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European Refugee Surge – The labour market and fiscal impact

Europe is facing its biggest refugee inflow since World War II. Estimating the number of arrivals remains very challenging, but over one million asylum applications could be received this year in the European Union (EU), up from 630 thousand applications in 2014, with an estimated 350-450 thousand people likely to be granted refugee or other humanitarian status (equivalent to 0.07-0.09% of the EU population). Large inflows of asylum seekers are also continuing in Turkey, where the number of registered refugees from Syria alone is now above 2 million, having risen so far in 2015 by over 350 thousand people. Additional sizeable arrivals seem possible over 2016-17, including from follow-on migration arising from “friends and family” type effects (Mitchell et al., 2011).

The numbers and the heterogeneity of the new refugees make this inflow particularly difficult to address (OECD, 2015d,e). Asylum seekers are arriving from a diverse group of countries (across MENA, South Asia and Eastern Europe), and with a varied range of skills. This has put a strain on processing and settlement systems, and raises the challenges involved in integrating new arrivals into societies. The upfront costs of integrating asylum seekers are also likely to be higher than for economic migrants. The numbers of new entrants have also resulted in some temporary border closures within the Schengen area. Appropriate policy choices in host countries can help to minimise the possible short-run challenges of absorbing a sudden large inflow of new asylum applicants and maximise the longer-run benefits that might result. A key point is to ensure that there are no barriers that prevent newly-accepted refugees from ultimately moving to locations in the EU that reflect economic conditions rather than other differences.

The new surge of asylum seekers into the European Union comes on top of an already-sizeable number of economic migrants into the area, although both are small relative to aggregate EU population (see figure below). In 2014, there were nearly 1 million immigrants to the EU-28 from non-member countries. The number of individuals who gained refugee or other humanitarian status, on a first-time decision basis, was around 160 thousand, less than half of the numbers expected in 2015, with further decisions likely in 2016. The new EU arrivals in 2015 seem likely to largely settle in three economies – Germany (where around 900 thousand new asylum seekers are anticipated), Austria and Sweden (where 140-190 thousand new asylum seekers are projected this year and 100-170 thousand in 2016). Most other EU economies will receive a small number of new arrivals.

Capture d’écran 2015-11-16 à 08.54.45

Effects on fiscal positions

Estimating the economic impact on host-nations of the sharp rise in refugees is difficult for a number of reasons: there is limited research on the impact of large refugee inflows on advanced economies, with most research focusing on the impact of increased total immigration (of which the share of refugees is usually quite small); different countries have different lags associated with the time it takes to process asylum- seekers, and further lags and restrictions may be associated with the ability for refugees to enter into local labour markets. The unprecedented nature and uniqueness of the current crisis makes it difficult to draw lessons from previous episodes.

Estimates of the short to medium-term fiscal impact of total immigration are quite varied across studies, but usually small, with some indicating net fiscal benefits and others net fiscal costs to host countries (OECD, 2013b; Dustman and Fratini, 2014). Short-term expenditure required to help support newly-arrived asylum seekers include: humanitarian assistance to provide food and shelter and basic income support; up-front expenditures associated with necessary language training and schooling; steps to identify the true skills of migrants and the expenditures associated with processing additional asylum claims. Additional support may be required in the medium term to assist new entrants enter the labour market. A possible longer-term benefit from the new arrivals is that they will help to improve the sustainability of pension systems, particularly in economies where there might otherwise be pressures due to population ageing.

In most of the main countries affected by the present surge of asylum seekers, the additional expenditures announced so far have been relatively modest. Germany has projected an additional 1⁄4 per cent of GDP support this year and 1⁄2 per cent of GDP support per annum through to 2017 to meet initial needs of newly-arrived immigrants and to integrate them in the labour market. Austria projects that spending on refugees and asylum seekers will rise from 0.1% of GDP in 2014 to 0.15% of GDP in 2015 and 0.3% of GDP in 2016. Sweden, which has been a major host country for refugees for a number of years, has budgeted for additional spending in 2016 of 0.9% of GDP to improve the integration of newly-arrived immigrants. Hungary, an important transit country into the Schengen area, has announced additional spending of 0.1% of GDP in 2015, to cover costs associated with the new flows of refugees. Since 2011, the Turkish government has provided aid to Syrian refugees amounting to 0.8% of 2014 GDP. The European Commission has announced funding of €9.2 billion to address the refugee crisis over 2015-16 (0.1% of EU GDP).

These additional fiscal measures should provide a modest boost to aggregate demand, provided they are not offset by budgetary cuts elsewhere, with most of the public funds spent on non-tradable goods and services. In addition, the marginal propensity to consume of refugees will likely be quite high, given their low income levels. In the European economies as a whole in 2016 and 2017, the boost to aggregate demand could be worth between 0.1 and 0.2% of GDP.

Effects on labour markets

The initial impact of higher asylum seekers on the labour force will depend upon the success of asylum- seekers in gaining refugee status, the length of the application process, and whether or not they will enter the labour force. These factors vary considerably across EU countries, types of immigrants and over time. In general, the effects on host country labour markets should build up over time as refugees become better integrated.

  • In Germany the period of time taken to obtain refugee status declined to under 51⁄2 months by the first half of 2015 (Newhouse, 2015), compared to an average processing time of close to a year as of 2012.
  • Refugees are eligible to enter the labour markets of host countries. Asylum applicants may also be able to enter host country labour markets, but this varies across countries. For example, asylum seekers in Sweden are eligible to enter the labour force immediately, including via apprenticeship and training schemes, in Germany there is a 3-month wait (after application), in France a 9-month wait and in the United Kingdom a 12-month wait.

For the European Union as a whole, the labour market participation rate of those born in non-EU countries has, on average, been marginally lower than for EU citizens, at around 70-75% (Eurostat, 2015), but this varies considerably by the age, skills and gender of migrants.

The impact of refugee arrivals on the destination labour market will depend on current labour market conditions and institutions, the skills and characteristics of the new arrivals, and labour and product market regulations.

  • A prompt evaluation of the existing skill-sets of recent arrivals will allow authorities to better relocate migrants to local areas where demand outstrips supply for the specific type of labour. Skill matching tends to be a problem for immigrants, more generally, as they tend to be more overqualified for their jobs than native workers in host nations (OECD / European Union, 2015). Ensuring a wider recognition of the foreign qualifications of immigrants would also help (OECD, 2014b).
  • Ensuring that immigrants are included in active labour market programmes can enable them to make a quick transition into employment (OECD, 2012; OECD, 2014b).
  • More generally, there is a need to ensure that new arrivals are eventually able to move freely across different EU countries. This should help to increase the longer-term supply-side benefits of the new arrivals.
  • Employment protection legislation (EPL) may affect the ability of refugees to  enter the labour force and find employment and also the extent of their participation in the informal economy. Some countries, including Germany and Austria, have been proactive in addressing labour market access concerns for refugees (OECD, 2015e).
  • Product market regulation (PMR) can also affect the integration of newly arrived refugees into the labour market. More regulated product and labour markets can mean that an increase in the labour force share of immigrants weakens the employment prospects of the native population in the short- term, although this effect typically disappears in the medium-term (Jean and Jimenez, 2007).
  • The sharp increase in refugees into Turkey in recent years is thought to have affected both informal and formal labour markets (Del Carpio and Wagner, 2015); refugees have displaced informal domestic workers but have pushed formal wages up through increased demand for goods and services.

Chosen excerpts by Job Market Monitor. Read the whole story at  General Assessment Of The Macroeconomic Situation

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