Immigration and the labor Market Facts and Policy

Immigration and the labor Market: Facts and Policy Professor Zvi Eckstein School of Economics, Tel Aviv University May 2006

Outline • Definition, motives, facts and policy on: • Legal Immigration • Temporary (legal) Foreign Workers • Illegal Foreign Workers 2

Legal Immigration • Definition: Households move to permanently live in a new country - Alia • Motives of receiving Country Social-political: Jewish Alia (Israel) and political refugees Economic: Australia – point ranking US – Quota by region and industry EU – young workforce to replace aging population • Motives of Immigrants Economic or social permanent transition to new society • Policy: Local economic assistance and equal/preferred labor market status, welfare and taxes 3

Temporary (legal) Foreign Workers • Definition: Legal permit to non-residents working from few months to two years. • Motives of receiving country: Sector specific lobby to reduce labor costs (“shortages”): Agriculture, Construction (Israel), Hi-Tech (“competitive labor market” - specific cases of high skilled visitors, etc. ) • Motives of immigrants: Income and money transfer – import labor/services • Policy: Provide large quotas of workers for “man power” or employers to import workers under tax preferred status to employer – no welfare (Israel: agri. , construction, elderly care): Europe (nothing today. No tax preferred in 1950’s 70’s): US -some 4

Illegal Foreign Workers • Definition: Non-residents that have no work permit who live and get restricted public services (public goods, health and education). • Motives of receiving country Local demand for low cost personal services and work in cash economy. “competitive labor market”? ? ? . Law enforcement. • Motives of immigrants: Economic and money transfer. Motives to stay longer. • Policy : Compliance with law (varies by countries); out of the welfare system and after several years amnesty (US, EU). Size is highly correlated with legal foreign workers and wage differentials between these groups. 5

Summary of Facts and Policy • Legal Immigrants • 1. Facts: Israel: Legal immigration is associated with receiving country growth of income per-capita. Figure Israel: Aggregate analysis (macro) shows very small short run (one year to two) negative impact on wages of low skilled workers. (Eckstein and Weiss, 2004; Cohen and 2. Hsieh, 2000; Hercowitz and Yashiv, 2000). 3. Israel and other: Individual data analysis (micro) shows very small negative impact on native workers employment and wages – mainly low skilled (La. Lond and Topel, 1997; Preidberg, 1997; Cohen-Goldner- Paserman, 2005). 6

Legal Immigration: Facts (continued) 4. Micro evidence: Integration is a five year adjustment process for high skilled immigrants to adjust to the new labor market. No full convergence (Weiss and Eckstein, 2005). • Language, experience and training have high return to those who find high skilled occupation. • Imported skills have zero return if not interacted with local human capital (Weiss and Eckstein, 2005). 8

Legal Immigration: Policy: • High social and individual return to language and job finding and adjustment to labor market to all immigrants • High social and individual return to vocational training for high skilled occupations • Zero (small) return to vocational training to low skilled jobs and workers – (fully consistent with existing research – Heckman et. al. 1999). Conclusion: legal immigration (with public assistance) provides economic benefits to both natives and immigrants. 12

Temporary (legal – Illegal) Foreign Workers: Facts • Israel: (Data is less accurate) 1992 -3: Palestinians are about 8% of workers in business sector (Agri. Construction); 0. 2% are Foreign Workers. 1994 – 2005: Permits issued provided large cost reduction for construction and agriculture employment of foreign workers and large income for “importers”. Tax and other cost reduction benefits to employ foreign workers (40% difference to natives). Segmented labor market both from demand (cost) and supply (welfare). Since 1996 -7: Economists explain the implications – lower wages and employment for low skilled workers in Israel. Since 2000 – Several papers show the negative impact on productivity and native wages. • Other countries: Dustmann (2005, 2000, 1997) reports on the lower • integration of temporary workers in the new labor market – less investment in local skills. Today: Very small permit rates for temporary workers (no family formation) in developed countries. 13

Temporary (legal – Illegal) Foreign Workers: Policy Advice • Fix the differential tax system to make effective cost of all employee the same. • Allow labor mobility of legal temporary workers • Stop all permits to temporary workers (elderly assistance? ) in all sectors (in stages). • Increase law enforcement using the tax/social security system as well as incentives to illegal workers (amnesty) to leave/legalized in Israel. • Conclusion: Temporary low skilled imported workers has a negative impact on native low skilled workers in nontraded sectors. Is not associated with growth of percapita income and labor productivity. 14