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Immigration Economics, hot off the press!

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On June 11, in the Hayek Auditorium of Cato Institute and in front of an audience of 200 people, IZA fellow and 2011 IZA Prize laureate George J. Borjas presented his new book Immigration Economics, which was discussed by IZA Program Director Migration Amelie F. Constant. Alex Nowrasteh, Immigration Policy Analyst, Center for Global Liberty and Prosperity at Cato Institute moderated the discussion (view event video).

Starting with selection issues, George Borjas, a leading authority in the economics of migration, moved on to the economic assimilation of immigrants and then discussed the economics, the modeling and the empirics of the impact of immigrants on natives. He also talked about difficult to quantify issues such as positive externalities created from high skilled immigrants. Above all, immigration has distributional consequences and affects different groups differentially. George cautioned the audience to keep an open mind about how to interpret the existing evidence. While he explained why the same studies may find different results, he challenged us to think about proper measures to tackle the deficiencies of our current knowledge.

Amelie F. Constant praised the book as “thorough, well-argued, factual, insightful, vivid, and pleasant to read.” Amelie said that the book contains the state-of-the-art in the economic benefits and costs of migration as well as in the impact on natives literature. More importantly, the book provides the right stimuli to undertake further research and advance the filed. “Immigration Economics sharpens our understanding of immigration with its clarity, educates us about economic models with rigor, and makes us think for ourselves. This book will become a classic,” said the Program Director. The book forum ended with discussion and questions from the audience.

Immmigration Economics
George J. Borjas
Harvard University Press, June 2014
Hardcover, 296 pages
ISBN 9780674049772

Mr. Rossi, Mr. Hu and politics: How immigration shapes natives’ political preferences

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International migration is a global phenomenon, widely studied in the literature. An important but less investigated issue concerns the role of immigration for the political preferences of the natives, who often have strong views and prejudices on the issue. These feelings are likely to be among the determinants of residents’ political choices at the polls. At the European institutional level the issue is even more important, since immigration policy is at the core of the debate on the future of the European Union. Interestingly, parties that are against the Euro area and that are proposing an exit strategy for their countries are often associated with protectionist views on immigration. The Front National in France, the Dutch Freedom Party and the Italian Lega Nord (Northern League) offer some examples of these combined political positions.

A recent IZA discussion paper by Guido Barone, Guido De Blasio, Alessio D’Ignazio and Paolo Naticchioni analyzes the role of immigration in shaping electoral outcomes in the case of Italy, where immigration increased rapidly in the last two decades. As reported by an Italian newspaper, of the first ten family names entered at the register office of Milan in 2012, three were originally from China; the second most recorded being the Chinese Hu. The most frequently recorded name remains Rossi, a typical Italian surname. Twenty-five years ago no foreign last name (among the first ten) was recorded at the same office.

The paper investigates the impact of immigrants on the political choices of natives at the national political elections by comparing the voting pattern in about 8,000 municipalities differently exposed to migration flows, in parliamentary national elections of 2001, 2006, and 2008. Two of them (2001 and 2008) were won by the center-right coalition, headed by Silvio Berlusconi. The election of 2006 was, instead, won by the center-left coalition, headed by Romano Prodi. With respect to immigration, the political platforms of the two coalitions were, consistently over the three elections, very different. In short, the center-left alliance had a more open stance, stressing the importance of the immigrants for the prospects of the domestic economy, the duty of solidarity for a high-income country, and the benefits of a multi-ethnic society. On the other hand, the political program of the center-right coalition had a less liberal stance: the emphasis was more on the social problems (e.g. crime and lack of jobs) related to immigration and the threat that people with different backgrounds could pose for the domestic way of life.

The paper finds that a 1% increase in the share of immigrants in a municipality entails a 1.26% increase in the share of voting going to the center-right coalition headed by Berlusconi. Additional findings are: big cities behave differently, with no impact of immigration on electoral outcomes; gains in votes for the center-right coalition correspond to loss of votes for the center-left parties, a decrease in voter turnout, and a rise in protest votes; cultural diversity, competition in the labor market and for public services are the most relevant channels at work.

Student internships increase wages later in life

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Most university students complete an internship while pursuing an academic degree: some work during the semester breaks, others even take a whole semester off to gain some work experience. In Germany, nearly 80 percent of all students had at least done one internship at the time they have graduated. The immediate benefits of interning seem obvious: students get hands-on experience in a potential future occupation and might even establish a link to a future employer. On the other hand, there are also some downsides: interns are often poorly paid and some firms exploit highly qualified students as cheap labor. This eventually raises the question: does it pay off to do an internship?

In a new IZA Discussion Paper, Nils Saniter and Thomas Siedler show that it does. Later earnings of German students increase by about six percent when they gained some relevant work experience while studying. This effect is driven by a higher propensity to work full-time and a lower tendency to be unemployed in the first five years after graduation. The authors do not find different effects by gender, family background or high school performance. However, the positive effects of internships are significantly higher in study programs with weak labor market orientation. Although there is little evidence that doing internships improves job matching, Saniter and Siedler regard student internships as a “door opener” to the labor market.

Is becoming criminal a matter of time?

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When homo economicus thinks about committing a crime, it’s all about balancing: the benefit of the crime against the disutility of potential future punishment. But the balancing is more complicated than that since the benefit of the crime is usually immediate, while the costs, such as some time in prison, have to been borne in the future. Hence, if potential criminals do not think much ahead and hardly value future events, the deterrent effect of punishment has no traction.

Eventually, engaging in a crime is related to time preferences. In a new IZA Discussion Paper, David Åkerlund, Bart H.H. Golsteyn, Hans Grönqvist and Lena Lindahl investigate the relationship between criminal conduct and time preferences. Using Swedish Data they discover that individuals who do not care much about the future a more likely to commit a crime. This effect is especially pronounced when it comes to property crimes and for males with below-average intelligence. In 1966 all 13 year old students in the Stockholm area were asked if they would prefer 900 Swedish Krona (140 US Dollar) now or 9000 Swedish Krona (1400 US Dollar) in five years. Those who stated to preferred the higher payment in the future were 32 percent less likely to become criminal in the following 15 years.

The researchers interpret this relationship in the light of different human capital decisions. When an individual prefers payments today over payments tomorrow, he is less likely to accumulate much education. Since low education and criminal activity are strongly linked, this may be the channel through which the effect works.

What determines racist attitudes in Germany

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Although the end of World War II is not even seventy years ago, one out of five Germans thinks that Jews living in Germany should not have the same rights as Germans in every respect. Nearly as many think that foreigners should marry people of their own nationality. And 18% of the respondents would find it unpleasant if an Italian would marry into the family.

In a new IZA Discussion Paper Naci Mocan and Christian Raschke investigate the driving forces leading Germans to make such statements. They use data from the German General Social Survey (ALLBUS), covering the years from 1996 to 2010. The researchers show that education and economic conditions are strongly associated with racist and anti-Semitic attitudes: a person with a college degree is 18 percent less likely to state that foreigners should marry people of their own nationality. The probability decreases further if the respondent has contact with foreigners at work and if he or she lives in a city with more than 100,000 inhabitants. In contrast, if personal economic conditions are perceived as bad, racist feelings can be enhanced by up to 27 percent. On the other hand, good economic circumstances mitigate hostile attitudes very strongly. In terms of gender, the authors find no differences between men and women in the responses.

Surprisingly, regional racial biases seem to be quite persistent: while Hilter’s Nazi party NSDAP received only 2.6 percent of the overall votes in the 1928 German elections, in certain German areas the party’s vote share was extraordinarily high. And still today, the likeliness of agreeing to the statement that Jews should not have the same rights as Germans is seven percent higher in these regions.

German parental benefits facilitate labor market re-entry

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“Elterngeld” (literally: parents’ money) is among the most generous benefit payments in Germany. If a parent decides to stay at home with a newborn child, the government pays two-thirds of his or her recent monthly net income (up to a maximum of 1,800 euros) for one year. If both parents take a baby break for at least two months each, the benefit period is extended to a total of 14 months.

In a new IZA Discussion Paper, Jochen Kluve and Sebastian Schmitz analyze the labor market effects of this parental benefit, which was introduced in 2007. The authors show that 3-5 years after giving birth, 1.8 percent more mothers were back at work, compared to a control group of women who gave birth just before the eligibility period started. The effect is especially strong for highly educated and first-time mothers. Kluve and Schmitz also report that most of the women re-enter the labor market in part-time jobs. For full-time working mothers, Elterngeld increased the probability of returning to the old job at the same company by 12 percent.

The researchers conclude that the introduction of the parental benefit defined a new social norm: While there was previously no particular point at which mothers typically returned to work, Elterngeld now implicitly suggests returning to work after the end of the benefit period. Apparently this new “norm” also suits employers, who are more likely to keep the old job open, and seem to offer more attractive contracts than before the Elterngeld was introduced.

Job information centers improve students’ career choice

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In many countries high school students visit job information centers before they graduate. They learn about job prospects, earnings and prerequisites of their desired job, as well as about local labor market conditions. This information is supposed to help teenagers choose their future occupation more wisely.

In a new IZA Discussion Paper, Nils Saniter and Thomas Siedler analyze the effect of visiting job information centers in Germany, which many students have to visit together with their classmates and teacher. The authors find that visiting the centers often pays off for students.

The authors exploit the fact that only about half of the German districts run a center and that there was a staggered introduction of centers across districts starting in 1976. Saniter and Siedler show that a student growing up in a district with a center is 7-12 percent more likely to graduate with Abitur, the highest German school degree. Also, the likelihood of attaining the lowest degree (Hauptschulabschluss) decreases, which is another indication for upward educational mobility.

Moreover, the students exposed to centers experience a smoother transfer into the labor market: the probability of becoming involuntarily unemployed during the first five years decreases by 8-10percent. The are also on average 2.8 months longer full-time employed than students without a center nearby. The authors conclude that job information centers contribute significantly to a better matching of occupational features with students’ interests.

Becoming a German citizen pays for female immigrants

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Today there are ten million immigrants living in Germany, accounting for 13 percent of the whole population. At the same time, immigrants often seem to perform relatively poorly in the labor market. This is also true for Germany, where even second-generation migrants face lower employment rates and earn substantially less than natives.

In a new IZA discussion paper, Christina Gathmann and Nicolas Keller analyze whether a more liberal access to citizenship can improve the economic integration of migrants by estimating the effect of becoming a German citizen on the labor market performance of migrants. For identification, the researchers use changes in the German immigration law. From 1991 until 1999 immigrants younger than 23 had to live in Germany for eight years in order to become eligible for citizenship. Older immigrants needed 15 years in the country. So for siblings who were 14 and 16 years old when they arrived in Germany in 1983, the younger one could have become a citizen in 1991, while the older one would have had to wait until 1998. From 2000 on, the waiting period was reduced to eight years for everyone.

The authors find that especially women gain from naturalization, while the effect for men is negligible. Moreover, returns are also larger for more recent immigrants, but essentially zero for traditional guest workers. Gathmann and Keller demonstrate that the wage and employment gain for naturalized women can neither be explained by becoming eligible for certain governmental jobs nor by improved language skills. Instead, these women switch from jobs with temporary contracts to those with permanent ones, and work at larger firms, both of which is typically associated with higher earnings.

China’s still playing catch-up

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Eswar Prasad

Cornell University and IZA

The era of U.S. economic dominance would appear to be over. New calculations from the World Bank’s International Comparison Program, based on adjustments for purchasing power, predict that China’s GDP will surpass that of the U.S. later this year. And right on cue, here come the hand-wringing pundits who have long predicted doom for the U.S. economy.

This is one of those cases where you shouldn’t believe the hype. While the World Bank’s new figures do present a better picture of living standards, as with all purchasing power calculations they are less useful when comparing the sizes of entire economies.

The principle is simple and also applies domestically—goods and services that can’t be traded over long distances (for example, apartments and haircuts) cost less in places with lower productivity. Even the prices of tradable goods are affected to some degree by local costs. So a family earning $100,000 annually can afford a materially more comfortable lifestyle in Topeka, Kansas, than they could in New York City.

However, we should be wary of drawing further conclusions based on these facts. For example, the family in Topeka is not necessarily richer, since there are other benefits that lead people to prefer living in New York. Using the prices of a comparable basket of goods is also misleading as consumption patterns might be quite different for the “average” household in Topeka compared to one in New York.

These are some of the reasons why calculations based on purchasing power are less useful when measuring the sizes of economies. Market exchange rates are still a more robust and objective measure for cross-country comparisons. By this measure, China still has a long way to go to match the U.S.

Moreover, China will remain a middle-income country even when it does become the world’s largest economy. There is still a gulf in terms of per capita income and other measures of development. Even by the most optimistic measures, China’s per capita income is about one-fifth that of the U.S., and based on market exchange rates it is one-eighth.

Interestingly, Beijing is not keen to proclaim itself a leading economic power and has gone so far as to reject the new calculations. The government would prefer that China be viewed as a developing country as opposed to a leading one with all the obligations that come with it.

Beijing seems to want to have it both ways—demanding the prestige and respect due to a major economic power but none of the responsibilities. For instance, Chinese officials have long argued that they should not be expected to contribute as much to climate change mitigation as the advanced economies since their population still has a much lower standard of living.

Moreover, Beijing still sees its actions and policies from the narrow perspective of national self-interest rather than its role as a leader. Other Asian countries are keen to develop closer economic ties with China but they are wary of China’s expansionist tendencies in areas such as the South China Sea. Even with its economic might, Beijing has few partners that trust it.

The Chinese yuan is becoming more important in international finance as China becomes more prominent in global trade. But there is little chance it will be seen as a safe haven currency, one that investors world-wide turn to for protection from global financial turmoil. For all the flaws in U.S. economic policies, the U.S. dollar’s role as a safe-haven currency was actually strengthened by the financial crisis.

What accounts for this faith in the U.S.? In addition to its economic size and deep financial markets, the U.S. has a set of powerful institutions that inspire the trust of domestic and foreign investors—an open and transparent political framework with an institutionalized system of checks and balances, trusted public institutions, free press and an independent judiciary.

For China to be respected rather than feared, it will take more than just economic might. Beijing will also need to undertake a broader set of political, legal, and institutional reforms—reforms that its leaders have rejected since they threaten the Communist Party’s grip on power.

The size of China’s economy will likely exceed that of the U.S. not later this year, but at some point over the next decade. Yet the world will still look to the U.S. for leadership. Of course, American exceptionalism is by no means guaranteed and Washington’s dithering on everything from Syria to Crimea hurts its standing in the world. The World Bank calculations may be misleading but they still ought to serve as a wake-up call to Washington.

This article was also published online in the Wall Street Journal.

When the crowd goes wild: Home advantage in same-stadium derbies

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The football matches between Inter and AC Milan or between Lazio and AS Rome belong to the most prestigious in Europe. Not only because of the long-standing rivalries of the clubs, but also because they share the same stadium: In Milan the derbies are played in Stadio Giuseppe Meazza, while in Rome the Stadio Olimpico is the venue.

One could think that due to these circumstances there should be no home advantage for any of the teams in these matches. But in a new IZA Discussion Paper Michela Ponzo and Vincenzo Scoppa provide strong evidence against this. Looking at all same-stadium-derbies in Italian Serie A from 1991 on, they find that the club defined as home team has a fifteen percent higher probability of winning the game, controlling for team quality, recent results, etc. This estimate is smaller than the usual home advantage (+23 percent probability of winning), but still highly significant.

Generally there are three factors helping the home team: The crowd support, the familiarity with the stadium and the possible travel fatigue of the visitors. The last two points are eliminated in same-stadium-derbies. Because the home team usually gets much more tickets while fans of the visiting club have to gather in certain small areas of the stadium, the researchers are able to measure the “pure effect” of crowd support.

This effect can be distinguished in two factors: First, the cheering of the crowd tends to motivate the players of the home team. And second, also the referees seem to be influenced. The authors show that the home team gets awarded penalties significantly more often, while visitors collect more red cards.