International Migration and Social Welfare Spending Among OECD Countries

Background/Purpose: In the recent decades, the substantial growth of expenditures on social programs has been accompanied by large international immigration flows. Policy makers in the destination countries are facing the challenges of whether and how to adjust immigration regimes such that the welfare state efforts can be sustainable in the long run. The impact of immigration on the host countries’ public finances is a controversial and complex subject which has motivated much literature in economics, sociology and political science domains. This study aims 1) to discuss the theories in all three domains to synthesize the theoretical explanations on how international migration may affect the host countries' welfare state efforts; 2) to empirically test to what extend are immigration's short-term and long-term impact channeled through different channels; and 3) to investigate how does the natives’ subjective perception on immigrants’ labor market behavior and social capital factors affect voters’ political behavior regarding their preference on level of welfare state. 

Methods: This study used the OECD International Migration Statistics database, OECD Social Expenditure Statistics database, OECD employment database, the World Values Survey, and World Bank's Database of Political Institutions. The data offered a sample of 24 OECD member states from 2000 to 2013. I first used country-year fixed effect to test the relationship between lagged immigration and the host countries' social spending and political preference through both labor market and social capital channels. I then used synthetic control method (a quasi-experimental design similar to the Difference-in-Differences method) to test the same hypotheses exploiting the natural experiment of the 2004 EU enlargement which enabled the free flow of migrants between the old and new EU member states. 

Results: Theories predict that immigration may positively affect host countries' social spending if the native population felt increased competitiveness in labor market thereby voting for better safety net to offset the risk of unemployment. Immigration may negatively affect host countries' social spending if the natives consider immigrants welfare consumers or people who are not as trustworthy or people who are "different" thereby voting to reduce level of welfare state to share the wealth. The empirical results show that in the short-term immigration has little to none effect on host countries' labor market and social spending. In long-term immigration positively affect social spending through the labor market channel. Immigration has modest negative effect on host countries' social capital.

Conclusion/Implication: The results suggest a positive contribution from immigrants to host countries' labor market. However, a reduced social capital in the host country due to large inflow of immigrants may shift the political preference to the right therefore reduce the country's support towards welfare state.