Recent worldwide socioeconomic and political developments have increased immigration pressure on developed economies. Receiving countries are putting enormous efforts into understanding the repercussions of immigration better, particularly the refugee waves. This column describes how in Germany, one of the largest recipients of refugees, different demographic groups experienced heterogeneous welfare effects of immigration between 2012 and 2017, with marginal losses to the welfare of the average worker. These losses can be partly mitigated by the recently established cooperation on worker mobility between Germany and India.
The developed world has experienced a remarkable surge in immigration lately. On the one hand, there is a frenzied demand for high-skilled labour in developed countries (Czaika and Parsons 2015, Dalmante and Frattini 2024); on the other hand, the labour supply has remained primarily low-skilled due to the refugee influx. A large body of literature evaluates the diverse aspects of these immigration waves in receiving countries. However, it ignores the immigrants’ entrepreneurial role despite its direct implications for the employment opportunities and wages of natives. In a recent paper (Iftikhar and Zaharieva 2024), we develop a unified framework that incorporates the dual role of immigrants as workers and entrepreneurs. As workers, immigrants compete with native workers for jobs in the regular job market. In contrast, as entrepreneurs, they compete with native entrepreneurs but create employment opportunities for other natives and immigrants looking for jobs. We consider four demographic groups: (1) low-skilled natives, (2) high-skilled natives, (3) low-skilled immigrants, and (4) high-skilled immigrants. Individuals in each group can be in paid employment or working as entrepreneurs (alone as self-employed or in businesses hiring coworkers), possibly transitioning from one state to another. The theoretical setup with search friction, combined with survey data from the German Socioeconomic Panel (GSOEP), is used to quantify the impact of immigration on self-employment, businesses, unemployment rates, wage structure, and welfare of workers in Germany.
Low-skilled immigration
Germany received approximately three million immigrants between 2012 and 2017. Since the immigration to Germany in this period consisted predominantly of the refugee influx, it is considered low-skill biased (Busch et al. 2020). It amounted to a 20% rise in immigration and a 24% increase in the low-skilled immigrants’ stock. Figure 1 summarises the results of the quantitative exercise conducted to estimate the welfare implications of low-skilled immigration to Germany (blue bars). The high-skilled group observes an average welfare gain of 0.9% per worker, while the low-skilled group experiences an average loss of 1.59% per worker. This is due to the classical effect of immigration from complementarity in production between the two skill groups. Thus, reducing the average productivity and wages in the same skill group and raising them for the other group of workers. Table 1 displays the wage and unemployment rate changes for representative workers in different groups. Despite wage gains for high-skilled workers, the loss to the low-skilled workers dominates the average, and the welfare loss to the economy-wide representative worker is 0.88%. The incumbent representative worker also experiences a decrease in welfare.
Figure 1 Welfare effects of a 20% increase in immigration to Germany
Sources: Authors’ calculations for immigration between 2012-2017.
Table 1 Wage and unemployment effects of a 20% increase in immigration to Germany
Source: Authors’ calculations for immigration between 2012-2017.
Zooming in on entrepreneurship, we find that the impact of low-skilled immigration on entrepreneurship varies across demographic groups. Low-skilled immigration has two crucial consequences for entrepreneurs: (1) it makes high-skilled workers more productive and low-skilled workers less productive, and (2) it makes hiring low-skilled workers easy. The first effect has an ambiguous impact on profits as an entrepreneurial setup may experience productivity gains or losses depending on whether the productivity gains due to high-skilled workers dominate the productivity losses of low-skilled workers. The second effect improves profits for all entrepreneurs. Our simulations suggest that the second effect dominates only for immigrant-owned businesses (Figure 2). Therefore, the fraction of immigrants in businesses increases in high (+3.7%) and low-skilled (+13%) groups. Nonetheless, the negative productivity effect of immigration leads to the shutting down of businesses owned by natives as the fraction of both high (-0.1%) and low-skilled (-3.2%) natives in businesses declines. A decline in the wages for low-skilled workers pushes natives into self-employment as the self-employment rate rises for low-skilled natives by about 9%.
Figure 2 Effects of a 20% increase in immigration on entrepreneurship: Low-skilled scenario
Source: Authors’ calculations for immigration between 2012-2017.
Cooperation with India
Germany signed the Migration and Mobility Partnership Agreement (MMPA) with India in December 2022. The agreement aims to promote the mobility of high-skill immigrants from India to Germany. Recent developments in October 2024 led Germany to agree to increase the annual number of visas granted to skilled Indian workers from 20,000 to 90,000. Given the increasing refugee migration to the developed world, we expect the low-skill scenario to dominate. However, policies facilitating high-skill immigration in Germany may, at best, result in skill-neutral immigration. Therefore, we simulate a skill-neutral immigration scenario to analyse the possible effects of increased Indian immigration to Germany. Figure 1 (brown bars) reports the welfare implications of a 20% skill-neutral migrant influx. The German-Indian cooperation mitigates the losses from low-skilled immigration. However, it does not entirely offset the adverse outcomes.
Scope of entrepreneurship promoting policies
The literature provides evidence that immigrant entrepreneurs contribute to job creation (Xavier et al. 2013, Kerr and Kerr 2016) in host economies. To understand the contribution of immigrant entrepreneurs to the welfare of workers in Germany through job creation, we simulate a counterfactual scenario. We calculate the welfare changes by banning immigrant entrepreneurial activities in the 2012 economy (before the immigration shock). The lack of entrepreneurial opportunities increases immigrants’ unemployment rate and reduces their expected income (Table 2). The entrepreneurial activities of low- and high-skilled natives increase, and their profits also increase. However, there is a decline in the wage rate for native workers. The expected income declines for representative low-skilled natives as the negative wage effect dominates the positive effect on profits. Only high-skilled natives gain from barriers to immigrants’ entry into entrepreneurship due to a dominant positive effect on profits. Nevertheless, these gains are marginal, and large losses experienced by immigrants lead to an overall loss to the economy. Representative workers in both skill groups suffer welfare losses. The welfare of a representative worker reduces by about 0.4% (Figure 3).
Table 2 Changes in unemployment and income from ban on immigrants’ entrepreneurial activities
Source: Authors’ calculations.
Note: Expected income from employment and entrepreneurship is the average of wage rate and profits from entrepreneurship.
Figure 3 Welfare effects of a ban on entrepreneurship
Source: Authors’ calculations
Ethnic segregation in businesses
Ethnic segregation in the labour market is a concern in the context of immigration. The literature provides empirical evidence of a higher probability of creating social ties between individuals of the same ethnic origin (McPherson et al. 2001). Dustmann et al. (2016) report for Germany that a new hire is more likely to be an immigrant if there is already a large share of immigrant workers in the firm. Remaining agnostic about the reason for ethnic segregation, we investigate the implications of ethnic segregation in businesses owned by low-skilled workers in the pre-immigration 2012 German economy. Ethnic segregation reduces welfare for all skill groups. Figure 4 summarises the results, with the welfare loss to a representative worker being 0.12%.
Figure 4 Welfare effects of ethnic segregation in businesses
Source: Authors’ calculations
Taking stock
Our analysis suggests that low-skilled immigration leads to welfare losses in Germany, which German-Indian cooperation can only slightly mitigate. It might be an opportunity for the German economy if immigration is high-skilled biased. Germany can further reap the benefits of immigration by facilitating immigrant entry into entrepreneurship and implementing policies that improve the labour market integration of immigrants. We conclude that entrepreneurship is an efficient way of reducing unemployment and poverty among immigrants. Finally, our results should be interpreted with caution as we do not account for demographic changes and the aging of the native population and disregard the contribution of immigrant workers to the pension system. Therefore, our results provide an upper bound on the possible losses from low-skilled immigration to Germany.
Source : VOXeu
