June 30, 2003

Immigration and the Dutch economy

Labour immigration will not solve the Dutch ageing problem, but can be useful for other countries

Press release
Large scale labour immigration is not an effective instrument to cope with the financial effects of an ageing population in the Netherlands. Nor will large scale labour immigration have positive effects on the labour market.

On the other hand, small scale labour immigration can be beneficial for the Dutch labour market, especially if immigrants are high-skilled, have good prospects for a job, and if they fill vacancies which are difficult to fill.
Whereas immigration is not a panacea for ageing and labour market problems in the Netherlands as a host country, it can be a sensible solution for other countries.

These are the main conclusions of CPB Netherlands Bureau for Economic Policy Analysis from a study on immigration, as presented today in CPB Report 2003/2 in two articles: The fiscal impact of immigration and Immigration and the labour market. These articles draw upon the analysis in the more comprehensive CPB Special Study Immigration and the Dutch Economy.
This study provides an overview of the development of immigration into the Netherlands and analyses the effects of immigration on the labour market and public finances.

Immigrants often have a lot to gain by immigration, both financially and socially, but this is not the subject of the present study. The focal point is the effect of immigration on the economy of the Netherlands as a host country: is labour migration desirable from an economic point of view?

The fiscal impact of an immigrant depends highly on his or her age at entry and on social and economic characteristics. For all entry ages, however, immigrants turn out to be a burden to the public budget if their social and economic characteristics are equal to those of the present non-Western resident. These characteristics include their skills and education and their use of social security. If immigrants have the same characteristics as the average Dutch resident, the result is positive for entry ages in the range of 14 to 45 years. Even in this case, immigration would only lead to a relatively small improvement of public finances. Substantial effects are achieved only if, on average, the immigrants have better characteristics than Dutch residents. It is not realistic to assume that large groups of high-skilled immigrants will come to the Netherlands, so that large scale selective immigration does not seem to be feasible.

The fiscal impact is calculated as the net lifetime effect on public finances: tax revenues and government expenditures. In case of positive net lifetime effects, immigration can have an alleviating effect. The consequence of negative net lifetime effects is that immigrants are a burden to the public budget. It is important to explore the long-run effects, as most immigrants are young when they enter. In general, people contribute more during their working age years, whereas they cost more when they get older. Furthermore, if an immigrant does not come alone, but brings in a family as well, this has a negative budgetary effect due to extra expenditures on education, etcetera.

Studies on the fiscal impact of immigration for other countries generally show more favourable outcomes. This partly depends on the seriousness of the ageing problem. In countries with a pay-as-you-go pension system combined with a low birth rate, immigration can be more advisable. Another factor is that immigrants in other countries often are more successful from an economic point of view than immigrants in the Netherlands, with average wages and employment that do not deviate as much from those of natives. The causes for the relative underperformance of immigrants into the Netherlands are not clear yet. This calls for further research.

Immigration is not likely to have strong positive effects on the labour market. The effect on wages is small but negative. A positive impact on the labour market and the long-term economic growth can be expected from a selective admittance policy on high skills and talents of immigrants, e.g. top-class scholars and football players.

Another advantage of labour immigration could be that it helps to grease the wheels of the labour market, by providing large groups of young workers who are willing to go there where labour is wanted, and thus helping the labour market to attain an efficient allocation. However, the Netherlands may be too small for this efficiency gain to be relevant.

A third possible advantage for the labour market is that (temporary) immigration can help to smoothen cyclical fluctuations in labour demand. This can be the case if immigrants come to fill vacancies that are difficult to fill. That can be positive if immigrants only come to the host country for the limited period of labour shortages. If they do not remigrate when the labour market situation changes, these labour immigrants will turn out to be a burden as they then aggravate the labour market problems.

CPB Report is CPB's quarterly, English language magazine. The 2003/2 issue has been released today. Next to the articles on immigration, this issue provides the economic outlook on the world and Dutch economy, and on the economic effects of the new Coalition Agreement (see press release 2003/25). Topics of other articles and notes include: the Common Agricultural Policy (CAP) of the European Union; ICT, innovation and productivity; Price dispersion and market power in the Dutch mortgage market; and the main observations and recommendations by the 2003 external review committee.


Dick Morks

What costs and benefits of immigration accrue to the host country? How can immigration and integration policies be modified so as to improve the balance? Is immigration an effective instrument in alleviating the burden of ageing? What can we learn from traditional immigration countries like Australia, Canada and the United States?

The international economic literature is not always conclusive in answering the questions raised. Much depends on the specific circumstances and institutions in the host country. This study focuses on the Netherlands as a host country for immigrants. Employing methods extracted from the literature, in combination with data on the Dutch economy, we assess the impact of immigration on the labour market, the public sector and the physical environment. The results may contribute to the debate on immigration and integration policy both in the Netherlands and at the European level.



Hans Roodenburg
Harry ter Rele