Immigration and the labor Market: Facts and Policy

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

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

3. 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

4. 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

5. 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.

6. Summary of Facts and Policy • Legal Immigrants • Facts: • Israel: Legal immigration is associated with receiving country growth of income per-capita. • 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 Hsieh, 2000; Hercowitz and Yashiv, 2000). • Israel and other: Individual data analysis (micro) shows very small negative impact on native workers employment and wages – mainly low skilled (LaLond and Topel, 1997; Preidberg, 1997; Cohen-Goldner- Paserman, 2005). Figure

7. 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 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.

9. 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.

10. 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 non-traded sectors. Is not associated with growth of per-capita income and labor productivity.