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Immigration into the Welfare State

MUNICH – The armed conflict destabilizing some Arab countries has unleashed a huge wave of refugees headed for Europe. About 1.1 million came to Germany alone in 2015. At the same time, the adoption of the principle of freedom of movement within Europe has triggered massive, but largely unnoticed, intra-European migration flows. In 2014, Germany experienced an unprecedented net inflow of 304,000 people from other EU countries, and the number was probably similar in 2015.

Some EU members, including Austria, Hungary, Slovenia, Spain, France, and the initially welcoming Denmark and Sweden, have reacted by practically suspending the Schengen Agreement and reinstating border controls. Economists are not really surprised at this. In the 1990s, dozens of academic papers addressed the issue of migration into welfare states, discussing many of the problems that are now becoming apparent. I myself wrote much on the subject at the time, trying – mostly in vain – to raise awareness among policymakers.

A fundamental issue is at stake. Welfare states are defined by the principle that those who enjoy above-average income pay more taxes and contributions than what they get back in the form of public services, while those with below-average earnings pay less than they receive. This redistribution, channeling net public resources toward lower-income households, is a sensible correction to the market economy, a kind of insurance against life’s vicissitudes and the rigors of scarcity pricing that characterize the market economy and have little to do with equitableness.

Welfare states are fundamentally incompatible with the free movement of people between countries if the newcomers have immediate and full access to public benefits in their host countries. In such cases, countries can act as welfare magnets, attracting many more migrants than would be economically advisable, because the newcomers receive, in addition to their wages, a migration grant in the form of public transfers. Only if migrants received only wages could efficient self-regulation in migration be expected.