Israel's Immigration Story: Winners and Losers

1. Israel's Immigration Story: Winners and Losers by Assaf Razin March 2018 Based on Razin (2017) and Razin and Sadka (2017)

3. Israel and the World Economy: The Power of Globalization (MIT Press, January 2018) Anti-globalization sentiments are rising, especially in Europe and the United States, with the increasingly integrated global economy blamed for domestic economic distress. In the book, I argue that Israel offers a counterexample to this view, showing decisively positive economic effects of globalized finance, trade, and immigration.

4. International migration is not just labor mobility! Migration differs from the movement of other factor of production and financial assets (e.g., capital flows) in one fundamental way: They have political economy decision making on the generosity and the burden of the welfare state. As immigrants become part of the society of the host country, affects its welfare-state policies. The policies, in turn, affect the types and volumes of immigrants. The Swiss playwright Max Frisch put it theatrically: “We asked for workers. We got people”.

5. Immigration has significant fiscal implications While high skilled and therefore high-wage migrants may be net contributors to the fiscal system, low skilled migrants are likely to be net recipients, thereby imposing an indirect tax on the taxpayer of the receiving country. A Political economics as to the affect on the generosity of the welfare state, as emphasized by Razin, Sadka and Swagel (2002a,b), is called for!

6. The Economic and Fiscal Consequences of Immigration: US Experience The New Americans: Economic, Demographic, and Fiscal Effects of Immigration James P. Smith and Barry Edmonston, Editors, National Academies of Sciences 1997 and Panel on the Economic and Fiscal Consequences of Immigration; Francine D. Blau and Christopher Mackie, Editors; National Academies of Sciences, Committee on National Statistics 2016

7. Controlled vs. Free Migration Jeff Sachs (2017) says: “If people were told that they could move, no questions asked, probably a billion would shift around the planet within five years, with many coming to Europe and the US. No society would tolerate even a fraction of that flow. Any politician who says, “let’s be generous,” without saying-”we’re not going to let the doors wide open”, will lose.”

8. Israel’s immigration law Unique to Israel, the Law of Return not only enabled free immigration (of Jews) but also grants these immigrants immediate citizenship, and naturally voting rights.

9. Israel’s story is unique! Almost no other country allows for free immigration. Israel’s Free immigration regime is based on the “Law of Return”.

10. Emigration of Jews from the former USSR to Israel, USA and Germany (left axis, thousands) and the fraction of Jews in Israel (right axis, percent)

12. Immigration waves are to economists a “Natural Experiment” Immigration to both the pre-state Palestine and to the State of Israel came in exogenously determined waves. Immigration in the last wave from the Former Soviet Union (FSU) amounted to about 19 percent of the established population, within less than a decade.

13. Israel Immigration and Emigration of Jews from the former USSR

14. Labor-Market Characteristics of FSU immigrants [1] Including immigrants

15. Academic Degrees of FSU immigrants Even more striking is the percentage of the head of the household with a bachelor degree: 41.1% among the new immigrants, compared to a national average of just 29.5%.

16. Assimilation-integration viewed from the Second Generation perspective

17. Standard Immigrant Assimilation Measures Assimilation measurable variables are: language acquisition, fertility, intermarriage, etc. Assimilation of immigrants are higher in the Anglo Saxon Countries (USA, Canada, UK, Australia, NEW Zeeland) compared to the European-continental countries. Israel assimilation policies are the strongest in the world.

18. Earning Deciles of Children from bottom decile Parents: Immigrants and established population

19. Probability of outranking parents (by 5 percentiles) against parents’ quantiles FSU Total population Arab

20. Forced Migration and Human Capital: Evidence from Post-WWII Population Transfers, Becker, Grosfeld,  Grosjean,  Voigtländer,  Zhuravskaya • After World War II, the Polish borders were redrawn, resulting in large-scale migration. Poles were forced to move from the Kresy territories in the East (taken over by the USSR) and were resettled mostly to the newly acquired Western Territories, from which Germans were expelled. BGGVZ exploit a unique historical setting to study the long-run effects of forced migration on investment in education to show that, while there were no pre-WWII differences in education, Poles with a family history of forced migration are significantly more educated today.

21. Voting turnout patterns Voting turnout patterns of Soviet-Jew immigrants to Israel in the 2001 elections, conducted by Arian and Shamir (2002) find no marked difference in the voting turnout rates between these new immigrants and the established population.

22. Two Basic Concepts of Inequality:Market-based Gini vs. Disposable-Income Gini

25. Israel’s declining welfare state Social expenditures temporarily increased during the immigration wave, thanks to a one-off absorption-type expenditure on new immigrants. They declined at the beginning of the 2000s. Disposable-income inequality in Israel was roughly stable until the beginning of the 1990s, and rose sharply thereafter, even though no such change occurred with respect to market-generated inequality. A significant change in redistribution in the 2000s is potentially related to a reduction in income taxes. Income Tax fell from 30 percent of revenues in 2000 to 20.4 percent in 2015. At the same time, VAT increased from 24.9 percent of tax revenues to 30.1 percent. Child allowances were severely cut.

26. Gini Coefficient before and after taxes and transfers

27. Labor market inequality determinants Dahan (2007) explores the main factors behind the steep decline in the labor-force participation rate of Israeli men. He observes four factors responsible for the decline between 1980 and 2001: increases in the population of students (21%), the ultra-Orthodox (21%), the disabled (32%), and discouraged workers (25%).

28. Inequality Time-Series Patterns A strong rise in disposable income inequality between 1990 and 2003, is a combination of declining market income inequality, which is more than offset by and a marked fall in redistribution.

29. A Stylized political-economy model ofImmigration and Income RedistributionInspired by the FSU Immigration Wave

30. The Essence of the ModelAn influx of high skilled immigrants will gives rise to a rising middle class and a rebalanced political economy equilibrium which is less redistributive.

31. Supply of Migrants

32. Supply shock

33. Immigrant Incentives The flows of migrants 𝑚𝑆 and 𝑚𝑈 are determined by the migrants themselves according to their reservation incomes (embedded in the supply functions, (10) and (11), and the disposable income accorded to them in the host country.

34. Supply Side Block

35. Redistribution System

36. A Two-Skill Economy • and Unskilled

37. Initial Capital Native born have an endowment E of capital. E can be allocated between human capital investment or saving capital. Immigrants have zero initial endowment.

38. Native-born Initial endowment

39. Cost of Education

40. The c-Individual

41. A cutoff level of cost, c*: All c-individuals with c ≤ c* will choose to become skilled, and all the others (with c ≥ c*) will remain unskilled. This c* is defined by

43. Income Levels of immigrants, native-born low-skilled and the marginal native-born skilled

44. Borrowing by some skilled with high C to invest in education, Lending by high-skilled

45. Native-born Disposable income= Net Wage + Capital Income + Transfer

46. Income Groups’ Relative size

47. Aggregate Stock of Human Capital and Stock of Physical Capital

49. Income Ranking (endogenous to the model) In sum, we have the following ranking of incomes:

50. Policy Variables There are therefore only two policy variables – the tax rate 𝑡 and the social benefit 𝑏. However, as the government is constrained by a balanced budget (condition (16)), it follows that there is essentially only one policy variables. Once 𝑡 is chosen, all the other economic variables are determined in equilibrium, including the tax revenue (𝑡𝑤𝐿), the number of migrants (𝑚𝑆 and 𝑚𝑈), and 𝑏. Or, alternatively, once 𝑏 is chosen, all the other economic variables are determined in equilibrium.