department

CONTENTS

Facts Numbers in Perspective Institutional Framework

3

European Department

REFUGEE SURGE IN PERSPECTIVE

Worldwide refugees: 14.4 million in 2014 (up 25 percent from 2013)

Inflow of first-time asylum seekers to the EU has

increased dramatically: • Through November 2015 the inflow was 1,140,000, up 128%

over the same period in 2014. • In Q3 2015 the inflow was 415,000, up 153% over Q3 2014.

More could come:

• 8 million displaced people in Syria • 4.3 million having fled to neighboring countries • Ongoing conflicts in Iraq, Afghanistan, and Eritrea • Network effects

4

European Department

ASYLUM APPLICATIONS IN THE EU OVER TIME

FACTS

5

0

200

400

600

800

1,000

1,200

1,400

1985

19

86

1987

19

88

1989

19

90

1991

19

92

1993

19

94

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

14

2014

* 20

15*

EU-28: Asylum Applications (Thousands)

Sources: Eurostat. *Data is through November.

End of the Cold

War Civil war in

Syria

Bosnia and Kosovo Wars

European Department

SURGE IN MID-2015

Source: Eurostat.

6

10

30

50

70

90

110

130

150

170

190

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec.

2013

2014

2015

First-Time Asylum Applicants (Thousands)

European Department

UNEVEN IMPACT ACROSS EU COUNTRIES

Source: Eurostat

7

0

2

4

6

8

10

12

14

16

18

20

0

200

400

600

800

1000

1200

1400

EU-2

8

DEU

HU

N

SWE

ITA

AUT

FIN

DN

K

GRC

MLT

Total applicants, thousands

Applicants per 1,000 inhabitants (RHS)

Selected Asylum Seekers' Destinations in the EU-28 (December2014 to November 2015)

0

100

200

300

400

Syria Afghanistan Kosovo Eritrea Serbia

First-Time Asylum Applicants in the EU by Major Countries of Origin (Thousands of Applications)

20142014M1-M112015M1-M11

European Department

INSTITUTIONAL FRAMEWORK - I

UN 1951 Refugee Convention and its 1967 Protocol

Common European Asylum System

The 2013 Dublin Regulation Standards on asylum procedures

Countries Many other asylum rules are national, including when/on what grounds residency is granted

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European Department

INSTITUTIONAL FRAMEWORK - II Consensus that the current EU system is not working

Few countries are fully respecting the minimum standards Scope for returns under the Dublin system is limited Lack of resources. Gateway countries are overwhelmed Asylum seekers want to apply for asylum in their favored destination

Temporary (partial) solution In the fall of 2015, EU countries agreed to:

• “Hot spots” in gateway countries where asylum seekers can be registered, identify people in clear need of international protection

• Relocation of 160,000 asylum seekers from Greece and Italy on an ad hoc basis over the next two years

• Stepped up border enforcement • Humanitarian help for Turkey

9

European Department

CONTENTS

Economic Impact Labor Market Fiscal Effects GDP Growth Age-Related Spending

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European Department

LABOR MARKET AND INTEGRATION

How do migrants perform in the labor market?

Which policies facilitate the entry of immigrants in the labor market? What is the economic impact of immigrants on natives?

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European Department

REFUGEES INTEGRATE SLOWLY *

-0.25

-0.2

-0.15

-0.1

-0.05

0 <6 6-10 11-20 >20

Employment relative to native workers (Share)

Other immigrants: Role of language skills Other immigrants: Conditional gap Refugee: Role of language skills Refugee: Conditional gap

Years since arrival in country

Add

itio

nal s

hare

wit

h re

spec

t to

nati

ves

•We proxy the refugee experience using that of immigrants from refugee-sending countries

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European Department

LARGE WAGE GAPS

0

2

4

6

8

10

12

14

16

18

20

-90% -80% -70% -60% -50% -40% -30% -20% -10% 0%

Num

ber o

f est

imat

es

Wage gap Source: IMF Staff Estimates Note: Histogram of migrant wage gap, conditional on observables, based on 75 estimates across 9 studies on earnings assimilation of immigrants in the US, Canada and Europe.

Immigrant Wage Gap: Distribution of Estimates in Select Studies

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European Department

HIGHER RELIANCE ON SOCIAL BENEFITS

0

0.05

0.1

0.15

0.2

0.25

<6 6-10 11-20 >20

Social Benefits: Main Source of Income (Share)

Other immigrants: Role of language skills

Other immigrants: Conditional gap

Refugee: Role of language skills

Refugee: Conditional gap

Years since arrival in country

Add

itio

nal s

hare

wit

h re

spec

t to

nati

ves

14

European Department

INTEGRATION POLICIES: STRONG EVIDENCE OF EFFECTIVENESS

Policy Measure Evidence

Active Labor Market Policies

Wage subsidies Denmark, Germany

Training / skill provision Germany, Denmark, Israel

Access to temporary employment agencies

Denmark, Netherlands, Sweden

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European Department

INTEGRATION POLICIES: SOME EVIDENCE OF EFFECTIVENESS

Policy Measure Evidence

Overall labor regulation

Lower entry wages / limited exception from minimum wages

Cross-country Lower employment protection

Reduce taxes and social security contributions for low-wage workers

to address “inactivity traps”

Product market

regulation Lower barriers to self-employment Cross-country

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European Department

EFFECTS ON NATIVES

Migrants do not steal natives’ jobs • Numerous studies have documented only small and short-lived

effects

Why? • Migrants’ skills often complementary to those of natives • Demand effects of large population outweigh any substitution

effects • Natives upgrade their skills

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European Department

CONTENTS

Economic Impact Labor Market Fiscal Effects GDP Growth Age-Related Spending

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European Department

SMALL POSITIVE IMPACT ON PUBLIC FINANCES

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

LUX

CHE

GRC

IT

A ISL

SVN

BE

L ES

P PR

T ES

T G

BR

NO

R N

LD

SWE

FIN

AU

T D

NK

HU

N

USA

AU

S CZ

E SV

K CA

N

IRL

POL

FRA

DEU

Estimated Net Fiscal Impact of Stock of Immigrants, 2007-09 Average (% GDP)

Source: OECD, International Migration Outlook 2013.

Average

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European Department

DEMOGRAPHICS MATTER

-300

-200

-100

0

100

200

300

400

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Age

Natives Migrants

Germany: Present Value of Expected Future Net Fiscal Contributions, By Age Group (Thousands of euro, generational account approach, base year=2012)

Source: Bonin (2014).

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European Department

ESTIMATED SHORT-TERM FISCAL EFFECT OF CURRENT REFUGEE WAVE

Fiscal Cost of Asylum Seekers, 2014-16

(Percent of GDP)

2014 2015 2016

Austria 0.08 0.16 0.31

France 0.05 0.05 0.06

Germany 0.08 0.20 0.35

Hungary 0.0 0.1 0.0

Italy 0.17 0.20 0.24

Spain 0.01 0.01 0.03

Sweden 0.3 0.5 1.0

GDP-weighted average 0.08 0.13 0.19

Source: IMF staff estimates based on authorities' information and/or other sources.

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European Department

CONTENTS

Economic Impact Labor Market Fiscal Effects GDP Growth Age-Related Spending

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European Department

GROWTH SIMULATIONS: ASSUMPTIONS Asylum Applicants: 1.3 million annually during 2015-17; falling off sharply subsequently Approval and transition to labor market :

40 percent rejection rate Become eligible to work within up to two years of application

Labor market integration: Scenario 1: lower participation and higher unemployment rates

than natives—but gap declining over time Scenario 2: “Slow integration scenario”: unemployment gap doubles

Fiscal costs: 12,000 euro per year before becoming eligible to work; same amount for rejected applicants for one year

Model: EUROMOD semi-structural global models; country-specific calibrations

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European Department

GROWTH EFFECT POSITIVE, BUT UNEVEN

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2015 2016 2017 2018 2019 2020

Output Level (Percent)

EU scenario 1 EU scenario 2 DEU scenario 1 DEU scenario 2

Impact of Refugee Inflows (Deviation from baseline scenario)

Sources: IMF staff estimates.

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2015 2016 2017 2018 2019 2020

Government Debt/GDP (Percentage point)

EU scenario 1 EU scenario 2 DEU scenario 1 DEU scenario 2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2015 2016 2017 2018 2019 2020

Unemployment Rate (Percentage point)

EU scenario 1 EU scenario 2 DEU scenario 1 DEU scenario 2

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European Department

CONTENTS

Economic Impact Labor Market Fiscal Effects GDP Growth Age-Related Spending

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European Department

MIGRATION KEY FOR POPULATION GROWTH

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

1960 1970 1980 1990 2000 2010

Natural change

Net migration

EU28: Population Changes (Millions)

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European Department

PENSION EFFECT LIKELY POSITIVE Refugees younger than the average EU citizen Quantification: assume same inflow as in scenario 1

Pension expenditure would be lower than in the baseline EC Aging

Report scenario by some ¼ percent of EU GDP by 2030 Effects on health spending also favorable Heterogeneity across countries reflecting refugee distribution

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European Department

LABOR MARKET PULL, NOT AGING

BEL BUL

CZE DNK

DEU EST

IRL

GRC

ESP

FRA

HRV

ITA

CYP

LTA LTU

LUX HUN

MLT

NLD AUT

POL

PRT

ROM

SVN

SVK FIN

SWE

GBR NOR

0

5

10

15

20

25

30

25 35 45 55

Une

mpl

oym

ent r

ate

(Q3

2015

)

2030 old-age dependency ratio

Size of Bubble = Asylum Seekers per 1,000 Inhabitants (2013-15 average)

BEL BUL

CZE DNK

DEU EST

IRL

GRC

ESP

FRA

HRV

ITA

CYP

LTA LTU

LUX HUN

MLT

NLD AUT

POL

PRT

ROM

SVN

SVK FIN

SWE

GBR NOR

0

5

10

15

20

25

30

40 50 60 70 80

Une

mpl

oym

ent r

ate

(Q3

2015

)

2050 old-age dependency ratio

Size of Bubble = Asylum Seekers per 1,000 Inhabitants (2013-15 average)

Source: Eurostat (‘no migration’ scenario).

28

European Department

CONTENTS

Policies Labor Markets Product Markets Housing and Mobility Fiscal Policy

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European Department

LABOR MARKETS

Reduce restrictions to work for asylum seekers Ensure early language/tailored skill training Provide targeted and temporary

• Wage subsidies • Exemptions from some labor market regulations?

Strengthen active labor market policies

Prompt integration of refugees into labor markets is key to favorable economic impact

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European Department

PRODUCT MARKETS

Simplify regulatory and administrative procedures for new firms

Provide start-up support Accelerate skill recognition; targeted training

Ease avenues to self-employment and facilitate skill recognition

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European Department

HOUSING AND MOBILITY

Tackle construction bottlenecks (e.g., land use regulation, permissions, rent control)

Financial incentives to build social housing Full geographical mobility of accepted asylum seekers,

within and between countries?

Mobility to high-labor-demand areas requires affordable housing

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European Department

FISCAL POLICY

Many EU countries have limited fiscal space but…

Most countries should be able to absorb the immediate fiscal cost within their SGP targets

SGP flexibility for non-recurrent expenditures. Caveat: There are major operational issues

How should the short-term fiscal costs related to refugees be handled?

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European Department

SUMMARY Flows of displaced people are large by historical standards and

may persist

The economic implications are notable, but not major:

The international experience is that the impact on native workers is likely limited

Faster labor market integration lowers costs and raises gains

Policies help, especially ALMP and labor and product market reforms

Fiscal costs are limited. Immigration can help reduce population ageing pressures but will not solve the problem

34