The creative minds competition – Danish labour market and the foreign experts

1. The creative minds competition – Danish labour market and the foreign experts Nare Hakhverdyan University of Southern Denmark 2012

2. Introduction • International migration of highly skilled workers(HSW) • Globalization • Respond to labour market shortages • Knowledge economy • HSW possess special knowledge

3. My paper • Firm level • Critically review the international theory about the HSW’s impact on firm’s productivity and wages • Description of the theory and a discussion of the used methods in the empirical part • National level • Review what OECD countries do to attract and retain HSW. • Study whether the used instruments have an empirical impact on the mobility pattern of HSW • Case study of Denmark: Danish schemes for attracting HSW? How competitive is DK compared to other countries?

4. Highly skilled workers’ impact on productivity and wages • Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen and Trofimenko, 2007 ) • Investigate the relationship between foreign experts and firm’s productivity and wages • Data: Colombian firms for the years 1977-1991 • Result: hiring of foreign experts increases firm productivity and wages of the local employees.

5. Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen and Trofimenko, 2007 ) • Theory: • Dynamic model: • 1st period firms hire foreign experts • 2nd period foreign experts leave the firm • Assumption: knowledge transfer takes place  productivity increases permanently • Worker specific learning  domestic workers can transfer the knowledge to other firms in the 2nd period • Low wages in the 1st period BUT wages increase in the 2nd period to make sure that the workers do not transfer the knowledge to other firms

6. Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen and Trofimenko, 2007 ) • Empirical part: • Statistically insignificant and relatively lower unskilled wage and skilled wage while foreign experts are at the firm • Skilled wage increases after the foreign experts leave • Productivity • Value added per worker while the foreign experts are at the firm 8.1%, after foreign experts leave: 11.3%

7. Econometric method • Fixed effects to estimate the effects: • Advantage: control for unobserved time-invariant factors • Disadvantage: Cannot control for unobserved factors that are not time-constant • Difference-in-differences • Many control variables have an impact on different levels • Advantage: eliminates the effects of differences in exogenous productivity and other changes that have an impact on the firm’s productivity and wages

8. Do Foreign Experts Increase the Productivity of Domestic Firms?(Malchow‐Møller, Munch, Skaksen, 2009) • Analyse the impact of highly skilled foreign workers on domestic firms’ productivity and wages • Data: Danish population of workers and Danish private firms for the years 1995-2007. • Results: firms with foreign experts are more productive compared to firms without foreign experts.

9. Do Foreign Experts Increase the Productivity of Domestic Firms?(Malchow‐Møller, Munch, Skaksen, 2009) • Theory: • O-ring model is extended in four ways • Wages are firm-specific which is due to rent sharing • Gap between the actual skills of workers and the optimal skill that is required by a firm • Hiring foreign workers is costly • Firms differ in terms of their exogenous productivity parameter

10. Do Foreign Experts Increase the Productivity of Domestic Firms?(Malchow‐Møller, Munch, Skaksen, 2009) • Empirical results: • Average wage is used to measure the productivity affect in firms that hire foreign experts to firms without foreign experts • Firm level: • The third year following the hiring of foreign experts ” average wage increases with 2.4 % more compared to firms hiring only domestic experts • Indicates that productivity increases • Worker level: • Wage benefits are strongest and most positive for the highly skilled workers

11. Econometric method • Difference-in-differences • Compare firms that hire foreign experts to firms without foreign expert and try to find equivalents between the firms’ productivity level where everything apart from the variable of interest, namely hiring foreign experts, is assumed to be the same.

12. OECD countries and the schemes • Competitive behavior among nations • Current policy approaches: • Passive and active schemes • Passive: Demand vs. supply driven schemes • Active: Tax concession and non-economic benefits

13. Demand-driven schemes: Most European countries • EU Blue Card (all EU member countries except Denmark, UK, Ireland), • Researchers scheme (Germany, The Netherlands, Austria, Belgium, Finland, Ireland, Luxemborg, Portugal, Slovak Republic and Denmark) • Other schemes where initiatives are undertaken by an employer with a need for a particular skill. The employer offers a specific job with some requirements such as specific education level, previous work experience and wage level.

14. Advantage of demand-driven schemes • Meet the specific needs of the current labour market, especially in industries where there is a high demand for labour • Give the employers the right to self-access whether the migrant possesses the required skill and work experience

15. Supply-driven schemes • Schemes based on point systems • Canada, Australia, New Zealand and Denmark • Advantage • Small firms who do not have the resources to recruit abroad can easily find the necessary labour force • Disadvantage • Requires a considerable administrative infrastructure to process and assess applications for admission.

16. Active schemes - tax concession • 15 OECD countries by 2010 had introduced tax concession • Reduced tax rates on labour income • General deductions, allowances and exemptions from personal income tax • Specific deductions and/or exemptions for employer provided fringe benefits • Exemptions from foreign sourced income

17. Active schemes – non-economic benefits • The Netherlands: • ACCES: arrange social events, provide information about school system, near supermarket • Expat centers: help to integrateinto the localcommunity etc. • Norway: • New in Norway: Provides information aboutschool system, healt system etc. • Interational Network of Norway: helps with homefinding, schoolfinding for children, help the family to establish social network

18. Empirical evidence on tax concession on migration decisions • Paper by Kleven, Landais, Saez, Schultz, 2011 • Data from Danish Researchers’ Tax Scheme • Highly paid foreign workers are tax-sensitive and hence respond positively to favourable income taxation. • The scheme has doubled the number of foreigners with earnings above the threshold in Denmark compared to slightly less paid ineligible foreigners

19. Empirical evidence on tax concession on migration decisions • Paper by Liebig, Puhani, Sousa-Poza, 2006 • Data from Switzerland • Highly educated individuals are more tax sensitive compared to older, less educated persons

20. Evidence for non-economic benefits • Well-being a key determinant formigration • Social engagement • Goodquality of educational and social system

21. The Danish labour market • Demand-driven schemes: • The Positive List • The Pay Limit Scheme • Corporate scheme • The Researchers’ Tax Scheme • Supply-driven scheme: • Green Card

22. How competitive is Denmark? • In most areas of research and educational quality DK does well • One of the leading destination for highly skilled migrants from OECD and other countries alike • Recommendation: • Keep the passive schemes flexible and reasonable • Evaluation of policies and their effects should be based on their consequences for well-being