Question

Razin and Wahba [2011] studies the interaction of immigration and welfare policies in
EU countries and found that the more generous the welfare policies, the lower the skill
composition of immigrants. Why might this occur, and what are the likely
consequences?

Answer 1

The given phenomenon occurs, because more generous welfare policies, makes immigrants to work on lower wages. since lower wages are more attractive to the immigrants with lower level of skills, then immigrants with a level of lower skill sets, easily becomes the part of labor force. Further, generous welfare policies are more suitable to these immigrants also who are poor, not highly skilled and less knowledgeable. These welfare policies may not be very conducive to the immigrants with superior skills. Hence, it increases the proportion of immigrant workers, who are lower end of the skill sets in the workforce. Though, it has its own consequences. The first consequence is the less than expected increase in productivity due to the migrant workers. It gives less benefit to the country in terms of increase in real GDP, productivity, long run aggregate supply. The second consequence is the increased burden upon the welfare policies that is ultimately passed on to the tax payers or employees. It builds additional burden upon households and disposable income decreases. It leads to decrease in AD. The third consequence is the negative image towards the immigrants and possible conflict in the society. It is disturbing to the social harmony in the society. So, these are some of the consequences of the phenomenon as mentioned.