In almost every rich western country there are loud objections to immigrants on the assumption that they drain public finances. In America this manifests itself in the form of accusations that illegal immigrants are draining state budgets by exploiting American welfare benefits.
But I will not write about America today, but rather my home country Norway, as it is a very peculiar case in this regard. In Norway there has been much debate over “innvandrings regnskap,” which is an totaling of the state’s income and expenses in relation to immigrants.
Norway is special case, because it offers perhaps the most generous welfare benefits in the world, in combination with having massive revenues from oil exports. This causes some surprising effects.
The normal way of calculating whether an immigrant is a net gain or expense to a country is to perform the following calculation:
income * tax - expenses
This seems correct, but it is easy to demonstrate with a thought experiment why you can’t perform the calculation like that.
Suppose we have two construction workers, doing the same job, with the same speed and quality. One is a Norwegian named Ole and the other is a Swedish immigrant named Nisse.
- Pay $10 per hour
- Tax rate 40%
- $3 average welfare contribution from the government
$10 * 0.4 - $3 = $1
- Pay $5 per hour
- Tax rate 40%
- $3 average welfare contribution from the government
$5 * 0.4 - $3 = -$1
So according to this calculation, every hour, the Norwegian is a net benefit to society every hour he works, while the Swede drains the public finances by $1 every hour, on average.
Something is obviously wrong in this picture, because the Swede renders the exact same service as the Norwegian. So he is contributing exactly the same to society in total. So does het get more back than the Norwegian?
The total income of the Norwegian including what he gets in welfare on average is:
$10 * (1 - 0.4) + $3 = $9
While for the Swede it is:
$5 * (1 - 0.4) + $3 = $6
In other words the Swede is keeping $3 dollars less for himself than the Norwegian, yet the official calculations claim he is a drain on public finances.
So what exactly are we doing wrong?
The Flaw in the Calculations
The flaw in the calculations of the cost of immigration is the assumption that the value of the Swede’s work is the proportional to his wages.
It does not take into account several factors. One is that an immigrant has lower expectations for conditions and salary based on coming from a poorer country. Hence the supply and demand curves are shifted for them. However the value to Norwegian customers is the same regardless of who carries out the work.
So where does the $3 dollars the Swede isn’t taking going? It translates into lower prices for goods and services they make, and higher profits for Norwegian companies. If it mainly ends up as higher profits, then the government gets the extra contributions from the Swede primarily through higher tax revenue from the company that employs him.
If it primarily makes housing cheaper for Norwegians then cheap Swedish labour allows Norwegians to have higher taxes without being left with less in disposable income.
What Would Happen If We Kicked Out All the Immigrants?
The best way of understanding how flawed typical immigration cost calculations are, is to perform a thought experiment with what would happen if we kicked all immigrants out?
In September 2017, there are 2.6% completely unemployed people in Norway. That means should all immigrants be kicked out which make up around 10% of the population, it would not be possible to fill all the missing positions with native Norwegians.
For those Norwegians with low skills typically competing with immigrants from poorer countries this would be a big benefit.
However we would instantly face a severe shortage of construction workers, cab drivers, bus drives, sub way drivers, cleaners, restaurant workers etc. We know what happens in a market economy when supply it cut short, prices increase.
A lot of Norwegians today have nice well paid office jobs. Society will need some of these to become construction workers and cleaners. How is society going to accomplish that? I work in an office as a software developer. What would it take for me to switch career working as a cleaner or construction worker? An awful lot of money! I wouldn’t do it even if they paid me the same as I get now. Many would be in the same situation.
This means a lot of services and products would get substantially more expensive than they are today. It would not necessarily mean society would get poorer per capita. It simply means wealth would get more evenly distributed at the expense of the middle class with cushy well paid jobs. They would see their purchasing power fall. While construction workers and cleaners would see their wages rise.
All this rests on the assumption that all these Norwegians could actually instantly take the jobs required, given high enough salary. In practice they wouldn’t as their skills would not match and this could require retraining. That means in the meantime the cost of building a house would skyrocket, because of sever shortage of construction workers.
The Oil Money
On September 19th 2017, the Norwegian sovereign wealth fund was worth 1 trillion dollars. That translates to $190,000 for each of Norway’s 5.2 million inhabitants.
It means a significant amount of Norwegian welfare budgets are covered by a small percentage of this oil money. Which is part of the reason why welfare benefits are more generous that taxation rate should suggests.
It is one of the reasons it is argued that immigration is bad for the economy. However there is a more curious effect which has been claimed which is that the average Norwegian isn’t worth it either. Every time another Norwegian is born there are more people to share the vast oil fortune on.
We then get into the curious logic that Norway is better of economically with a shrinking population. On paper the country should be better off if everybody just stopped having kids.
If we imagine a thought experiment with only seniors left in Norway flush with oil money. The oil money exists in the form of ownership of assets abroad. They could exchange these assets for things made in Norway or other things made abroad. Without anybody at working age in Norway, nothing would be made in Norway. The oil money could thus be used to import goods like iPhones, cars and food, but that is just a small portion of what seniors would need. They would need hospitals, staff in the retirement homes etc.
That lack of these services which seniors need means that oil wealth isn’t all that useful. The point of this thought experiment is to get across the idea that just because you import a person which means you got to share more oil wealth doesn’t mean the country is worse off.
It is something which is ironically underscored by the fact that quite a lot of health care workers and people employed at retirement homes in Norway are in fact immigrants.
I am not claiming all immigrants are an economic benefit to Norway or that we even should take in more immigrants. That was not the purpose of this post, but rather to make the point that one should not assume that the calculation of whether somebody is a net benefit to society or not, is a simple one.
It is likely more important to focus on skills needed rather than the exact economics of it.