Immigration Patterns from Southern Europe to Germany and Switzerland in response to expected job prospects and welfare gain: 1990-2013
Farah Hamud Khan
May 2015
Abstract: From the fall of the Soviet Union in 1990 to the financial crisis of 2008-2009, Europe has undergone major institutional changes that have changed the economies of the member countries, as well as their labor markets. The Eurozone and the Schengen Area, which includes Switzerland, allow free movement of legal workers, and therefore polarities in labor markets and standards of living act as push-pull forces for movement of labor. This paper studies immigration flows from four Southern European Countries (Greece, Italy, Spain, and Portugal) to Germany and Switzerland from 1990-2013. The data analysis examines to what extend immigration changes according to expected welfare gains and improved job prospects from moving to the destination countries, and the effect of the 2008 financial crisis on labor flows is carefully scrutinized.
Farah Hamud Khan, Smith College
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1. Introduction
The political and economic instability created by the cold war and collapse of the Soviet Union after 1989 pushed the European Union (EU) to increase integration, and extend membership to Eastern European Countries. The formation of the Eurozone in 1990 meant that member states had to adhere to strict economic and monetary policies (DokosThanos et al., 2013). The reunification of Germany in 1990 and free movement of workers due to the formation of European Community (which Spain and Portugal joined in 1992) led to a surge of guest workers from the Southern European Countries to Western and Northern Europe (Oezcan, 2004). Switzerland, which is not a part of the Eurozone, experienced a large influx of foreign workers due to rapid economic development in 1980’s. Between 1991-1991, the Swiss Government altered the immigration system so as to ease entry of workers from the member states of the European Union only (Messagerelatif à l’initiativepopulaire, Contrel’immigration de masse, 2012).
The financial crisis of 2008-2009 had asymmetrical effects on the economies of European Countries. While recession and unemployment levels rose to record levels for many Southern European countries, levels in Western Europe remained stable. Examples of countries which faced record levels of unemployment and recession were Greece, Spain, Portugal and Italy. Employment rates in Germany and Switzerland however remained stable and their economies grew (Bräuninger, Dieter et al., 2011). Greece for example reported an unemployment rate of 18% in 2011, and Spain an even higher rate of 21.4% in the same year, while Germany reported a rate of 5.8 % in 2011(Source: The World Bank DataBank).
Since Eurozone and Switzerland allows the free legal movement of labor from member states of the European Union (EU), an asymmetric distribution of employment rates within the Schengen Area is likely to cause labor migration from areas of low employment to areas of high employment. The increased labor mobility could act as an equilibrating mechanism reducing unemployment in some areas and relieving labor shortages in other areas (Bräuninger, Dieter et al., 2011). Unemployment rates are not the only determinants of immigration because other factors such as cost of living and wages are also taken into account when making the decision to migrate. Higher standards of living and higher wages provide economic incentives for migration. Labor migration often occurs because people want to move to areas where they will be rewarded more for the same amount of work they do in home countries. Higher wages and higher standards of living act as ‘pull factors for migration’. Immigration occurs because immigrants want to maximize benefits and therefore while studying the effects of wages; one must take into account the cost of living in destination countries (SUNY Levin, Globalization 101, Pull Factors). This paper examines the effect of both unemployment rates and wage rates (in countries of origin and destination countries) on immigration flows from Southern Europe to Germany and Switzerland.
2. Literature Review
The literature review shows that immigration from the Southern Europe countries to Germany has been steadily increasing since the 1990’s and started to rapidly increase after the 2008 financial crisis. Bertoli et al. (2013) use an econometric approach to determine that declining economic conditions in destination countries account for 11-16 per cent of the immigration flows from Greece and Portugal to Germany. Benjamin and Zimmerman (2013) also verify that there has been a surge in immigration to Germany after 2009, and the immigrants who have arrived after the Eurozone crisis are better educated and well trained. Germany is an attractive economic destination because migrant workers in Germany do not have a hard time finding employment due to the country’s economic stability (Kim, 2011).
A prime cause of this immigration flow is the large disparity in employment levels in Western and Southern Europe (Jauer et al., 2014). Bräuninger, Dieter et al.(2011) also examine the effects of difference in wage rates to explain immigration flows. The authors find that after the financial crisis, workers from Greece and Portugal immigrate more in response to expected gain in welfare.
Switzerland has been receiving an increasing influx of high skilled and low skilled migrant workers since the 1980’s (Gerfis, Michael and Boris Kaiser, 2013). Favre (2011) uses data from Statistik Schweiz to explain the effect of foreign labor inflows on the Swiss wage structure. He also looks at the history of immigration in Switzerland and how the policy changes in 1990 allowed free movement of labor across the EU, and as a result immigration from the EU increased directly (Favre, 2011).
3. Unemployment in Southern Europe:
The Eurozone is a compilation of heterogeneous economic regions in different levels of urbanization. Western and Northern European Countries have had much lower unemployment rates than Southern European Countries since the 1990’s.For example in 1991, Spain had an unemployment rate of 15.5 while in Switzerland only 1.7 percent of the population remained unemployed (The World Bank Databank).
The failure of numerous European banks and stock markets was caused by the 2008 global financial crisis, and strained the bonds between EU member states threatening their solidarity. Southern European Countries are much more heavily indebted that their Northern and Western counterparts after the crisis, due to reckless borrowing at low interest rates inside the Eurozone (Lin, Carol Yeh-Yun, et a. 2012l)
Germany: Germany’s unemployment rate has fluctuated in 1990-2005. 6.4 percent of the population was unemployed and the rate increased and decreased several times before reaching a rate of 11.2 percent in 2005. The rate climbed down after 2005 and has been decreasing ever since. In 2013, Germany reported an unemployment rate of 5.4 percent (The World Bank DataBank).
Switzerland:Switzerland had a record low unemployment rate of 0.80 percent in 1990 but the rate steadily increased reaching 4.1 in 1997. The unemployment rate started falling after 1997 and fell to a 2.5 percent in 2001 before rising again. In 2007, the unemployment rate was 3.60 and it has been increasing ever since. In 2013, Switzerland reported an unemployment rate of 4.4 percent.
Greece: The Greek economy displayed strong progress in terms of fiscal and monetary reforms in 1990’s which allowed its accession into the European Union (EU) (Lin, Carol Yeh-Yun, et al. 2012l). For example in 1991, Greece had an unemployment rate of 7.7 percent only, the lowest in the last 25 years. Once guaranteed entry however, the economy became sluggish and the government started to borrow heavily. For example in 1993, Greece had an annual GDP growth rate of -0.96 percent (The World Bank DataBank). There were no structural reforms in the economy, and unemployment started to rise. Relief came for the labor market with the preparation of the Olympic Games in 2004, and unemployment rates fell in 2002 and 2003. Greece did maintain an economic growth of 4.27% in 2002-2007, although most of it was financed by borrowing. Unemployment rates declined steadily after 2004, coming to a low at 7.8% in 2008(The World Bank DataBank).
The Greek economy remained initially more stable than other Southern European Countries when the financial crisis hit but could not avoid a recession as global confidence, tourism and shipping receipts fell drastically. The service sector made up 78.8% of its national output and with the fall in demand for the service sector, unemployment rates in Greece started to climb steadily (Lin, Carol Yeh-Yun, et a. 2012l). In 2014, Greece reported an unemployment rate of 26.5%.
Italy: Italy enjoyed dynamic economic growth in the mid 1990’s and was one of the first 11 countries to become a member of the Euro-zone. However an economic downtown started in the late 90’s and in 2005, Italy had zero economic growth in GDP (Lin, Carol Yeh-Yun, et a. 2012l). Unemployment rates in Italy after 1990’s have fluctuated but started to fall in and 2004 reached a low of 6.1 percent in 2006(The World Data Bank). When the economic crisis hit in 2008, the country suffered from even worse negative economic performance. The sector hit the hardest was the production sector, and specifically mechanical engineering and small companies were affected the most in terms of production, productivity and employment. Large sized companies were also affected by the crisis and so were subcontractors and suppliers. The country reported a negative GDP growth rate of -5%. 380,000 people were unemployed in the fiscal year of 2008-2009, resulting in a dramatic rise in the unemployment rates. The unemployment rate climbed to 7.7% in 2009, and has been increasing ever since. Workers with temporary job contracts were affected the most(Lin, Carol Yeh-Yun, et al.).
Portugal:Portugal experienced positive economic growth after joining the European Union in 1990’s. In early 90’s Portugal had relative low levels of unemployment ranging in the 5-6 percent range. The country’s robust economic growth stopped in 2000, and the economy took a downturn in 2001-2008. Portugal has since then been one of the worst economies in the Euro zone with lack of government attention to competition, inflexible labor laws and rising unemployment. Unemployment rate started to climb after 2004, and stood at 9.2 percent in 2007.
Due to the poor economic conditions preexisting before the financial crisis, the country was theworst prepared to handle the financial crisis. GDP fell by 2.7% in 2008 to 2009 and unemployment rose to 10.7 percent in 2009. Much like Greece, Portugal has a huge service industry which suffered from the lack of global demand in the recession. Poor labor productivity and insufficient wage moderation also exists in the economy and has given rise to large national account deficits.
Spain: Of all the members of the Eurozone, Spain was the country most affected by recession. The unemployment in Spain was much higher than the other Southern European countries when it first joined the EU. For example in 1990 it had an unemployment rate of 15.5 percent (The World Bank Databank). Spain’s unemployment began persistently rising through the 90’s from 15.5 percent in 1991. In 1997 the percentage of the labor force unemployed had reached and 18.4 percent. Labor market conditions improved in early 2000 but in 2007 Spain had already gone into the recession(even before the crisis started) and unemployment rates started rising again. In 2008, before the crisis hit, Spain had an unemployment rate of 11.3 percent that increased to 17.9 in 2009. For the first time in the country’s history, Spain had 4,000,000 million people unemployed and 1.2 million jobs had been lost in 2008-2009. Unemployment benefits, which are generous in Spain, increased dramatically with unemployment. However, a fall in government tax revenue due to a collapse of the real estate market, lead to a decline in the benefits for the unemployed population.
4. Migration Flows:
The formation of the European Union and free labor movement laws with Switzerland means that residents with legal work permit constantly move around for work. In 2004, nearly 6 percent of Europeans were not citizens of countries in which they reside (Beets and Willekens, 2009). With polarized labor markets in Europe after the financial crash, migration from areas of low to areas of high employment was inevitable. In many of the Southern European countries, young workers were affected the most. Data from 2011 Euro barometer survey indicate that 53% of Europeans aged 15-35 wanted to relocated because of lack of employment opportunities in their own country. A disproportionate amount of these 53 percent where Spaniards (68%), Irish(67%), Greeks(64%), and Portuguese(57%). Migrant workers in these countries were also severely affected because most migrant workers tend to work in industries such as construction, manufacturing, hotel and catering, many of which suffered from the economic crisis (Bräuninger, Dieter et. al, 2011).
Migration to Germany: Most countries in northwestern Europe, including Germany, became recipients of a large number of immigrants starting from the third quarter of the twentieth century. Net migration in Germany was positive overall in 1950-2014. Between 1950 and 2010, Germany had an average of 181000 net migrants per annum, the highest amongst all European Counties (Zincone et al., 2011). Amongst all the Southern European Countries, Italy had the largest number of citizens moving to Germany in the 1990’s. In 1991, 38,500 Italians and 28,429 Greeks moved to Germany. Portugal and Spain had relatively smaller numbers standing at 11,013 and 4863 respectively. For Greece, the flow of immigrants to Germany decreased through the 90’s and through to early 2000’s. In 2007, only 7892 Greeks moved to Germany (The World Bank DataBank).