Milton Friedman famously once said “You cannot simultaneously have free immigration and a welfare state”. However, while free immigration is not a global phenomenon, it is very much a reality within the European Union and Schengen countries for EU citizens – providing the perfect case to test Friedman’s statement.
This paper empirically investigates the role that migration plays in the determination of welfare state spending and generosity in Europe. Previous research tends to focus on immigration’s impact on the demand-side of redistribution – how immigration impacts support for the welfare state. This paper focusses on the supply-side of redistribution and seeks to determine if levels of spending and generosity have been altered as a result of immigration.
In this paper, I use two different measures for welfare generosity; spending as a percentage of GDP (as is common convention) and a welfare generosity index from the Comparative Welfare Entitlements Dataset. As the main explanatory variable, I use foreign born as a percentage of the population, which serves as an indicator of the stock of migrants in a country.
In addition, I lag the explanatory variable and all the control variables by one year in order to help mitigate endogeneity issues arising from reverse causality. Furthermore, in the case of certain variables it makes theoretical sense; policy decisions can take time to be reflected in spending levels - by lagging the variables, this can be better taken into account.
The results show that levels of foreign-born are positively and significantly associated with levels of social spending; a 1 percent increase in foreign-born is associated with, on average, a 0.235 percent increase in social welfare spending, ceteris paribus.
A first explanation is that this result lends support for the compensation hypothesis. Some of the previous literature focusing on support for redistribution found that if natives feel economically insecure when exposed to increased movement of labour, then they support more compensation and greater redistribution from the government. The higher spending associated with immigration could be an indication that this demand is being reflected in policy decisions.
When I replace the dependent variable with the generosity index, the coefficient for foreign-born is not statistically significant. I find no effect for either increased or decreased generosity as a result of increasing immigration. It is interesting that the results for these two indicators of welfare generosity are different – it suggests that the two indicators are in fact measuring different things.
Importantly, however, I find no evidence to suggest that free movement of labour has been detrimental to either social spending or levels of generosity across Europe.
