World Economy - 2018 - Kancs - Long Term Social Economic and Fiscal Effects of Immigration Into The EU The Role of The

DOI: 10.1111/twec.
12637
ORIGINAL ARTICLE
Long-term social, economic and fiscal effects of

immigration into the EU: The role of the
integration policy
d’Artis Kancs1 | Patrizio Lecca2

1
DG Joint Research Centre, European Commission, Ispra, Italy
2
DG Joint Research Centre, European Commission, Sevilla, Spain
1 | INTRODUCTION
The increasing flows of forced migrants from civil war regions in the Middle East pose rising chal-
lenges to EU societies and economies (Hatton, 2016). In 2015 and 2016, the number of asylum
seekers in the EU exceeded one million per year – for the first time since the Second World War.
The existing evidence about possible socioeconomic impacts of the rapidly rising refugee inflows
into the EU is scarce and scattered. This study aims to fill this research gap by assessing the
expected long-term social, economic and fiscal effects of the rapidly increasing forced civil-war
refugee immigration into the EU and evaluating what role an active integration policy can play?
When thinking about refugees, the humanitarian aspect is the most often invoked rationale. At
the same time, however, forced civil war migrants pose also important social and budgetary chal-
lenges, as well as may offer economic opportunities for EU economies. On the one hand, the
social-beneficiary status quo of asylum applicants by providing them with welfare benefits and the
necessary access to education, language and the social infrastructure may increase the budgetary
costs of EU Member States in the short-run. On the other hand, by integrating accepted asylum
seekers into EU labour markets may result not only in social, but in the long-run also in economic
and budgetary gains. In addition, integrated refugees can play an important role, for example, in
filling vacancies with specific skill requirements, addressing Europe’s alarming demographic chal-
lenges, improving the ratio of economically active to those who are inactive, a ratio that is decreas-
ing in many EU Member States, and boost jobs and growth in the whole EU.
Numerous studies have investigated potential impacts of immigration on destination country
labour markets. There is a general agreement in the literature that, when immigrants bring skills that
are short in supply in receiving countries, there are good reasons to expect positive impacts on labour
markets (Muenz, Straubhaar, Vadean, & Vadean, 2006). Also, Ottaviano and Peri (2012) show that
general equilibrium effects of immigration on receiving country’s labour markets depend strongly on
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| KANCS AND LECCA
the complementarity/substitutability between immigrants and foreign workers. Along the same lines,
Peri (2016) also confirms that the skill complementarity and substitutability between immigrants and
natives in employment, and the response of receiving economies in terms of specialisation and tech-
nological choices, are important factors determining the total effect of immigration.
Most empirical studies, for example, World Bank (2015), find that immigration can bring rela-
tively rapidly benefits to receiving country economies, depending on how quickly accepted refugees
find jobs and to what extent their skills are complementary to the existing workforce. Similarly, also
Furlanetto and Robstad (2016) find that an exogenous positive immigration shock lowers unemploy-
ment (even among native workers) and has a measurable positive effect on public finances in the
short-run. On the contrary, they do not find any support for those arguments used against immigra-
tion in terms of native employment displacement effects and burden on public finances. These
results are consistent with findings of Jayet, Ragot, and Rajaonarison (2001); Kancs (2011); Jau-
motte, Koloskova, and Saxena (2016); Mongelli and Ciscar (2018), according to which there are
significant long-term benefits to immigration in terms of a higher GDP per capita for recipient coun-
tries. More importantly, both high-and low-skill migrants contribute to the GDP per capita increase.
In contrast, other studies, for example, Borjas (2014), find that there might be also adverse effects on
destination country labour markets in terms of employment, wages and productivity. In line with these
arguments, Br€ ucker and Jahn (2011) find that migration reduces average wages and increases unem-
ployment of the incumbent workforce in the short-run, while it is neutral in the long-run. Further,
OECD (2015a, 2015b) argues that integrating forced civil war migrants into receiving countries’ labour
markets is more costly than integrating economic migrants. According to OECD (2015a, 2015b), the
integration success hinges crucially on integration policies, for example, on providing the local language
training, the school education and professional training, and access to the sociocultural infrastructure.
The existing literature, however, does not provide conclusive and robust answers to questions
related to rapidly increasing asylum seeker inflows into the EU, expected long-term effects on
labour markets and the public budget and the potential role of integration policies in the context of
the current refugee crisis. Among others, also because the concept of the skill complementarity/
substitutability is less applicable to asylum seekers than to economic migrants. This study attempts
to fill this knowledge gap by assessing the costs and benefits of the refugee integration into receiv-
ing EU Member States’ labour markets by identifying and accounting for all key socioeconomic
and fiscal costs and benefits. Short and medium-term integration costs include, for example, wel-
fare benefits, the provision of the language training, the professional education to migrants and the
school education to migrants’ children, access to the sociocultural infrastructure, initial direct costs
for the care, accommodation, and the costs of providing social benefits for non-working refugees.
In the short term, a higher government spending on refugees may also have a positive impact on
growth. However, given that any additional public spending needs to be financed through addi-
tional taxes, likely, the demand effect of the increased government consumption cannot be the only
source of growth. Long-term economic benefits include, among others, integrated refugee contribu-
tions to income taxes, payments to the welfare system (e.g., pension), as well as resolving labour
market shortages in specific economic sectors and Member States.
The main contribution of this study is to estimate the expected long-term social, economic and
fiscal effects of the recently increasing inflows of forced civil-war refugee migrants into the EU in
a general equilibrium framework and to access what role an active policy can play in the refugee
integration into the labour market. By complementing previous literature, our study offers more
nuanced insights regarding the regional, sectoral and temporal distribution of potential impacts of
the recent refugee crisis, the role of alternative financing methods of the government expenditure,
and costs and possible consequences related to different policy engagement intensities in the
KANCS AND LECCA | 2601
integration of accepted refugees in EU labour markets. This study abstracts from economically dri-
ven migration to the EU, as socioeconomic impacts of the labour migration have been investigated
considerably more and are relatively well established in the existing literature.
To assess the impact of alternative refugee integration policies in the EU, we perform a scenario
analysis with a general equilibrium model for the EU, augmented by a number of specificities for
the purpose of this study.1 First, the immigration of refugees concerns all EU Member States, and
both regional and sectoral dimensions are important for our questions, as refugee-related labour mar-
ket shocks can be very different across EU regions and sectors. Therefore, the model captures the
whole EU and is implemented at a regional level with a sectoral detail; regional and sectoral econ-
omies being linked through the trade of goods and services, income flows and the mobility of labour
and capital. Second, to capture the above-discussed skill complementarity/substitutability issue of
migrants, the model distinguishes between three types of skills, low, medium and high, and intro-
duces a split labour market, one for immigrants and one for native-born. The labour of native-born
can be substituted by the immigrant labour, although the substitutability is not perfect. Finally, the
labour supply shock (accepted and integrated refugees entering the labour market) and the demand
shock (additional expenditures of government and immigrants) affects both the supply and demand
sides of the labour market in the model and interactions between them. Labour market shocks are
absorbed through three endogenous channels of adjustment – (un)employment, wages and competi-
tiveness – together with two further labour market mechanisms – education and migration.
The rest of the paper is structured as follows. Section 2 provides a brief background about the
latest developments in terms of asylum seeker inflows into the EU, the refugee integration in the
EU societies and labour markets, and presents an overview about the relevant institutional frame-
work. Section 3 provides a short overview about the underlying simulation model, which will be
used for simulating and assessing alternative refugee integration policy scenarios. Section 4 outli-
nes the main assumptions of the three integration policy scenarios (policy status quo, advanced
and full), and of the baseline scenario. Section 5 presents and explains key simulation results. Sec-
tion 6 compares our findings with previous studies. The final section concludes and draws a num-
ber of policy conclusions from this study.
2 | FORCED IMMIGRATION IN THE EU: RECENT

DEVELOPMENTS
EU Member States have been open to asylum seekers since a long time. Although there have been
several increases in the number of asylum seeker applications in the EU in the past (e.g., a rather
high number of asylum applications (672,000) were received in 1992, mainly from the former
Yugoslavia), 2015 was the first time when the number of asylum applications in the EU exceeded
one million in 1 year (Figure 1). Furthermore, according to IOM (2017), Europe will likely face
high numbers of asylum seekers/refugees also in the coming years.
2.1 | Size and distribution of the forced migration

According to Figure 1, the annual number of first-time asylum applicants in the EU has histori-
cally been below half a million until 2013, with around 300,000 per year on average between
1
The underlying model has been used widely in several contexts; see, for example, Brandsma, Kancs, and Persyn (2014)
and Brandsma, Kancs, Monfort, and Rillaers (2015).
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| KANCS AND LECCA
1,500,000
1,000,000
Asylum Applicants
500,000
0
2008 2010 2012 2014 2016

Year
F I G U R E 1 Dynamics of asylum applications in the EU-28 Member States during 2008–16, thousands
Source: Eurostat (online data code: migr_asyappctza).
2009 and 2016.2 The number of first-time asylum applicants has more than doubled in the EU
from 563,000 in 2014 to almost 1.26 million in 2015. Also in 2016 the total number of asylum
applicants in the EU significantly exceeded one million (Figure 1).
As regards destination countries, the largest increases in the number of first-time asylum appli-
cants, expressed as a share of the destination country population, were recorded in Finland (around
ten times higher in 2015 compared 2014), Hungary (around five times higher) and Austria (more
than three times higher) (Figure 2). In absolute numbers, the inflow of first-time asylum applicants
in Germany increased from 203,000 in 2014 to 476,000 in 2015 and 745,000 in 2016 (Eurostat,
online data code: migr_asyappctza). Also Hungary, Sweden and Austria registered very large
increases in first-time asylum applications between 2014 and 2015. In contrast, most EU Member
States in the Central and Eastern Europe, for example, the Czech Republic, Croatia, Latvia, Lithua-
nia, Slovenia and Romania, have registered rather few asylum applicants both in 2014 and 2015.
For migration modelling, this implies that, in terms of the population share and the number of
first-time asylum applicants, differences among EU Member States are significant, and hence, we
take them into account in the computations of country-specific costs and increases in the labour
supply (Section 4.1).
2.2 | Age distribution

In terms of the age distribution, the vast majority of the first-time asylum seekers in the EU in
2015 were less than 35 years old (83%) (Eurostat, 2016); those in the age range 18–34 years
accounted for slightly more than half (53%) of the total number of first-time applicants, while
almost one-third (29%) were minors aged less than 18 years old. According to Eurostat (2016), a
similar age distribution of asylum applicants was common across EU Member States, with the
2
A first-time applicant for international protection is a person who lodged an application for asylum for the first time in a
given EU Member State and therefore excludes repeat applicants in that Member State and so it reflects more accurately
reflects the number of newly arrived persons applying for international protection in the given Member State (Eurostat,
2016).
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luzembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
0 .5 1 1.5 2
Applicants as a Share of Population
F I G U R E 2 Asylum applications in EU Member States in 2015 as a share of the incumbent population in per
cent
Source: Eurostat (online data code: migr_asyappctza).
largest share of applicants being those aged 18–34. The fact that the majority of asylum seekers in
the EU are in the working age will have consequences for the labour market, fiscal and budgetary
impacts. Among others, they have the potential to strengthen the EU0 s labour market and con-
tribute to the EU Member States budget. Therefore, we take them into account in the computations
of country-specific costs and increases in the labour supply (see Section 4.1).
2.3 | Acceptance and rejection

In 2015, more than half of all first instance asylum decisions in the EU resulted in positive out-
comes, granting a refugee or subsidiary protection status, or an authorisation to stay for humanitar-
ian reasons (Eurostat, 2016).3 For first instance decisions, around 75% of all positive decisions in
the EU-28 resulted in granting a refugee status, while for final decisions the share was somewhat
lower, at 69%. Also the share of successful applicants is important for the labour market, fiscal
and budgetary impacts, and hence, we take them into account, when calculating fiscal costs per
Member State for asylum seekers and for successful applicants, as well as the increase in the
labour supply in receiving countries (Section 4.1).
Main contributors to the rapid increase in asylum seekers were growing numbers of asylum
applicants from civil war regions in Syria, Afghanistan and Iraq, 29%, 14% and 10%, respectively.
Knowing the asylum seeker country of origin is important, as asylum seekers from different coun-
tries and world regions have systematic differences in the language knowledge, education
3
http://ec.europa.eu/eurostat/web/asylum-and-managed-migration/data/database.
2604
| KANCS AND LECCA
background and professional skills (Kielyte, 2016). Hence, there may be differences in integration
costs depending on where asylum seekers originate from, and differences in labour market, fiscal
and budgetary impacts depending on the substitutability/complementarity of refugee skills (Otta-
viano & Peri, 2012). In this study, we follow Clemens and Pritchett (2016) and assume that
migrants do not bring their economic productivity with them when moving to the destination coun-
try in the EU, and assume that during the training and learning process, accepted asylum seekers
assimilate skills and productivity of native-born. We assume that the skill distribution, that is, the
shares of low, medium and high-skill labour, of accepted asylum seekers after education and train-
ing follows the pattern of the host country. Note, however, that skills of immigrants and native-
born are not equal within each skill level. As will be explained in the next section, due to the split
labour market, immigrant and native-born skills within each skill level, for example, high-skill, are
not perfect substitutes.
3 | MODELLING FRAMEWORK
In this section, we briefly introduce main model’s features.4 The EU economy consists of 268
NUTS2 regions, which are included into EU Member States. The rest of the world is introduced in
the model as an exogenous external aggregate. Each regional economy is composed of economic
sectors (also called industries) in which firms operate under the monopolistic competition. In each
region sector, a representative firm produces a single variety, which is considered an imperfect
substitute for the variety produced in other regions. Regional goods are produced by combining
the value added (labour and capital) with domestic and imported intermediates. Final goods are
consumed by households, governments and investors (the form of capital goods), while firms con-
sume intermediate inputs.
Trade between and within regions is costly, implying that the shipping of goods entails trans-
port costs that are assumed to be of the iceberg type. Transport costs are specific to sector and
region pairs; they are based on the transport network model TRANSTOOLS, which considers dif-
ferent modes of transport and computes generalised transportation costs. These costs are positive
within regions and asymmetric between regions.
Regional investments are determined by an investment adjustment rule, according to which the
additional level of investments is generated in each region by the gap between the desired level of
capital and the actual level of capital (Uzawa, 1969). Given the regional dimension of the model,
the demand for investment can be satisfied by domestic and external markets, without balance of
payment constraints. The capital stock in each region is updated period by period through invest-
ments adjusting for depreciation.
To capture the above-discussed skill complementarity/substitutability issue of migrants, the
model distinguishes between three skill levels of workers: low-skill, medium-skill and high-skill,
which correspond to three levels of education: primary and lower-secondary education (ISCED 0–
2), upper- secondary and postsecondary education (ISCED 3–4), and tertiary education (ISCED 5–
6). For each skill level, the wage—unemployment relationship is represented by a wage curve
(Blanchower and Oswald, 1995), whose implication is that lower levels of unemployment increase
the workers’ bargaining power, thereby increasing real wages.
To account for the widespread evidence of split labour markets between immigrants and native-
born in Europe (Markaki & Longhi, 2013), we extend the underlying simulation model by
4
For a more detailed description of the model, see Brandsma et al. (2014, 2015), Di Comite, Kancs, and Lecca (2018).
introducing a split labour market. According to the split labour market theory of Bonacich (1975:
549), “Ethnic antagonism germinates in a labour market split along ethnic lines. To be split, a
labour market must contain at least two groups of workers whose price of labour differs for the
same work, or would differ if they did the same work.” In our model, this implies that within each
skill level (low, medium and high-skill) the labour supplied by immigrants and native-born are not
perfect substitutes (Ottaviano & Peri, 2012). They differ in terms of productivity and the wage
rate, which are lower for immigrant workers than for native-born.
Labour supply shocks (accepted and integrated refugees entering the labour market) and
demand shocks (additional expenditures of government and immigrants) affect both the supply and
demand sides of the labour market, and interactions between them. On the labour demand side, the
relative price of labour together with the demand for final goods and services determine the labour
demand. Companies (and the public sector) rent labour services from households, for what they
receive a wage income. On the labour supply side, each region is populated by workers, who rent
their differently skilled labour to firms.
To keep the analysis as tractable as possible, the model version that we use in this study is
deliberately deterministic in nature.5 Our focus is to perform a counterfactual analysis abstracting
from the main drivers governing regional business cycles. The modelled shocks do not follow any
stochastic processes,6 and our calibration strategy is such that we are able to exactly replicate the
initial data set.
4 | SCENARIO CONSTRUCTION
To undertake a scenario analysis and assess the impact of alternative refugee integration policies in
the EU, first, a baseline scenario is constructed and simulated (as we cannot observe it). In the
baseline scenario, we use Eurostat’s regional population projections, which provide “what-if” sce-
narios about the likely future size and structure of populations, based on assumptions for fertility,
mortality and migration.7
Following the empirical evidence of Clemens and Pritchett (2016), we assume that forced
migrants do not bring their skills and productivity with them when moving to the destination coun-
try in the EU. Second, inspired by findings of Clemens and Pritchett (2016), we assume that dur-
ing the training and learning process, accepted asylum seekers assimilate the skills and
productivity of native-born, and that the skill distribution, that is, the shares of low, medium and
high-skill labour, follows the pattern of the host country.
A further assumption that we make throughout this study is that we focus solely on the forced
migration triggered by civil wars in origin countries, while we abstract from other forms of
5
A statistical inference over the main parameters of the model is not only computationally intensive, but it is currently not
practicable, given the lack of data at the sectoral and regional levels. We are aware that a statistical inference would
improve the credibility of simulation results. However, the complexity associated with the multisectoral and multiregional
nature of the model prevents to some extent a better and more appropriate approach.
6
It is likely to expect that typical stylised facts inferred for a nation economy (generally performed using Real business cycle
models) do not hold for regional economies subject to common currency areas, with no fiscal and monetary policy power.
What we would expect is some degree of deviation from predictions derived from real business cycle models. Essentially,
not necessarily fluctuations in the economy are determined by supply-side shocks such as exogenous productivity effects.
7
Note that IMF (2016) assumes that the inflow of first-time asylum seekers would grow at 5% annually starting from 2019,
which is higher than the baseline population growth in our study. To see the impact of a higher baseline population growth,
we perform sensitivity analysis.
2606
| KANCS AND LECCA
migration, such as the economic migration, climate change or natural disaster-driven migration.
This implies that all simulation results reported in this study refer solely to the currently observed
continuous forced immigrant inflows from civil war regions in the Middle East to the EU. This
assumption also implies that the total number of both regular and irregular migrants to the EU is
larger in reality, implying also that the true socioeconomic effects to the EU society and economy
may exceed those reported in this study.
4.1 | Assumptions about the forced migration to the EU8

4.1.1 | Size and distribution of the forced migration
In line with most recent Eurostat data, we assume that 1.32 million first-time asylum seekers have
entered the EU in 2015 and 1.26 million in 2016 (see Section 2). Following IMF (2016), we
assume that 1.3 million will enter the EU in 2017. In line with the most recent empirical evidence
(Eurostat, 2016; Kielyte, 2016), we depart from IMF modelling choices by assuming that starting
from 2018 the forced migration of refugees into the EU will decline every year by about one quar-
ter, implying that 0.98 million first-time asylum seekers will arrive into the EU in 2018, 0.73 mil-
lion in 2019, 0.55 million in 2020, etc. In around 10 years, the current civil war and refugee crisis
will have no more significant impact on the immigration of refugees into the EU, and the annual
numbers of asylum seeker applications will have reached the long-run steady state, as assumed in
the baseline scenario. Second, following IMF (2016), we assume that the geographic distribution
of refugees across EU Member States in future years will be the same as it was in 2016. To
explore the impact of a higher/lower inflow of forced civil war migrants, we run extensive sensi-
tivity analysis.
4.1.2 | Acceptance and rejection

Following Eurostat’s most recent data, we assume that 60% of asylum seeker applications are
accepted, which is also in line with IMF (2016). As in the IMF study, we assume that rejected
applicants receive financial support for 1 year and then they leave the EU. We further assume that,
while staying in the EU, rejected applicants do not enter the EU labour market. Although this
assumption may not be entirely consistent with the real situation in some Member States, there is
too little robust evidence available about the employment of rejected asylum applicants in the EU
to construct more nuanced policy scenarios. As above, to ensure the robustness of this assumption,
we run an extensive sensitivity analysis, for example, by allowing the rejected asylum seekers to
enter low-skill jobs.
4.1.3 | Relocation, resettlement

In July 2015, the EU implemented a European resettlement scheme, to provide legal and safe
pathways to enter the EU. Through this scheme, EU Member States have agreed to resettle over
22,000 persons in need of international protection during the 2015–17 period. Furthermore, EU
Member States are also resettling Syrian refugees from Turkey under the EU-Turkey Statement of
8
To facilitate the comparability of our results, most of our scenario assumptions about the forced migration of asylum seek-
ers into the EU follow the modelling choices of IMF (2016). We depart from IMF assumptions only when there is more
recent/robust evidence available about refugee flows, distribution and/or characteristics in the EU, which we clearly indicate.
March 2016, having provided protection to over 10,000 Syrians so far. In total, over 25,000 peo-
ple have been resettled under both EU-level resettlement schemes between 2015 and 2017 (Euro-
pean Commission 2017). This resettlement scheme is fully accounted for in our migration
assumptions.
In September 2015, EU Member States set up an Emergency Relocation System to support
Italy and Greece who were faced with an unprecedented increase in arrivals. The relocation
scheme applies to eligible asylum seekers arriving in Greece and Italy. Based on arrival figures so
far and the expectation that they would continue at the same rate, EU Member States agreed to
support Greece with the relocation of 63,000 persons in need of international protection and Italy
with 35,000 – a total of around 98,000 (European Commission, 2017). Also this relocation scheme
is fully accounted for in our migration assumptions.
4.1.4 | Return migration

Further, we account for the fact that every year part of accepted asylum seekers from civil war
regions voluntary return to their home countries, despite a legal possibility to stay in the EU.
According to Eurostat data (migr_asyappctza and migr_eirt_vol), currently only a tiny share of
accepted asylum seekers from civil war regions voluntary return to their home countries. The aver-
age annual voluntary return rates of asylum seekers from seven largest sending countries – Afgha-
nistan, Eritrea, Iran, Iraq, Nigeria, Pakistan, Syria – were 0.6%, 0.5% and 0.9% in 2014, 2015 and
2016, respectively (Table 1). These voluntary return rates are fully accounted for in our migration
assumptions.
Further, one may expect that voluntary return rates may increase in future, when the situation
in sending countries improves. To account for a possibility of higher voluntary return rates in
future, we use figures from Balkan countries, where voluntary return rates are considerably higher.
According to Eurostat data (migr_asyappctza and migr_eirt_vol), the average annual voluntary
return rates of asylum seekers from five largest Balkan sending countries – Albania, Serbia, Bosnia
and Herzegovina, Macedonia, Montenegro – were 6.2%, 4.5% and 6.5% in 2014, 2015 and 2016,
respectively (Table 2). We create an additional “robustness check” model run by assuming an
average annual return rate of 5.74%, as observed in Balkans.
4.1.5 | Age distribution

Following IMF (2016) and most recent Eurostat data (migr_asyappctza), we assume that the share
of the working-age population (15–64 years old) among all accepted asylum seekers is 80%.9 This
assumption is based on the average share among all asylum applicants in 2016 (see Section 2).
According to Eurostat (2016), 19.4% are children in the age group 0–13, and 0.6% are 65 or older.
Based on these age distribution statistics, we compute that in the following years the working-age
population of accepted applicants will increase by 0.92% annually (the job entry rate of young
adults is higher than the retirement rate). Finally, we assume that the age distribution is equal
between accepted and rejected applicants. Again, all these assumptions are subject to an extensive
sensitivity analysis.
9
Note that the IMF assumes that the share of the working-age population among all accepted asylum seekers is slightly
higher at 81%. In this study, we adjust the working-age population estimates of the IMF by latest EUROSTAT data.
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| KANCS AND LECCA
T A B L E 1 Return migration (emigration) from the EU to main sending countries in Asia and Africa in 2014–16
No Persons Per cent
2014 2015 2016 2014 2015 2016
Asylum applications
Afghanistan 41,405 181,415 186,605 100 100 100
Eritrea 36,945 34,130 34,470 100 100 100
Iran 10,905 26,575 41,395 100 100 100
Iraq 21,365 124,965 130,100 100 100 100
Nigeria 20,065 31,245 47,775 100 100 100
Pakistan 22,220 48,015 49,915 100 100 100
Syria 122,065 368,350 339,245 100 100 100
Returns, total
Afghanistan 1,460 2,135 3,105 3.5 1.2 1.7
Eritrea 350 330 275 0.9 1.0 0.8
Iran 355 485 985 3.3 1.8 2.4
Iraq 780 3,490 4,290 3.7 2.8 3.3
Nigeria 40 45 20 0.2 0.1 0.0
Pakistan 1,325 1,585 1,200 6.0 3.3 2.4
Syria 1,970 4,665 910 1.6 1.3 0.3
Returns, voluntary
Afghanistan 235 495 1,925 0.6 0.3 1.0
Eritrea 40 40 60 0.1 0.1 0.2
Iran 185 275 720 1.7 1.0 1.7
Iraq 495 2,175 3,555 2.3 1.7 2.7
Nigeria 15 25 5 0.1 0.1 0.0
Pakistan 335 330 320 1.5 0.7 0.6
Syria 370 665 490 0.3 0.2 0.1
Notes: EU covers 20 countries, data are missing for Germany, Greece, Cyprus, Lithuania, the Netherlands, Austria, Finland and the
United Kingdom.
Source: Eurostat data: Asylum and first-time asylum applicants by citizenship, age and sex; annual aggregated data (rounded) [migr
asyappctza] and third-country nationals who have left the territory by type of return and citizenship [migr eirt vol].
4.1.6 | Labour market rights

Following IMF (2016), we assume that gradually accepted applicants will become eligible to work in
the EU. However, due to lengthy work permission procedures, labour market rights are not granted
instantly. As in the IMF (2016) study, we assume that accepted asylum applicants become eligible to
work after 1 year, which is roughly in line with the Reception Conditions Directive.10 While
acknowledging that in some Member States, for example, in Belgium and Italy, the access to labour
markets usually is granted faster, the underlying simulation model cannot account for monthly or
10
Directive 2013/33/EU of the European Parliament and of the Council.
T A B L E 2 Return migration (emigration) from the EU to main sending countries in Balkans in 2014–16
No Persons Per cent
2014 2015 2016 2014 2015 2016
Asylum applications
Albania 16,950 67,950 32,465 100 100 100
Serbia 10,705 8,935 4,415 100 100 100
Bosnia and Herzegovina 10,335 15,855 8,465 100 100 100
Macedonia 1,845 4,080 1,840 100 100 100
Montenegro 30,840 30,065 13,185 100 100 100
Balkans 70,675 126,885 60,370 100 100 100
Returns, total
Albania 5,890 8,055 6,285 34.7 11.9 19.4
Serbia 1,455 1,750 1,115 13.6 19.6 25.3
Bosnia and Herzegovina 740 930 600 7.2 5.9 7.1
Macedonia 175 365 195 9.5 8.9 10.6
Montenegro 2,325 2,505 1,600 7.5 8.3 12.1
Balkans 10,585 13,605 9,795 15.0 10.7 16.2
Returns, voluntary
Albania 1,785 2,535 1,865 10.5 3.7 5.7
Serbia 925 1,120 775 8.6 12.5 17.6
Bosnia and Herzegovina 400 525 350 3.9 3.3 4.1
Macedonia 70 230 85 3.8 5.6 4.6
Montenegro 1,230 1,270 850 4.0 4.2 6.4
Balkans 4,410 5,680 3,925 6.2 4.5 6.5
Notes: EU covers 20 countries, data are missing for Germany, Greece, Cyprus, Lithuania, the Netherlands, Austria, Finland and the
United Kingdom.
Source: Eurostat data: Asylum and first-time asylum applicants by citizenship, age and sex; annual aggregated data (rounded) [migr
asyappctza] and third-country nationals who have left the territory by type of return and citizenship [migr eirt vol].
quarterly adjustments, as its minimum temporal frequency is 1 year. Finally, we assume that, while
not eligible to work, accepted asylum seekers continue to receive welfare benefits.
4.2 | Integration policy scenarios

4.2.1 | Labour market integration
The labour market integration of accepted asylum seekers depends, among others, on implemented
refugee integration policies in EU Member States. Together with international migration policy-
makers and refugee integration experts in the European Commission, we have designed three alter-
native refugee integration scenarios:
• Policy status quo scenario;

• Advanced integration scenario;
• Full integration scenario.
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To simulate and assess the impact of alternative refugee integration policies, first, integration
costs and expected labour market outcomes are computed for each scenario. In the policy status
quo scenario, we assume current level of the government expenditure per refugee for the immi-
grant integration into labour markets, and the resulting level of the refugee participation and
employment rates for low-, medium- and high-skill workers. In the advanced integration scenario,
we assume an increase in the current integration expenditures by two times, which results in higher
than the current employment and participation rates of accepted refugees. In the full integration
scenario, we assume a significant increase in refugee integration expenditures to achieve compara-
ble professional and language skills to natives, and the same participation and employment rates as
the native population. Hence, differences in participation and employment rates of accepted asylum
seekers among the three scenarios are due to higher spendings on the integration policy. All three
scenarios are compared with the baseline scenario.
4.2.2 | Generic costs of asylum seekers11

Part of fiscal costs to the public budget related to the asylum seeker acceptance in EU Member
States does not depend on the integration policy. For example, during the application procedure,
indispensable asylum seeker benefits include accommodation costs, basic healthcare costs, in-kind
benefits, cash benefits, etc. To account for these costs, in all simulated policy scenarios we use
country-specific estimates on the public expenditure per refugee.12 For example, for Germany we
use German Council of Economic Experts estimates on the public cost of refugees: 800 EUR per
asylum applicant plus 6,600 EUR welfare benefits per year for successful applicants. Note however
that additional public administration costs, for example, for processing asylum seeker applications
are not included in these calculations. To approximate these additional costs in our simulations, we
assume a fixed country-specific public administration cost based on the 2015 inflow of refugees;
these costs do not change with the number of asylum seekers in the following years.
4.2.3 | Scenario-specific costs of the refugee integration

Another part of fiscal costs to the public budget related to the refugee acceptance, education and
integration into the labour market depends on integration policy efforts – achieving higher levels
of the refugee integration is more costly for the public budget. Two types of integration costs are
accounted for in this study: (i) language training costs and (ii) upper secondary, professional and/
or tertiary education costs. As noted by the European Commission (2016), learning the destination
country’s language is an important precondition for migrants to successfully start their integration
process into the host country’s society. To maximise the learning effectiveness, language integra-
tion programmes should be provided at the earliest stage possible after the refugee arrival and the
language learning should be combined with the learning of other skills and competencies or work
experiences.
To account for differences in the investment between alternative policy scenarios, both language
and professional education costs depend on the integration intensity. As scenario names suggests,
the lowest integration costs are in the policy status quo scenario, the highest in the full integration
scenario. Language training costs are collected from international language training institutions for
11
Integration costs are calculated in real terms, 2015 being the base.
12
Note that this assumption is different from IMF (2016), where authors assume that fiscal costs comprise an equal support
for asylum applicants of 12,000 EUR/person/year in all countries.
each EU Member State, they range from 153 EUR/person in Bulgaria to 3,616 EUR/person in
Sweden per successful asylum applicant. Education cost data are extracted from the Eurostat
domain educ_uoe_fine. Also school education and professional training costs are Member State
and skill-specific, they range from 1,120 EUR/person/year in Bulgaria to 26,410 EUR/person/year
in Denmark. Total education/training costs for each integration policy scenario and Member State
are calculated based on the number of persons in education/training and the cost per person to
achieve scenario-specific labour market outcomes (see below).
We acknowledge that, depending on the background of immigrants (skills, education, age, lan-
guage and IT knowledge), in reality these costs may be higher compared to native-born. Therefore,
we account for the possibility that education costs might be higher for asylum seekers than for
natives, for example, because of a traumatisation experience. Although the quantitative evidence is
very limited about the magnitude of these cost differences, the few existing studies suggest that
education and training costs might indeed be somewhat higher for asylum seekers than for natives
(Bonin, 2017; Koehler, 2017). The existing literature also suggests that they depend on many fac-
tors and likely are different from refugee to refugee. In this study, we assume that education and
training costs are 12.5% higher for asylum seekers than for natives, for example, because of the
traumatisation experience. In addition, we perform extensive sensitivity analysis with these costs
varying between +2.5% and +25%.
4.2.4 | Scenario-specific labour market outcomes

In line with the empirical evidence (Eurostat, 2016; and Kielyte, 2016), we assume that the efforts
(and expenditures) of the refugee integration policy determine labour market outcomes in terms of
participation, employment and the wage rate of refugees (which are determined in the model).
Higher integration costs are associated with higher participation, more skilled jobs, higher employ-
ment and wage rates. Following IMF (2016), we assume that, in the policy status quo scenario, the
participation rate of accepted refugee seekers remains 10 percentage points lower than among
natives, whereas the unemployment rate remains 30 percentage points higher.13 Non-participating
and unemployed refugees receive temporarily limited welfare benefits without contributing to the
government revenue, as described above.
In the advanced integration scenario, we assume that, after completing a language and profes-
sional training, the participation rate of accepted refugee seekers increases to 5 percentage points
lower than among natives, and the unemployment rate decreases to 15 percentage points higher
than among natives. Also these labour market outcomes of the advanced integration scenario are
consistent with IMF (2016) assumptions about the labour market integration of accepted asylum
seekers. Finally, in the full integration scenario, we assume that, after completing the language and
professional training, the labour market outcomes in terms of participation and employment rates
of accepted refugee seekers are comparable to those of natives in host countries.
5 | SIMULATION RESULTS
Integration policy scenarios constructed in Section 4.2 are simulated using the general equilibrium
model outlined in Section 3. Policy shocks simulated in the model imply a combination of two demand-
side shocks and one supply-side shock that induce further adjustments in the economic system.
In IMF (2016), this scenario is referred to as “slow integration scenario”.

13
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| KANCS AND LECCA
On the demand side, we account for the increase in the current government expenditures related
to the cost of the refugee integration into the labour market and the corresponding reduction in the
disposable household income (due to lower transfers/higher taxes). In contrast to IMF (2016),
which assumes that associated fiscal costs are not offset by any fiscal measures, we account for
the fact that all integration policy costs are fully financed by EU Member States. In particular, they
are funded by EU households in the form of a reduction in government transfers to the household
income or an increase in the income tax rate. Although the Stability and Growth Pact (SGP) has a
built-in flexibility that allows EU Member States to respond to the refugee crisis,14 for example,
through additional borrowing, we believe that assuming that integration policy costs can be
financed through the government borrowing would bias the interpretation of simulation results. For
example, more integration policy expenditures could be always better than less, if associated policy
costs are not borne by anyone in the EU economy. A further demand-side shock is given by the
private consumption increase stemming from refugees themselves.
On the supply side, the inflow of refugees increases the labour supply in EU Member States.
As detailed in Section 4.2, the increase in the labour force is country, skill and year-specific, and
differs between the three integration policy scenarios. Given that integration policy costs and the
projected labour force increase vary according to the level of the refugee integration, we expect to
observe differences in the simulated economic impact between the three alternative refugee integra-
tion policy scenarios.
5.1 | Main results

Aggregated simulation results are reported in Figure 3, where we plot for the whole EU the per-
centage change in the GDP from baseline values for the three refugee integration scenarios (policy
status quo, advanced integration scenario and full integration scenario) for the 2016–60 period.
The results reported in Figure 3 suggest that there is a remarkable difference in terms of the econ-
omic impact between the three refugee integration scenarios. While all three scenarios share a simi-
lar dynamics over the time period considered, differences in the GDP impact between them
increases as economies expand. As expected, for the entire period of the simulated integration pol-
icy shock, the full integration scenario records the highest boost in the GDP compared to the pol-
icy status quo and advanced integration scenarios.
In the short-run (2016), the GDP impact under all three scenarios is positive and equate to
0.05%, 0.12% and 0.23% for the policy status quo, advanced and full integration scenarios, respec-
tively. As more integrated refugee workers enter the labour market, the EU economy expands con-
tinuously until 2060, when it reaches a new steady state. In this time frame, the GDP increases by
0.15%, 0.6% and 1.6% for the policy status quo, advanced and full integration scenarios, respec-
tively. Figure 3 also suggests that the GDP impact is rather small in the short term, as the multi-
plier associated with the increase in the government expenditure is partially or fully offset by the
reduction in the disposable household income. Furthermore, in few initial periods, the labour sup-
ply shock is too small to amplify effects on economic activities. However, as more integrated asy-
lum seekers enter the labour market as a result of the refugee integration, the augmented labour
supply is able to fill vacancies, put a downward pressure on wages and therefore generate a fall in
14
According to the SGP, Member States can deviate from the adjustment path towards the Medium-Term Objective in case
of an “unusual event outside the control of the Member State which has a major impact on the financial position of the gen-
eral government.”
1.8
1.6
1.4
1.2
0.8
0.6
0.4
0.2
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Full Advanced Status Quo
F I G U R E 3 The simulated impact on the GDP under three alternative refugee integration scenarios,deviations
from baseline in per cent
Notes: The bottom line represents the policy status quo. Advanced and full integration scenarios are hypothet-
ical scenarios simulating a significant increase in the government expenditure on the refugee integration (see
Section 4.2 for scenario assumptions).
Source: Authors’ simulations.
commodity prices. The ultimate effect is then an improved competitiveness which boosts the
economies of refugees-integrating EU Member States even further.
Next, we investigate whether and to what extent the costs associated with refugee integration
policies are offset by benefits generated from the increase in workforce. To identify relative bene-
fits, Figure 4 compares the costs of the policy integration expressed in terms of the government
expenditure as a share of the base year GDP (bars) and benefits expressed as percentage changes
in the GDP (red line) off base year values. Notice that, in terms of units, in Figure 4 both refugee
integration policy costs and benefits and the three policy scenarios are directly comparable.
The simulation results reported in Figure 4 suggest that, in the first years and for all integration
levels, integration policy costs are higher than economic benefits. In particular, for the policy status
quo integration scenario, only in the very long-run a break-even point of positive net benefits is
achieved. However, we should remind that nevertheless multiplier effects are positive for all three
refugee integration scenarios. For the other two integration policy scenarios (advanced and full),
the difference between costs and benefits is negative until 2024. Hereafter, economic benefits
exceed fiscal costs. The positive difference is larger for the full integration scenario where, despite
of higher integration costs, the augmented workforce generates even larger GDP expansionary
effects.
By and large, from this analysis we can see that, if the EU economy would expand through the
integration of refugees into the labour market, then economic benefits would be eventually greater
than fiscal costs. This is confirmed also by Figure 5, where we see the net present value (NPV)
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| KANCS AND LECCA
2.5
(a)
1.5
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Average Cost EU GDP
(b)
1.5
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Average Cost EU GDP
2.5 (c)
1.5
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Average Cost EU GDP
F I G U R E 4 The cost of integration policies as % of the GDP (bars) and the simulated impact on the GDP in %
(solid line) for the three integration scenarios
Notes: The bottom panel represents the policy status quo. Advanced (middle panel) and full integration (top
panel) scenarios are hypothetical scenarios simulating a significant increase in the government expenditure on
refugee integration. See Section 4.2 for scenario assumptions.
Source: Authors’ simulations. [Colour figure can be viewed at wileyonlinelibrary.com]
600,000
400,000
200,000
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
–200,000
-400,000
–600,000
–800,000
–1,000,000
NPV Full NPV Advanced NPV Status Quo
F I G U R E 5 Net present value in million euro of the refugee integration in the EU under the three integration
scenarios
Notes: Y-axis: million euro, Y-axis: years.
associated with each integration scenario until 2060. The NPV is calculated as difference between
the discounted present value of the GDP deviation from the base year values obtained from the
results of simulations and the discounted present value of the government expenditure shock. The
discount rate applied in these calculations is equal to 0.05.
The NPV in this context gives us the size of the (discounted) multiplier effect in each period.
Note that, even if the NPV is negative, not necessarily the overall impact on the economy is nega-
tive. It could simply mean that the multiplier effect is less than 1. The NPV gives us an idea of
the time in which the economy is able to fully absorb the exogenous demand shock.
The results plotted in Figure 5 suggest that the NPV is negative for a prolonged period, but
then eventually becomes positive for two refugee integration scenarios: full and advanced. It is also
interesting to see that, under the full integration scenario, the NPV is the lowest in the short to
medium-run, but it becomes the highest in the long-run. Hence, our results suggest that, in order
to be able to gain from the full potential of the refugee integration in the EU labour markets,
receiving countries should be prepared to wait for a prolonged time period in order to see the
potential benefit of integration policy to be fully realised. However, the fiscal disadvantage is nev-
ertheless associated with positive growth effects for the whole EU, as seen in Figure 3.
A central issue in the ongoing and lively immigration debate is how the inflow of immigrants
impacts native-born in receiving countries? In particular, it is important to understand the extent to
which the integration of immigrant into the labour market affect wages and employment of native-
born. In Figure 6, we plot changes in real wages for natives and foreign-born for the three integra-
tion policy scenarios. Figure 6 suggests that the inflow of immigrants into the economy signifi-
cantly lowers the wage rate of foreign-born both in the short and long-run (dashed line). In all
three scenarios, the impact of immigration on the earnings of EU native workers is small and posi-
tive in the long-run. Real wages of natives experience a short-run rise and a medium-run fall off
2616
| KANCS AND LECCA
baseline values. However, once the integration process is complete, the natives’ real wage rises
above the initial steady state. Under the full integration scenario, the real wages of natives experi-
ence the highest positive impact compared to other integration policies under examination. This
suggests that, if natives and foreign-born are imperfect substitutes, integrated asylum seekers enter-
ing into the labour market generate long-run benefits for native-born workers. However, in the lit-
erature there is still no clear consensus about the complementarity/substitutability between foreign
and native workers. For example, Borjas (2003) and Borjas, Jeffrey, and Gordon (2008) argue in
favour of a perfect substitution, while Ottaviano and Peri (2012) show evidence of an imperfect
substitution between natives and foreign-born. For this reason, for each integration policy scenario
in Figure 6 we plot an additional curve representing changes in real wages obtained under a per-
fect labour substitutability. Under this assumption, wages of natives and foreign-born equalise and
the impact of an increase in the labour supply of foreign-born has the effect of reducing the wages
of both types of workers. We also notice that the more foreign-born enter labour markets, the
greater is the fall in real wages under a perfect labour substitutability. Indeed, under the full inte-
gration scenario where we have the largest increase in the labour supply, reduction in the real
wage is larger than under the other two integration policy scenarios.
Table 3 shows the impact of employment under a perfect and imperfect labour substitutability
obtained under the three integration policy scenarios. In the short-run, changes in employment are
positive for all integration policies and for the two alternative substitutability assumptions. In the
long-run, however, specifically for the perfect substitutability assumption, we observe negative
impact on the employment of native workers contrary to the case where foreign/domestic workers
are imperfect substitutes. In this case, the long-run impact on the native-born employment is posi-
tive.
5.2 | Alternative assumptions

Until now, we have assumed that the additional government revenue required for financing the
integration of refugees was fully financed through lump-sum taxes of the household income. Econ-
omically, this is the most efficient way to create additional government revenues, as it does not
affect the marginal tax rate. However, this might not be necessarily true in reality in EU Member
States. Therefore, we investigate impacts of collecting the additional government revenue required
to finance the cost of refugee integration policies through an increase in the labour income tax rate.
In this set of simulations, we still treat government expenditures as exogenous and vary tax rates
so as to generate a corresponding increase in the government revenue. Therefore, the labour
income tax rate has to increase until the additional tax revenue is sufficient to cover the additional
integration policy expenditure, while taking into account endogenous changes in prices.
These simulations allow us to compare the policy option of financing the necessary additional
government expenditures through a simple reduction in transfers from governments to households
(as the case analysed above) with the policy option in which the costs of the refugee integration
are fully financed by a corresponding increase in the labour income tax. The two types of policy
financing options are rather different, and economic agents will adjust to them differently. A reduc-
tion in transfers simply affects the demand-side of the economy, by reducing the household con-
sumption, while an increase in the labour income tax rate has an adverse labour supply effect.
Therefore, it is likely to partially or fully offset the effects of the increase in the government
expenditure, if the augmented labour supply resulting from more refugee immigrants entering the
labour market is not sufficient to counteract the adverse effects of the labour taxation.
1
(a)
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–0.5
–1
–1.5
–2
–2.5
–3
–3.5
Real Wage - Domestic Real Wage - Foreign Real Wage Perfect Subs
1
(b)
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–0.5
–1
–1.5
–2
–2.5
–3
–3.5
1 (c)
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–0.5
–1
–1.5
–2
–2.5
–3
–3.5
F I G U R E 6 Impact on the real wage of immigrants and native-born under split and integrated labour markets
Notes: Percentage changes from the baseline. Top panel: policy status quo, middle panel: advanced integration
scenario, bottom panel: full integration scenario.
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| KANCS AND LECCA
T A B L E 3 Changes in employment under an imperfect and perfect substitutability between foreign and native
workers, per cent off baseline
Perfect substitute Imperfect substitute

Short-run Long-run Short-run Long-run
Full
Native 0.24 0.04 0.26 0.19
Foreign 2.92 19.17 2.67 15.71
Advanced
Native 0.09 0.05 0.11 0.06
Foreign 1.86 9.00 1.66 7.57
Status quo
Native 0.05 0.03 0.06 0.01
Foreign 0.78 2.48 0.69 2.12
Under default model assumptions, a long-run wage curve determines the real wage after tax;
therefore, an increase in the government expenditure financed through taxes in the absence of off-
setting effects coming from the increasing labour supply would lead to a negative overall impact.15
However, with a continuous integration of refugees into the EU labour market, we would expect a
downward pressure on wages. If the labour supply shock is large enough, we are likely to observe
a fall in real wages and therefore in commodity prices that is sufficient to raise competitiveness
and boost the EU economy. To better illustrate the potential effects of a distortionary taxation, in
this experiment we only focus on the full integration scenario, where the increase in the labour
force is significantly larger than in the other two scenarios.
The simulations results for the two policy financing methods are reported in Figure 7. As in the
preceding section, we report the required overall increase in the government expenditure as a share
of the EU GDP (grey bars) and simulated GDP effects as a share of the EU GDP obtained by
financing the integration policy via a lump-sum transfer (red solid line) and via changes in the
income tax (red dashed line). The simulation results reported in Figure 7 suggest that under a non-
distortionary tax, the economic impact on the EU is positive since the beginning of the implemen-
tation of the integration policy, while for a distortionary taxation the change in the GDP is nega-
tive in first years until 2028. Hereafter, as more accepted asylum seekers are integrated into the
labour force, the positive effect of an increase in the labour supply comes fully into play by boost-
ing the growth of the EU economy. In the first 13 periods, the positive labour supply shock is not
sufficient to fully counteract the negative impact of the increase in taxes. This is not a surprising
result, as in this time frame, the net labour income tax increases significantly in order to cover the
considerable initial expenditures necessary to operationalise the integration of immigrants, whereas
the number of immigrants integrating into the labour market is not yet large enough to balance out
the negative impact of taxation. However, as soon as the government expenditure declines (still
increasing but at a decreasing rate), distortionary effects on wages are reduced, while we have a
15
Results could change if for instance we impose fixed nominal wages. In these circumstances, it is likely to expect conven-
tional Keynesian multiplier effects.
2.5
1.5
0.5
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–0.5
–1
Average Cost EU GDP Lump Sum Tax EU GDP Adverse Tax
F I G U R E 7 The cost of integration policies as % of the GDP (bars) and the simulated impact on the GDP in %
(lines) for the full integration scenario under two alternative policy financing methods
continuous and increasing inflow of refugees integrating into the labour force, in turn generating
positive effects in the economy.
However, if we analyse the economic impact under a different angle, the long-run positive
effects obtained for the income tax financing method not necessarily lead to a full absorption of
integration policy costs. As we can see from Figure 8, where the NPV for the two alternative pol-
icy financing methods are depicted, in both cases, the short and medium-run NPV is negative
while, in the long-run, a full repayment of the integration policy investment is achieved only under
the non-distortionary financing method. Under the income tax financing method, the cumulative
GDP growth over the 2015–60 period is not enough to ensure a full absorption of the adverse sup-
ply-side effects. It is interesting to see that, while the gap between the two alternative policy
financing methods is narrow in the short-run, as the level of the refugee integration increases per-
iod by period, differences become more and more sizeable.
5.3 | Regional impacts

Next, we explore the impact of alternative financing methods on the relative competitiveness of
EU regions. As shown in Section 5.2, the underlying mechanisms resulting from the application of
a non-neutral financing policy are substantially different from a neutral financing option. When the
model is framed to account for adverse supply-side effects coming from taxation, in the short-run,
a low level of the migrant integration into labour markets is not enough to lower wages; therefore,
workers become costlier and all prices in the economy rise, generating significant negative impacts
on the economic activity exacerbated by a loss in competitiveness. On the other hand, in the long-
run, a full integration of accepted asylum seekers implies that the increased pool of available work-
ers is large enough to put a downward pressure on wages stimulating in such a way
2620
| KANCS AND LECCA
500,000
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
–500,000
–1,000,000
–1,500,000
–2,000,000
–2,500,000 NPV Full - Lump Sum Tax NPV Full - Adverse Tax
F I G U R E 8 Net present value under two alternative financing methods, full integration scenario
Notes: Y-axis: million euro, Y-axis: years.
competitiveness and in turn export demand. This is then eventually able to counteract the negative
supply-side effects of taxation in all EU regions thus boosting the economy even further.
To identify sources of the increased competitiveness at the regional level, in Figure 9 we plot
changes in the regional GDP against changes in exports and compare both policy financing meth-
ods for the short and long-run, respectively. Red triangles denote regional changes in the GDP
(horizontal axes) and exports (vertical axes) under the distortionary financing, while grey squares
denote regional variations for the same set of output variables under the lump-sum taxation for
financing the integration policy. Note that under both methods of financing, we are referring to the
full integration scenario.
In the short-run (Figure 9), we observe a highly negative correlation between the GDP and
exports for the case of a non-distortionary taxation. In almost all regions, positive changes in the
GDP are related to negative changes in exports (Figure 9), as the government expenditure shock
creates an upward pressure on prices resulting, in a reduction in exports. The counteracting effect
of the increase in active workers entering the labour market is still too small to revert the direction
of the policy crowding out effect. On the contrary, a positive correlation, although not as pro-
nounced, is observed where the recycling method implies changes in the rate of the labour income
tax. In this case, negative changes in the regional GDP are associated to losses in the regional
competitiveness.
In the long-run, we observe a rather different situation, which is depicted in Figure 10. Under
both methods of financing, positive changes in the GDP are related to positive competitiveness
effects (Figure 10). As explained above, the labour supply shock dominates over other effects. It is
worth noticing that regions above the fitting lines are those benefiting particularly strongly from
improved competitiveness effects, as for example several regions in Hungary, Sweden and Austria.
Other regions experience less than expected changes in export (regions below the fitting line).
0
–3 –2 –1 0 1 2 3
–1
–2
–3
–4
–5
–6
–7
F I G U R E 9 Impact on the relative competitiveness of regions: short-run

Notes: Red triangles: distortionary financing; grey squares: lump-sum taxation.
Source: Authors’ estimations based on simulation results. [Colour figure can be viewed at wileyonlinelibrary.-
com]
As expected, under the non-distortionary taxation, the effects on the GDP and exports are lower
than under the neutral financing, while both variables show the same correlation effects in both
types of simulations. We can identify a group of regions with comparable GDP effects, while the
same group of regions experiencing heterogeneous competitiveness effects. To identify competi-
tiveness adjustment channels, we regress changes in exports on changes in the regional GDP and
plot residuals in Figure 11. Differences between the actual changes and the predicted changes in
exports provide a measure of the relative competitiveness that regions achieve as result of the inte-
gration of accepted refugee migrants into their labour markets. In Figure 11, we report results for
the distortionary taxation, which are considerably more interesting than for the neutral taxation.
When residuals are negative, gains in the relative competitiveness resulting from the integration of
migrants in a particular region are smaller than what we have expected. In the opposite case, that
is when residuals are positive, gains in the relative competitiveness are larger than expected. This
analysis is useful, because it neutralises the direct effect related to the labour supply shock.
According to simulation results reported in Figure 11, Swedish regions receive a significant
increase in the numbers of active workers joining the labour market; however, resulting relative
competitiveness gains are smaller than we would have expected, given the long-run impacts on the
GDP. This is not the case for regions of Hungary and Austria that receive a comparably large
labour supply shock. Deviations between the expected and realised gains in the relative competi-
tiveness are due to heterogeneities across regions in labour markets, the structure of economies,
trade patterns, etc., as observed in the base year data.
Finally, to further facilitate the understanding of mechanisms operating in the model at the
regional level, in Figure 12 we plot percentage changes in GDP, exports and household consump-
tion for one representative region – Stockholm region in Sweden (SE11, NUTS2) – for the full
2622
| KANCS AND LECCA
10
Percentage Change in Export from Initial Steady State

9
0
0 1 2 3 4 5 6 7 8 9 10
Percentage Change in GDP from Initial Steady State
F I G U R E 1 0 Impact on the relative competitiveness of regions: long-run

Notes: Red triangles: distortionary financing; grey squares: lump-sum taxation.
Source: Authors’ estimations based on simulation results. [Colour figure can be viewed at wileyonlinelibrary.-
com]
0.5
0
UKM5
DEA3
UKD4
DEB3
DEE0
UKE3
UKG1
UKH3
UKK4
BG31
BG42
DK03
GR11
GR22
GR41
HU10
HU32
RO12
RO41
AT11
AT31
BE21
BE31
CZ04
DE11
DE22
DE27
DE71
DE92
NL12
NL31
NL42
SK04
UKJ3
ES12
ES24
ES51
ES63
FR22
FR30
FR52
FR71
LT00
PL31
PL42
PL62
PT17
SE22
ITC2
ITG2
ITH5
FI1C
ITF3
SI01
–0.5
–1
–1.5
F I G U R E 1 1 Expected versus realised gains in the relative competitiveness of regions. Positive values – more
than expected; negative values – less than expected
Source: Authors’ estimations based on simulation results. [Colour figure can be viewed at wileyonlinelibrary.com]
15 (a)
10
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–5
–10
–15
–20
GDP Exp HH Consumption CPI Net Export
10
(b)
0
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
–5
–10
–15
–20
–25
–30
–35
–40
GDP Exp HH Consumption CPI Net Export
F I G U R E 1 2 The simulated impact on the GDP, exports, CPI and the household consumption Stockholm
region (SE11) in Sweden, deviations from the baseline in per cent
Notes: The bottom panel represents the case of the distortionary financing while the top panel reports results
for the non-distortionary financing.
2624
| KANCS AND LECCA
integration scenario under the non-distortionary financing method (top panel) and under the distor-
tionary financing method (bottom panel).
In the very short-run, which corresponds to the first period of simulations (2016), the household
consumption is constrained to fall, to finance the integration policy cost, while net exports (interre-
gional and international) are below the baseline value (5%). In this time frame, GDP multiplier
effects are positive, and the GDP is above baseline values, although the magnitude of the impact
is small. This occurs because positive supply-side shocks, coming from the additional supply of
integrated refugee workers entering into the labour market, are not strong enough to fill all vacan-
cies in the economy and generate a sufficient fall in prices to improve the competitiveness of refu-
gees-integrating economies. However, as the labour supply rises through the increased level of the
refugee integration, competitiveness effects come fully into operation and the household consump-
tion starts to increase. This occurs after around 15 years, after which the household consumption
keeps continuously rising until settling at around 1.5% off baseline values.
Under the distortionary taxation, household consumption falls continuously, reaching the largest
reduction in 2020 (around 40% from initial steady-state value) and remaining below baseline value
for the entire transition path. GDP and net exports record negative changes, as long as the
increased level of integration of immigrants in the labour market is not enough to reduce prices
and increase competitiveness.
These results are in line with our expectations. The distortionary financing involves prolonged
crowding out effects on GDP and consumption, especially in regions largely exposed to inflows of
migrants such as the Stockholm region. To shorten this period, regions have to become more com-
petitive. When more refugee workers are integrated into the labour force, an increase in the substi-
tutability of traded goods and services allows economies to better exploit their comparative
advantages of the improved competitiveness.
5.4 | Robustness checks

We realise that the success of the refugee integration policy will largely depend on the level of the
labour market integration, which the EU will be able to achieve. For this reason, we have con-
structed and analysed three alternative integration scenarios by altering critical assumptions about
integration policy costs and expected labour market outcomes. As the process of acceptance, train-
ing and all other tasks related to the integration of refugees improves due to the exchange of best
practices between Member States, through the learning by integrating and information sharing, the
level of the refugee integration policy effectiveness and efficiency is likely to improve over time.
Hence, we can expect certain policy learning effects to arise, if measures linked to the integration
of refugees become efficient and effective in the EU. In the construction of integration policy sce-
narios, we have considered all these issues. We have accounted for higher training costs to reflect
traumatisation experiences that can initially prevent immigrants to realise their potentials, and in
our migration assumptions, we have also considered the possibility for migrants to return voluntary
to their country of origin.
There are further factors that likely will influence the final outcome of the integration of immi-
grants in host countries. Particularly for immigrants who lack basic skills, the investment and the
effort required to allow them to achieve a full labour market integration can be more costly than
costs associated with a comparable training of native-born. Furthermore, in a ideal situation train-
ing should be targeted to those migrants who are most likely to remain in the host country. As
mentioned in Section 4, it is likely that a certain share of immigrants once trained will voluntarily
return to their country of origin. To investigate the role of these additional factors, in this section
T A B L E 4 Impacts on GDP, employment and real wages under alternative return and educational cost
assumptions, per cent off baseline
Default Higher voluntary return Higher training costs

GDP 1.68 1.15 1.67
Employment
Native 0.19 0.16 0.19
Foreign 15.71 11.23 15.72
Real wage
Native 0.12 0.15 0.12
Foreign 2.25 1.64 2.24
we look at long-run results of two hypothetical counterfactuals based on the full integration scenar-
io, where we increase the costs of training by 25% and assume an annual rate of voluntary return
of 5.74% – as observed in the Balkans.
In Table 4, we report the impact on the GDP, employment and real wages of these alternative
assumptions. We can observe that simulation results are not dramatically sensitive to higher train-
ing costs, although there is some degree of sensitivity in response to changes in the rate of the vol-
untary return of migrants to their home countries. This is not surprising, given that the long-run
impact, as seen in the description of main results, is driven by the increased labour supply. When
we assume the Balkan rate of the voluntary return, both the GDP and employment show lower
positive effects compared to results under default assumptions. Furthermore, with a decreasing
inflow of workers into the labour market, the downward pressure on wages is reduced. Foreign-
born workers experience a less dramatic reduction in real wages, while for natives these modelling
experiments suggests a slight increase in real wages.
6 | COMPARISON WITH PREVIOUS STUDIES

Comparing our results with previous studies, we note that the range of the estimated GDP effects
of immigration on receiving countries is rather wide in the migration literature, implying that many
factors, such as migrant skill complementarity/substitutability to the incumbent workforce skills,
integration policies, local labour market conditions, likely will determine the net effect of immigra-
tion in the medium to long-run.
Our simulation results are consistent with findings of Jaumotte et al. (2016), according to
which there might be significant long-term benefits of immigration in terms of a higher GDP per
capita for receiving countries. Their estimates suggest that an increase in the migration share by 1
percentage point can raise the destination country per capita GDP by up to 2% in the long-run.
Moreover, both high and low-skill migrants contribute to the GDP per capita increase in receiving
countries. Their estimates of a sizeable and positive impact of immigration on the GDP per capita
also suggest that the true fiscal benefits from immigration could be larger than typically estimated,
since static estimates of net fiscal gains, which calculate the difference between immigrants’ taxes
and social security contributions and their receipt of social security benefits and government ser-
vices, typically do not take into consideration the indirect effects of immigration on the aggregate
productivity of the receiving country economy. Jaumotte et al. (2016) conclude that the labour
market integration of migrants is critical to secure GDP per capita gains and benefits for public
2626
| KANCS AND LECCA
finances, and a number of policies can increase the benefits of migrant worker integration, includ-
ing language training and active labour market policies targeted to the needs of migrants. Hence,
the policy conclusions of this study are fully supported by those of Jaumotte et al. (2016).
The results of the IMF (2016) study, analysing the economic impact of the recent refugee
inflow in the EU, suggest that in the short-run, the macroeconomic effect from the refugee inflow
in the EU is likely to be modest in terms of the GDP growth, reflecting the fiscal expansion asso-
ciated with the support to asylum seekers, as well as the expansion in the labour supply, as inte-
grated refugees begin to enter the EU labour market. IMF (2016) concludes that the impact of
accepted refugees on medium- and long-term growth depends on how they will be integrated in
the EU labour market. Policies can help to open up the refugee’ path to the EU labour market:
minimising restrictions on taking up work during the asylum application phase, and active labour
market policies specifically targeted to the refugees strengthened in the EU. Again, the policy con-
clusions of this study seem to be in line with those of IMF (2016).
Similarly, also Furlanetto and Robstad (2016) find that an exogenous positive immigration
shock lowers unemployment (even among native workers) and has a positive effect on public
finances even in the short-run. The positive long-run effects are likely to be even larger. In con-
trary, they do not find any support for those arguments recently used against immigration in terms
of native employment displacement effects and burden on public finances.
Our simulation results are also broadly comparable with the results reported in a study examin-
ing the economic effects of administrative action on immigration on the US economy by the US
President’s Council of Economic Advisors (CEA 2014). The CEA estimates are based on a bot-
tom-up approach relying on the literature’s estimates of the effects of high-skill immigration on
TFP, hours supplied per workers, skill composition of the workforce and capital intensity. Accord-
ing to CEA (2014) results, the semi-elasticity of output per worker to immigration is of a similar
magnitude to the one we have found in this study for the policy status quo scenario.
Further, in a cross-sectional setting, Ortega and Peri (2009) find that a country with a migration
share of 10 percentage points higher than another country would have twice as high level of
income in the long-run. These estimates are comparable to our results for the full integration sce-
nario reported in this study.
Our findings are also in line with those of Jayet et al. (2001), who find that immigration to
France does not lead to higher unemployment rates or lower wage rates. Using data from the
French Labour Force surveys, Jayet et al. (2001) find that most labour market effects are positive
and statistically significant. These findings are directly comparable with our findings suggesting
that the integration of accepted asylum seekers does not reduce the wage rate or increase unem-
ployment of natives. In contrary, both effects are positive for incumbent workers.
As a general conclusion, our results seem to be broadly in line with those of previous studies
investigating possible impacts of immigration on destination country societies and economies. By
complementing previous findings, our study offers more nuanced insights regarding the regional
and temporal distribution of potential impacts, the role of alternative financing methods of the gov-
ernment expenditure and the consequences of the policy engagement and costs regarding the inte-
gration of accepted refugees in EU labour markets.
7 | CONCLUSIONS
The increasing flows of forced migrants from civil war regions in the Middle East pose rising chal-
lenges to EU societies and economies. In 2015 and 2016, the number of asylum seekers in the EU
exceeded one million per year – for the first time since the Second World War. The existing evi-
dence about possible socioeconomic impacts of the rapidly rising refugee inflows into the EU is
scarce and scattered. This study aims to fill this research gap by assessing the expected long-term
social, economic and fiscal effects of the rapidly increasing forced civil-war refugee immigration
into the EU and evaluating what role an active integration policy can play?
To assess the impact of alternative refugee integration policies in the EU, we perform a sce-
nario analysis with an empirically implemented general equilibrium model, augmented by a num-
ber of specificities for the purpose of this study. First, the immigration of refugees concerns all
EU Member States, and both regional and sectoral dimensions are important for our questions, as
refugee-related labour market shocks can be very different across EU regions and sectors. There-
fore, the model captures the whole EU and is implemented at a regional level with a sectoral
detail; regional and sectoral economies being linked through the trade of goods and services,
income flows and the mobility of labour and capital. Second, to capture the above-discussed skill
complementarity/substitutability issue of migrants, the model distinguishes between three types of
skills: low, medium and high, and introduces a split labour market: one for immigrants and one
for native-born. The labour of native-born can be substituted by the immigrant labour, although
the substitutability is not perfect. Finally, the labour supply shock (accepted and integrated refu-
gees entering the labour market) and the demand shock (additional expenditures of government
and immigrants) affects both the supply and demand sides of the labour market in the model and
interactions between them. Labour market shocks are absorbed through three endogenous channels
of adjustment – (un)employment, wages and competitiveness – together with two further labour
market mechanisms – education and migration.
Our simulation results suggest that, although the refugee integration (e.g., by providing welfare
benefits, language and professional training) is costly for the government budget, in the medium-
to long-run, socioeconomic and fiscal benefits may significantly outweigh the associated refugee
integration costs. Most importantly, in the medium to long-run, the net benefits of investment into
refugee integration are higher, the higher are investments into refugee integration at the time of
their arrival. Depending on the integration policy scenario and policy financing method, the annual
long-run GDP effect would be 0.2%–1.6% above the baseline growth, and the full repayment of
the integration policy investment (positive the NPV) would be achieved in the long-run. Hence,
our study confirms that sustainably integrated refugees have the potential to play an important role
in addressing Europe’s alarming demographic trends, filling vacancies with specific skill require-
ments, improving the ratio of economically active to those who are inactive, a ratio that is falling
in many Member States, and boosting jobs and growth in the EU.
Based on our simulation results, we can draw a number of policy recommendations. First, an
effective and sustainable integration policy is costly, it requires sufficient political, social and
financial resources to undertake necessary investments which, according to our simulation results,
will pay off for receiving countries in the medium to long-run. Second, the integration of refugees
may serve as an important channel of turning challenges associated with hosting refugees into job
and growth opportunities for the EU, as investing resources into integration policies today may
contribute to making Europe a more prosperous, cohesive and inclusive society and economy in
future. Third, according to our simulation results for the policy status quo integration scenario, the
long-run cost of non-integration is likely to be considerably higher than the short-run investment
costs of the refugee integration, as shown in the full integration scenario.
Our results seem to be in line with those reported in previous studies investigating possible
impacts of immigration on destination country society and economy. By complementing previous
literature, our study offers more nuanced insights regarding the regional and temporal distribution
2628
| KANCS AND LECCA
of potential impacts, the role of alternative financing methods of government expenditure, and
costs and consequences related to different policy engagement intensities in the integration of
accepted refugees in EU labour markets.
Turning to limitations of our study, we recognise that in the presented analysis we have focused
solely on socioeconomic impacts (both costs and benefits) of the refugee integration. In reality,
however, there are many more aspects, such as humanitarian, security, equality and social inclu-
sion, which need to be taken into account by policymakers, when designing migration and refugee
integration policies. This comprises a promising avenue for the future research. Second, our simu-
lation results depend on a large number of assumptions, both in the scenario construction and in
the underlying simulation model. For example, the size, dynamics and distribution of the forced
immigration – key assumptions on which our simulation results rest – are unknown and inherently
difficult to forecast. While, we have been using the best data available do date and have attempted
to be as transparent as possible about all key assumptions underlying our simulations, and have
been running extensive sensitivity analysis to test the simulation result responsiveness with respect
to them, the robustness of presented findings would benefit significantly from complementary stud-
ies, which invites for a follow-up research on forced migration in future.
ACKNOWLEDGEMENTS
The authors acknowledge helpful suggestions from Laurent Aujean, Peter Bosch, Juan Carlos Cis-
car, Mongelli Ignazio, Jan in ‘t Veld, Ralf Jacob, Julda Kielyte, Philippe Monfort, Rainer Munz,
Damiaan Persyn, Jorg Peschner, Giuseppe Piroli, Romanos Priftis, Filip Tanay and Alessandra
Zampieri, participants of the EASO conference EU and Global Asylum-related Migration Research
in Malta, as well as participants of seminars at the Durham University and European Commission.
The authors are solely responsible for the content of the paper. The views expressed are purely
those of the authors and may not in any circumstances be regarded as stating an official position
of the European Commission.
ORCID
d’Artis Kancs http://orcid.org/0000-0002-8514-725X
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SUPPORTING INFORMATION
Additional Supporting Information may be found online in the supporting information tab for this
article.
How to cite this article: Kancs D, Lecca P. Long-term social, economic and fiscal effects
of immigration into the EU: The role of the integration policy. World Econ. 2018;41:2599–
2630. https://doi.org/10.1111/twec.12637

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DOI: 10.1111/twec.

Long-term social, economic and fiscal effects of

d’Artis Kancs1 | Patrizio Lecca2

World Econ. 2018;41:2599–2630. wileyonlinelibrary.com/journal/twec | 2599

2 | FORCED IMMIGRATION IN THE EU: RECENT

2.1 | Size and distribution of the forced migration

2008 2010 2012 2014 2016

2.2 | Age distribution

2.3 | Acceptance and rejection

4.1 | Assumptions about the forced migration to the EU8

4.1.2 | Acceptance and rejection

4.1.3 | Relocation, resettlement

4.1.4 | Return migration

4.1.5 | Age distribution

4.1.6 | Labour market rights

4.2 | Integration policy scenarios

• Policy status quo scenario;

4.2.2 | Generic costs of asylum seekers11

4.2.3 | Scenario-specific costs of the refugee integration

4.2.4 | Scenario-specific labour market outcomes

In IMF (2016), this scenario is referred to as “slow integration scenario”.

5.1 | Main results

5.2 | Alternative assumptions

Perfect substitute Imperfect substitute

5.3 | Regional impacts

F I G U R E 9 Impact on the relative competitiveness of regions: short-run

Percentage Change in Export from Initial Steady State

F I G U R E 1 0 Impact on the relative competitiveness of regions: long-run

5.4 | Robustness checks

Default Higher voluntary return Higher training costs

6 | COMPARISON WITH PREVIOUS STUDIES

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