The True Economic Impact of Refugees

Though their impact has become a political football for the populist right across the globe, efforts to quantify the economic impact of refugees on their host nations are essential in furthering the debate on the basis of empirical evidence.

In 2015, over 1 million refugees and migrants arrived on the shores of the EU, and turmoil in Syria and Iraq has meant neighbouring countries have had to accept vast swathes of people looking for safety and security. The escalating crisis has shed light on a question that is crucial, both in the field of economics, and in the political arena; whether nations should allow increased immigration of refugees. Throughout the world, far-right populist movements have harnessed the growth of nativist and anti-establishment sentiment to garner support, with parties including Alternative für Deutschland and the English Democrats often asserting that refugees are an economic burden, taking more than they contribute, depressing wages and increasing government spending. Opponents argue that immigration of refugees is beneficial in expanding the workforce and that refugees are long term net contributors. This essay will give an insight into the arguments for and against allowing increased immigration of refugees, giving policy recommendations and coming to a holistic conclusion based on the evidence provided.

Firstly, it is important to determine whether immigration is good for refugees themselves. Refugees will often immigrate from a war torn nation to a peaceful one, and doing so has a myriad of advantages. During conflict, infrastructure is destroyed and wartime governments prefer to allocate resources to the military rather than funding rebuilding efforts. Lack of infrastructure, such as hospitals and schools, drastically reduces standard of living. Another direct consequence of war is inflation; governments often fund military endeavours by printing money, leading to inflation and falling real wages. Governments may borrow, rather than print, money, increasing government debt, leading to increased interest rates up as banks become more reluctant to lend. Investment decreases and no new jobs are created, meaning increased unemployment. International trade is also affected by conflict. In a landmark study, Glick & Taylor (2005) employ gravity model methodology to quantitatively determine the effect of war on international trade. They conclude, ‘Econometric analysis suggests that these costs [of war] are quantitatively large, statistically significant, and highly persistent’. International trade is beneficial even if one country completely eclipses the other in productive power, as demonstrated by David Ricardo’s theory of comparative advantage (Leamer, 1984), meaning wartime economies are at a clear disadvantage. From this evidence it is apparent that economic performance, and consequently standard of living, of countries in conflict is significantly poorer than that of those in peacetime, suggesting refugees have much to gain from immigrating to peaceful nations.

The other key area of discussion is the effect of increased immigration of refugees on the host nation’s economy. Perhaps the foremost implication of accepting more refugees is the increase in the size of the host nation’s population, especially the child population. This effect can be relatively insignificant, such as in the UK, where refugees make up only 0.19% of the population (Red Cross, 2016). In Lebanon, however, which neighbours conflict-ridden Syria, there are 1.1 million registered Syrian refugees (Amnesty International, 2016), constituting around a fifth of the population. Extensive analysis by Kelley and Schmidt (1994) suggests a relationship between excessive population growth and depressed economic performance, attributed to an increased child population. Using Lebanon as an example, UNHCR (2015) estimates that, in 2015, 40% of refugees were under the age of 11. Increased child population engenders a high dependency ratio, meaning the government and families must support members of society who are not part of the labour force, stunting the average household’s disposable income and increasing government spending. This effect is further amplified by the high fertility rate of Syrians compared to the Lebanese population; the average Syrian woman had 2.9 children in 2015, whilst the average Lebanese woman had 1.6 (World Bank, 2016), which means the problem is not only short term, but will affect Lebanon for at least a generation. It is usually the case that refugees, who typically immigrate from less to more developed countries, have a higher average fertility rate than that of the host population, meaning this phenomenon is not limited to Lebanon. The effect of an increased dependency ratio on Lebanon’s GDP growth can be seen in Figure 1. The sharp decline from 2010 to 2011 coincides with the start of the Syrian Civil War and mass flow of refugees into Lebanon. Data from the Lebanese Ministry of Finance (2015) shows that, from 2008 Q1 to 2015 Q1, Lebanon’s gross public debt grew from $43 billion to $69 billion, a rise which can be attributed to the increased pressure on public services induced by an increased child population, such as education and healthcare, leading to increased government spending, the negative effect of which is demonstrated by the Rahn curve (Figure 2) (Mitchell, 2005). Growing public debt and slowing GDP growth means Lebanon has one of the highest debt to GDP ratios on earth, which began to rise further in 2012 (Figure 3). It is clear that the effect of a large and young refugee population on the Lebanese economy is detrimental. It can be argued, however, that Lebanon is an extreme case and that, theoretically, implementing policy that regulates the flow of refugees renders these effects negligible, though in the real world it is often difficult to control the flow of refugees if the conflict is nearby, as is the case with Lebanon.

On the other hand, increased population caused by immigration of refugees can be advantageous in certain situations, most notably that of Germany. As a nation with an exceptionally low fertility rate of 1.4 births per woman (World Bank, 2016), Germany has an ageing population and a lack of blue collar labourers. This is especially problematic considering it is one of the most industrialised nations on earth, ranking second in UNIDO’s Competitive Industrial Performance Index (UNIDO, 2013). Fratzscher & Junker (2015) use macroeconomic modelling to predict that, though there is an initial cost of integrating refugees into the labour force, the long term effect on German GDP will be positive due to the high participation rate of the refugee population. By accepting 800,000 refugees in 2015, Germany has likely resolved its labour shortage, a problem which could have led to a plethora of economic complications. Employers would have been forced to give in to workers’ demands for wage raises due to lack of worker supply, leading to demand-pull inflation (Barth & Bennet, 1975). Businesses would have passed this cost on to customers, leading to cost-push inflation. Both forms of inflation could have led to diminished real wages. The negative economic outcomes of labour shortage illustrate how vital refugee labour is for Germany. It can be argued that Germany is one case and to use this example as evidence that all immigration of refugees has a positive impact is a gross generalisation, however the rising median age in developed nations such as Japan and Italy indicates labour shortages will likely emerge in the first world, as with Germany, making immigration of refugees all the more beneficial for the host nation’s economy.

One of the most prevalent arguments against immigration of refugees is that they receive more, in the form of state welfare, than they contribute, in the form of tax, making them an economic burden. Multiple studies have been conducted to asses whether refugees are net contributors or receivers, and to what degree. The Migrants Fiscal Impact Model (Access Economics, 2008), commissioned by the Australian Government, has found that refugees receive the most state welfare of all immigrant types, increasing government spending and damaging growth (Figure 2), and that refugees take the longest 15 years to become net contributors (Figure 4). Many studies point to low literacy levels, lack of recognised qualifications and lack of workplace knowledge to elucidate this phenomenon (Hugo, 2011; Koleth, 2009; MDA, 2011-2012; O’Dwyer, 2011), suggesting that implementing policies that promote accelerated integration into the host nation’s society could prove effective in making immigration of refugees beneficial for the host economy. Some studies point out that refugees are more inclined to entrepreneurship, with a higher proportion receiving their main income from business than other immigrant types (Hugo, 2011; ABS 2015). Most studies into the net contribution of refugees overlook the long term economic benefits of this entrepreneurship; innovation and new technology maximises the efficiency of production by facilitating increased specialisation and finer division of labour (Smith, 1776). Overall, refugees take an extended period of time to become net contributors, mainly due to integration barriers, leading to increased short term government spending, however, they are more inclined to entrepreneurship, benefiting the host economy, and become net contributors in the long term.

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Increased immigration of refugees can affect the real wage of all labourers in the host economy. Firstly, it is important to distinguish between economic migrants and refugees; refugees are not necessarily destitute and penniless, rather they are immigrating to escape war or persecution, meaning they often bring wealth to the host nation. Bearing this in mind, increased immigration of refugees means increased demand; a refugee family needs a place to live, clothing and food, and will spend their savings on such necessities, increasing aggregate demand for all of these goods. According to Keynesian economic theory, this will lead to demand-pull inflation, where aggregate demand in an economy outpaces aggregate supply, forcing manufacturers of these necessary goods to increase prices. (Figure 5) (Barth & Bennet, 1975). Moreover, refugees increase the availability of labour in an economy, and increased supply means decreased price (Figure 6). In other words, the average worker’s nominal wage will fall. Furthermore, the fact that refugees are usually willing to work for less than the average person in the host economy means that refugee labourers often undercut existing labourers, forcing existing labourers to reduce wage demands in order to remain competitive. An example of this was highlighted by the IRC (2016) in an investigation into the effect of Syrian refugees on economies in the Middle East. It concluded that ‘the recent influx [of refugees] has contributed to a driving down of wages’, attributed to increased competition and labour force size. Increasing inflation and decreasing wages means an overall reduction in real wage and therefore a reduction in the disposable income of the average household (Blanchflower & Machin, 2014). Using a backward bending supply curve of labour (Figure 7) (Hanoch, 1965), it is clear that as real wages decrease, there is less incentive for a worker to sacrifice leisure time for work. The average worker therefore works fewer hours meaning less disposable income per household leading to less consumer spending on luxury goods, and therefore lower aggregate demand. Low demand means firms that manufacture luxury goods must lay off workers in what is known as demand deficient unemployment. The aforementioned high inflation may also lead to negative real interest rates, a phenomenon which occurs when nominal interest rates are lower than inflation, harming any savers in an economy, including anyone with a pension. Again, however, it is possible to argue that the plethora of detrimental economic consequences presented are only exhibited when the influx of refugees is particularly overwhelming, and that these issues can be avoided if a nation maintains a small, steady flow of refugees over an extended period of time.

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The introduction of the minimum wage can help host nations reap the benefits of increased immigration of refugees whilst avoiding many of the drawbacks. By implementing a minimum wage policy, nations can stop the aforementioned undercutting of services and the resultant fall in nominal wages caused by oversupply of cheap labour willing to work at low rates for unscrupulous employers. A well enforced minimum wage serves to limit the degree to which refugees can undercut existing labourers, and reduce nominal wages, as it would be illegal to provide labour at extremely low prices. The policy can also encourage refugees to join the labour force, rather than be dependent on state welfare, by providing the incentive of a guaranteed income. This means the degree to which refugees are reliant on state welfare decreases, negating the previously mentioned increased dependency ratio. Avoiding a fall in wages means workers are not discouraged to work and are willing to sacrifice leisure time for work, counteracting the aforementioned decrease in hours worked by the average worker (Figure 7). There are disadvantages to the policy, as firms pass on the increased cost to consumers in cost-push inflation, however the minimum wage effectively protects the jobs and wages of the existing population whilst encouraging arriving refugees to seek employment, making it a highly recommended policy for any nation accepting refugees.

To conclude, it is clear that there are adequate reasons for refugees to immigrate to a peaceful country, namely the poor standard of living caused by conflict and its economic implications, however determining the effect of immigration of refugees on the host economy has given a much more nuanced conclusion. The Lebanese example demonstrated that a sustained flow of large populations of young refugees is detrimental to economic performance. It is therefore recommended that any nation accepting refugees adopt a ‘slow and steady’ approach, gradually accepting small numbers of refugees. The German example, however, demonstrates that the increased population associated with increased immigration of refugees can be beneficial in bolstering the labour force, especially in nations with ageing populations, helping to avoid major economic repercussions. The clear differences between the German and Lebanese cases suggest the effects of increased immigration of refugees varies from nation to nation, making it imperative to not make generalisations based on any one example. Studies from Australia and elsewhere demonstrated that refugees received a disproportionately large amount of state welfare for 15 years, leading to increased short term government spending, damaging the host economy. On the other hand, studies also showed that refugees are the most entrepreneurial of all migrants, leading to increased innovation and specialisation. It is recommended that, to shorten the period before refugees become net contributors, governments offer and expand schemes that assist integration, such as language courses. Increased immigration of refugees can lead to a decrease in wages for the entire population and efficiency of the workforce, however this effect can be negated through implementation and enforcement of a minimum wage policy, which serves to encourage refugees out of voluntary employment and limit undercutting of wages. Overall, the impact of increased immigration of refugees on a host economy is highly dependent on the situation of that economy, however by adopting effective policies, many of the negative impacts can be nullified. With this information and further research and analysis, host nations of the future may be able to fulfil their humanitarian responsibility whilst maintaining their economic integrity, benefiting both refugees and host nations.

This Essay was shortlisted for the Royal Economic Society’s Young Economist of the Year Essay Competition in 2017


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