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2
The Potential Gains from
International Migration
International migration can generate substan- migrants and for their origin countries. Here
tial welfare gains for migrants, their countries we can refer to a broader range of economic
of origin, and the countries to which they mi- issues than are captured by the model, al-
grate. The main focus of this report is on gains though without the ability to quantify that the
from the remittances that migrants send home model-based simulation provides.
(discussed in chapters 4–6); chapters 2 and 3 Starting from the base-case forecast of eco-
address the economic costs and benefits of nomic activity described in chapter 1, we in-
migration and the impact of migration on troduce an additional increase in migration
poverty. In this chapter, we use an economic from developing to high-income countries suf-
model to estimate the size of the welfare gains ficient to raise the labor force of high-income
resulting from migration from developing to countries by 3 percent over the period
high-income countries.1 It must be recognized 2001–25. The assumed increase, roughly one-
at the outset that the model fails to capture eighth of a percentage point a year, is close to
some known costs and benefits of migration; that observed over the 1970–2000 period. We
that the results are dependent on the specifica- imply no judgment concerning whether such
tion of the model and its key parameters; an increase is likely or politically feasible, but
and that the model cannot incorporate social rather view the rise in migration as an exoge-
or political considerations.2 The results of this nous shock. As discussed in chapter 3, pres-
simulation do not provide a precise forecast of sures to migrate are likely to rise over the next
the likely impact of migration; instead, they few decades, but the actual size of the migrant
provide a consistent framework that offers in- flows will depend heavily on political deci-
sights into (a) the economic gains that can be sions in destination countries. This exercise
expected from changes in policy or circum- presents us with the following key findings.
stances, and (b) the channels through which
migration affects welfare—and both are diffi- The expected decline in the labor force in
cult to measure in reality. The conclusions high-income countries will increase depen-
drawn from the model are supported by sev- dency ratios, which could add to the benefits
eral empirical studies, and they hold up well from migration. However, such increases in
under various alternative assumptions for migration are unlikely to be large enough to
model specification and parameters. have a significant impact on dependency ra-
In chapter 3, we complement this model- tios in high-income countries.
based approach to measuring the gains from
migration with a review of the economic liter- Under the assumptions adopted in this model-
ature, which covers the implications for ing exercise, the rise in migration—small
25G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
relative to the labor force of high-income coun- The costs of adjusting to increased migration
tries, but large relative to the existing stock of and the gains from migration depend, in part,
migrants—would generate large increases in on the investment climate. Adjustment costs
global welfare. Migrants, natives in destination as a result of migration will be lower if more
countries, and households in origin countries flexible labor markets and more efficient cap-
would experience gains in income, although mi- ital markets in high-income economies reduce
grants already living in high-income countries transitional unemployment and the cost of re-
would see a decline in wages relative to the base placing capital as economies adjust to the rise
case. Estimates of these gains and losses are par- in immigration. Similarly, developing coun-
ticularly sensitive to assumptions about the de- tries with strong investment climates will be
gree of differentiation among workers (between able to use increased remittances more effi-
natives and migrants and between old and new ciently, and enable workers who do not mi-
migrants), the impact of migrants on fiscal bal- grate to respond to improved labor market
ances, and the extent of remittances. conditions. The cost of adjustment may also
be lower if migration is spread over time
Empirical studies of the impact of migration rather than concentrated in spurts.
on natives’ wages have had mixed results. In
this simulation exercise, the rise in migration A principal conclusion from this exercise is
leads to a small decline in average wages in that migration can generate significant eco-
high-income countries relative to the baseline, nomic gains for migrants, origin countries,
which one would anticipate from a labor sup- and destination countries—but migration also
ply shock. But the decline has a barely per- can have important political and social conse-
ceptible impact on the long-term growth rate quences. For example, natives in destination
for wages. countries may become concerned about main-
Native households in high-income countries taining cultural identity in the middle of a
enjoy a rise in income, on average, as returns growing diversity, which also has implications
to capital increase, offsetting the mild decline relative to minority languages and other issues
in wages. The impact on developing countries surrounding the integration of migrants. To
is nearly the reverse, with wage income rising some extent, opposition to migration is driven
as labor-market conditions for workers im- by these concerns, and not by an economic
prove, while returns on capital decline with calculation of the gains and losses.
the smaller supply of workers. In developing We begin with a discussion of recent trends
countries the gain from increased remittances and discuss how migration to high-income
greatly exceeds that from changes in factor countries has grown over the past 30 years.
returns. We then turn to the prospects for migration,
including the intense pressures generated by
The economic benefits for high-income demographic changes. We describe the base-
economies could be even larger than those pre- case scenario for migration and the model-
dicted by the model, due to several factors: the based analysis of the welfare gains from in-
model excludes the increased productivity of creased migration. We conclude with issues
migrants (and the benefits to their offspring) that the model does not consider.
over time; investment levels could increase
substantially in response to higher returns to International migration trends
capital; labor-force participation could rise
among natives with the greater availability of Migration to high-income countries
migrant labor (for household help, for exam- has accelerated
ple); the labor market would become more The United Nations (UN) estimates that mi-
flexibile, and diversity would increase. grants account for some 3 percent of the
26T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
Table 2.1 Growth in international migration by destination, 1970–2000
Percent change per year in stock of migrants
1970–80 1982–90 1990–2000
World 2.0 4.4 1.3
High-income countries 2.4 2.9 3.1
Developing countries 1.8 5.5 –0.1
Excluding former USSR 1.9 2.1 0.0
Former USSR 0.5 25.0 –0.3
Source: United Nations.
world’s population, or about 175 million tion growth, the share of migrants in develop-
persons.3 The stock of immigrants to high- ing countries’ population (excluding the for-
income countries increased at about 3 percent mer Soviet Union) fell (figure 2.1).4
per year from 1980 to 2000, up from the Most high-income countries saw immigra-
2.4 percent pace in the 1970s (table 2.1). At tion rise by at least 2 percent per year from
that rate of growth, the share of migrants in 1980 to 2000.5 This increase reflected, in
high-income countries’ population almost part, increased demand for services accom-
doubled over the 30-year period, and popula- panying rising incomes, global competition
tion growth (excluding migration) fell from for highly educated workers as technological
0.7 percent per year in the 1970s to 0.5 per- advances boosted the premium for skills, the
cent in the 1990s. Immigration has had a par- growth of networks of immigrants in high-
ticular impact on population growth in several income countries that facilitated new immi-
high-income countries. For example, without gration, and increased refugee movements.
immigration Germany, Italy, and Sweden Almost 70 percent of the increase in immi-
would have experienced a decline in popula- gration is accounted for by the United States
tion in the past few decades (OECD 2005; and Germany, which together make up less
IOM 2005). By contrast, migration to devel- than 40 percent of the population of the
oping countries rose by only 1.3 percent per high-income countries. In the United States,
year from 1970 to 2000. With rapid popula- the Immigration Reform and Control Act
(IRCA) of 1986, which provided permanent
status to 2.7 million migrants, facilitated fur-
Figure 2.1 International migrants as a ther immigration through rules governing
share of destination countries’ population family reunification and may have encour-
Percentage
aged further irregular immigration (Passel
9 2005) by encouraging expectations of future
8 amnesties.6 Germany saw a large inflow of
7 ethnic Germans following the breakup of the
6 Soviet Union (Dustmann and Glitz 2005), as
5
well as an increase in temporary migration
4 1970
3 2000
under bilateral agreements.
2 Though the stock of migrants has acceler-
1 ated sharply relative to the population in the
0 industrial countries, in some respects the com-
World Developed Developing Developing
countries countries countriesa position and patterns of international migra-
tion have exhibited continuity over the past
Source: United Nations.
Note: a. Excluding countries of the former USSR.
few decades. The share of female migrants
has remained almost unchanged (47 percent
27G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Figure 2.2 Share of females in Figure 2.3 Immigration to selected
international migration countries, reasons for admittance, 2001
Percentage Percent
51 80
United
50 70 Kingdom Australia
49 2000 60
United
48 1970 50 States
47 40 France
46 30
45 20
44 10
43 0
World Developed Developing Workers Reuniting Refugee/
countries countries families asylum
Source: United Nations. Source: United Nations.
Note: Stock data, reported by countries of destination. Note: Stock data, reported by destination countries.
of global migrant populations in 1970, com- It should be emphasized that the migration
pared with 49 percent in 2000—figure 2.2), data on which these judgments are based
although women are the great majority of tend to be unreliable and incomplete. Many
migrants from some countries. More women countries and international agencies do not
today are migrating as independent wage distinguish between regular and irregular
earners, rather than to accompany their hus- migration or among types of temporary migra-
bands (IOM 2005). Migration continues to be tion. Some record migrants’ country of birth;
heavily determined by geographic proximity others their nationality (OECD 2005).
(from Mexico to the United States, from National estimates of the number of migrants
North Africa to Southern Europe, and from can be vastly different depending on whether
Eastern to Western Europe), as well as by “migrant” is defined as foreign born or of for-
colonial ties (from Latin America to Spain and eign nationality.
from a number of Sub-Saharan African coun-
tries to Belgium, France, Portugal, and the Migration is set to increase
United Kingdom—OECD 2005). The major It is likely that the number of people who wish
countries of destination continue to admit the to migrate from developing to high-income
largest share of permanent immigrants for countries will rise over the next two decades.
family reunification (or, in the case of the EU About 31 percent of developing countries’
countries, for humanitarian or refugee resettle- population is below the age of 14, compared
ment), although some countries are refocusing with 18 percent in high-income countries. We
their migration policy toward economic can thus anticipate a large influx in the age
(largely skilled) immigration (figure 2.3).7 But categories most suitable for emigration, as
international migration is also changing, par- lifetime earnings from migration tend to be
ticularly in the direction of flows. For exam- largest for those emigrating early in their
ple, more Asians are today seeking work in working life. The surge in immigration since
other Asian countries rather than in the Mid- the 1980s has established large diasporas in
dle East (Wickramasekera 2002; OECD 2005; high-income countries, which help to reduce
IOM 2005), while more Latin Americans are the costs and risks of migration (see chap-
turning to Europe for work opportunities, in ter 3). The demand for immigrant services in
addition to North America. high-income countries will also rise as the
28T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
aging of the population shrinks the workforce suming no change in labor-force participation
and increases demand for services that rates, the high-income countries may lose
immigrants can supply (such as nursing care). about 20 million workers by 2025, relative to
As income standards rise, the demand for peak employment.8
other services that employ migrants (such as The expected decline in the labor force is
household and restaurant help) should grow accompanied by a rise in the overall depen-
rapidly. The intensifying competition for dency ratio, defined as the ratio of nonworkers
skilled workers may also draw migrants, espe- to workers. For the high-income countries as a
cially from countries with strong systems of group, this ratio is forecast to remain at just
higher education. under one through 2009. However, by 2025,
100 workers will be supporting 111 depen-
Policies in destination countries dents, largely reflecting the increased number
can affect migration of the elderly (also, in most countries the num-
Forecasts of migration flows remain problem- ber of children under 15 will fall). The largest
atic. But with the underlying demand for and rise in the dependency ratio will be in Europe.
supply of migrants likely to increase in com- If we focus more narrowly on the number of
ing decades, the number of migrants will de- elderly per worker, every 100 European work-
pend on policy decisions governing admit- ers now support 36 elderly people; by 2025
tance and the effectiveness of efforts to police they will have to support 52. In Japan 100
borders and enforce workplace rules. Opposi- workers will support 60 elderly in 2025.
tion to immigration may grow as the number
of migrants increases, as it did in major In the developing countries the labor
countries of destination before World War I. force will expand
But it is likely that the main policy issue will Developing countries show considerable di-
be how best to manage and live with in- versity in demographic trends, but overall the
creased migration. In the simulations that fol- bulge of youths born over the last two decades
low, we explore the impact of an increase in is now entering the labor force, the number of
migration to 2025 in line with recent histori- elderly is as yet still rising slowly, and the
cal experience. number of births is falling rapidly. Thus
developing countries are forecast to add
nearly one billion workers to the world’s labor
The demographic challenge force by 2025, again assuming no change in
the labor-force participation rate, and depen-
The labor force in the high-income dency ratios are expected to fall.
countries is set to decline The expected expansion of the labor force
A key driver in the demand for international in developing countries, coupled with large
migrants over the next 20 years will be slow- wage premiums in high-income countries,
ing growth, and then decline, of the labor means that migration could help reduce de-
force in high-income countries. The age group pendency ratios in high-income countries.
that supplies the bulk of the labor force However, increases in immigration sufficient
(15–65 years old) is expected to peak near to have a noticeable impact on dependency ra-
500 million in 2010, and then fall to around tios would have to be very large. The scenario
475 million by 2025 (figure 2.4). In Japan this discussed below envisions an increase in the
age group has already begun to shrink, while labor force in high-income countries of 3 per-
in Europe the peak will be reached in cent through migration, or a hike of nearly
2007–08. In the other high-income countries, 50 percent in working migrants in high-income
the peak will occur later—around 2020 for countries. Even if migrants come with no
the United States and 2015 for the rest. As- elderly, the dependency ratio in the host coun-
29G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Figure 2.4 Labor force and dependency rates
Europe Japan
Labor force, millions Dependency rate Labor force, millions Dependency rate
200 1.3 70 1.3
195 65
1.2 1.2
190 60
1.1 1.1
185 55
1.0 1.0
180 50
0.9 0.9
175 45
170 0.8 40 0.8
1 4 7 0 3 6 9 2 5 1 4 7 0 3 6 9 2 5
2 00 200 200 201 201 201 201 202 202 2 00 200 200 201 201 201 201 202 202
United States Other high-income countries
Labor force, millions Dependency rate Labor force, millions Dependency rate
170 1.3 80 1.3
165 75
1.2 1.2
160 70
1.1 1.1
155 65
1.0 1.0
150 60
0.9 0.9
145 55
140 0.8 50 0.8
0 1 04 07 10 13 1 6 19 22 25 0 1 04 07 10 13 16 19 22 25
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Total, High-income countries Total, Developing countries
Labor force, millions Dependency rate Labor force, millions Dependency rate
500 1.3 3,600 1.3
495 3,400
1.2 1.2
490 3,200
1.1 1.1
485 3,000
1.0 1.0
480 2,800
0.9 0.9
475 2,600
470 0.8 2,400 0.8
0 1 04 07 10 13 1 6 19 22 25 0 1 04 07 10 13 16 19 22 25
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Labor force Dependency rate
Source: World Bank databanks (DDP).
Note: The dependency rate is measured as the ratio of the nonworking population to working population.
30T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
tries would fall by only about 3 percent under numbers hold up well as an approximation of
such a scenario. In the case of Japan, it would the gains to global output, regardless of vari-
lower the number of elderly dependents in ous assumptions made about taxes, non-wage
2025 from 60 per 100 workers to 59 per 100 income distribution, key model parameters,
workers—barely a dent. Nevertheless, as and other factors.
discussed in more detail below, selective Our modeling exercise uses a global gen-
migration—for example, of experienced and eral equilibrium model to measure the impact
skilled workers—can help mitigate the transi- of migration (box 2.1).10 One of the purposes
tional costs of financing pension benefits for of the global model is to verify the basic intu-
rapidly aging populations in high-income ition described above—that migration pro-
countries. duces a sizeable global gain. But it also is a
powerful tool to evaluate distributional
impacts—between skilled and unskilled work-
Migration and its development ers, between native- and foreign-born workers,
impact between capital and labor, and across
T o illustrate the potential gains from
increased migration, we compare the base-
case forecast for output and consumption
regions—and to show how these distribu-
tional impacts vary with policy choices and
parameters (for example, the role of fiscal
in chapter 1 with an alternative scenario, in policies or the propensity to remit).
which the stock of migrant workers is allowed
to increase in the high-income countries so The assumption is that migrants as a
as to raise the overall stock of workers by 3 per- share of population remain constant
cent (a movement of 14.2 million workers in the baseline scenario
from developing countries to high-income We begin with a base case for global eco-
countries by the year 2025). A first nomic activity (outlined in chapter 1), demo-
approximation of the global gains from such a graphic trends (described at the outset of this
scenario is simply to calculate the income gains chapter), and for migration. For the base case,
accruing to the new migrant workers—this the proportion of migrants in each region re-
will reflect the gains to the global economy, mains the same over time—somewhat con-
because it approximates the increase in global trary to the trends of the last two decades.
productivity derived from equipping the mi- This does not imply that gross migration is
grants with more and improved capital and stagnant, or even declining. The stock of mi-
technology. This back-of-the-envelope calcula- grants in any year will equal the previous
tion yields an increase in gross wage income of stock of migrants, plus new migrants, less the
$772 billion in 2025.9 As we will see later, attrition through death and return migration.
when corrected for differences in prices that We chose a relatively neutral assumption be-
migrants face in high-income versus develop- cause of the difficulty in forecasting these
ing countries, and taking into account other complex processes. For some countries—for
impacts of migration (on prices, for example) example Japan and those in Europe—the as-
as calculated by the model, global gains fall to sumption results in an absolute decline in the
$356 billion—an 0.6 percent increase in global stock of migrant workers. This decline paral-
income. The scenario is particularly beneficial lels the overall decline in the European and
to developing countries relative to high-income Japanese labor forces.11 For the high-income
countries. The aggregate percentage gain to countries as a group, the stock of migrant
developing countries (including the new mi- workers would increase by some 760,000
grants) is 1.8 percent, whereas the gains to between 2001 and 2025, just a small increment
natives in high-income countries amount to from the estimated 27.8 million in 2001. The
0.4 percent relative to baseline income. These main issue, however, is not the base case,
31G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Box 2.1 The model used in this study
including estimates of population and the stock of
T he underlying analytical framework used in this
chapter is the World Bank’s standard global
general equilibrium model—LINKAGE—which has
workers, both skilled and unskilled (Walmsley,
Ahmed, and Parsons 2005).a World Bank data (de-
been used in previous reports for trade policy analy- scribed in more detail in chapter 4 of this report)
sis. It has been modified to differentiate between mi- was used to provide the total level of remittances,
grant and native workers and to incorporate remit- and the bilateral stock of migrants was used to esti-
tances. The model is based on release 6.0 of the mate the bilateral remittance flows subject to the
GTAP database (base year 2001), developed by the overall total flows.
Global Trade Analysis Project (www.gtap.org), a The standard horizon for the LINKAGE model has
global network of researchers and policymakers en- been 2015. For the work described here, the model
gaged in the quantitative analysis of international horizon has been extended to 2025, in part because
policy issues. It is supplemented for use in our
demographic dynamics play a more important role
model with a new database developed jointly by
over the longer-term horizon, and in part to allow
GTAP and the University of Sussex (Parsons and
for more time to phase in the increase in migration.
others 2005). That database contains a comprehen-
sive estimate of bilateral stocks of migrants for 226
countries and territories.
aThe 87 regions of GTAP have been aggregated into 21 re-
While the new migration database is undergoing
constant improvements as new data become avail- gions for the purposes of this study. Six of these are high-in-
able and obvious errors are corrected, its developers come regions using World Bank definitions—the European
Union and the European Free Trade Area, Canada, the United
have done a remarkable amount of detective work,
States, Japan, Australia/New Zealand, and the newly-industrial-
largely in national data sources. The GTAP center izing economies. The fifteen developing countries/regions in-
has used this underlying migration database to build clude China, the Philippines, India, Russia, Turkey, South
a bilateral migration database for the 87-region level Africa, and Mexico as individual countries, plus 6 regions that
of aggregation of the main GTAP database— represent the remaining countries in each geographical area.
but rather the impact of deviations from of high-income countries by 3 percent, phased
it—although significantly different base as- in from 2010 through 2020.12 As migrants
sumptions could affect the deviations aswell. make up about 6 percent of high-income
According to the base-case scenario, mi- countries’ labor force, a 3 percent rise in the
grant workers would make up about 6 percent labor force (through migration) implies a
of the labor force of high-income countries in 50 percent increase in the number of migrant
2025, though with sharp differences across workers. This may seem like a large change,
regions and skills (table 2.2). The vast major- but the resulting stock of migrants in Europe,
ity of migrant workers are unskilled—some Japan, and the United States would remain a
25.3 million migrant workers out of a pro- far smaller share of population than current
jected total of 28.5 million, or 7.8 percent of levels in some high-migration countries. (In
high-income countries’ labor force. Skilled mi- Australia, for example, about a quarter of the
grants, on the other hand, represent just 2.2 per- population are migrants, in Canada 19 per-
cent of the total skilled workforce on average. cent, in Kuwait 50 percent). The percentage
increase in migrants is large in Japan (as the
There are welfare implications if baseline share of migrants is relatively low),
migration rises significantly and lower in the United States. The increase
The alternative scenario involves a rise in corresponds to an annual growth rate of
migration sufficient to increase the labor force about 1.9 percent, somewhat slower than the
32T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
Table 2.2 Labor force structure in the base case and after increases in migrants
In millions except where noted
Baseline Migration shock
2001 2025 Change in millions 2001–25 Change in percent 2001–25
High-income countries
Total labor force 480.8 474.0 14.2 3.0
Developing-country migrant workers 27.8 28.5 14.2 49.9
Unskilled 24.6 25.3 9.8 38.6
Skilled 3.1 3.2 4.5 137.9
Developing-country migrant workers
as share of total labor force, percenta 5.8 6.0 8.8
Unskilled, percent 7.4 7.8 10.5
Skilled, percent 2.1 2.2 5.0
Developing countries
Total labor force 2,596.2 3,561.0 –14.2 –0.4
Unskilled 2,395.9 3,294.3 –9.8 –0.3
Skilled 200.4 266.7 –4.5 –1.7
Source: Initial 2001 data from migration database under development by GTAP/University of Sussex (Parsons and others 2005
and Walmsley, Ahmed, and Parsons 2005). Scenarios based on World Bank assumptions.
Note: a. The percentage of migrant workers as a share of the total labor force is assumed to be the same for each individual
region of the model throughout 2001–25, but the share averaged across all developed regions will change through aggregation
effects.
average increase over the period 1980–2000. reflect the likely migration pressures implied
Moreover, the growth rate is unbalanced, with by large differences in demographic trends in
an annual increase of only 1.5 percent in un- sending regions (for example, Sub-Saharan
skilled workers, but 3.8 percent in skilled Africa versus Latin America).
workers. A number of additional assumptions Third, foreign workers are assumed to
are critical to the results. bring family members in proportion to the
First, the high-income countries’ labor dependency ratio in their home country. As a
force of both skilled and unskilled workers result, the total number of migrants in high-
increases by 3 percent.13 As the share of skilled income countries increases from 65 million
workers among migrants is much smaller than (6.5 percent of high-income countries’ popula-
the share of skilled workers among high- tion) in the baseline for 2025, to 93 million
income country natives, the shock results in a (9 percent of population) after the shock. This
much larger percentage increase for skilled assumption can change the average depen-
migrants. The number of unskilled migrant dency ratio of the host country. It can
workers increases by 39 percent, while the also have other implications not modeled
number of skilled migrant workers rises by explicitly—including fiscal impacts, because
138 percent.14 the families of new migrants may require ad-
Second, the share of migrants by region of ditional public services (such as schooling),
origin remains constant; in other words, the not fully compensated by the taxes paid by the
new migrants reflect the same allocation by new migrants.
region of origin as existing ones. Thus if Fourth, remittances are assumed to be a
Mexicans constitute 30 percent of foreign mi- fixed proportion of migrants’ labor income,
grants in the United States in the base case, equal to the level in the base year. The average
they maintain the same share after the increase for developing countries is 17 percent, although
in migration. This assumption is made to sim- the level varies with the migrant’s origin and
plify the analysis, although it does fail to destination countries. New migrants are
33G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
assumed to send remittances to their home nearly 0.9 percent from baseline levels.18 A
country at the same rate (relative to income) significant portion of the increase is due to the
as existing migrants.15 remittances from the new migrants, with some
improvement in labor-market conditions for
remaining workers. Those who are likely to
Returns to households
lose—in the absence of any compensatory
The gains from increased migration mechanism—are the existing migrants in
are large high-income countries, who are relatively
With the labor force moving, it is best to close substitutes for the new migrants. Their
assess the effects on real income in terms of private consumption would decline by over
households as opposed to the national level 9 percent and overall consumption (including
(as is typically done in analyses of trade re- public services) by 6 percent compared to
form). Households are broken down into four baseline levels.
groups. First are the native households in
high-income countries.16 Second are previous New migrants and their countries
migrants from developing countries now liv- of origin reap benefits
ing in high-income countries, that is, those (through remittances)
who were in place in the baseline scenario. The main gains come from the higher incomes
Third are native households in developing the new migrant workers can earn in the des-
countries—households that do not migrate.17 tination country relative to what they would
And finally, we have the households of the have earned in their country of origin. New
new migrants. Each household’s welfare is migrants earn $481 billion in real (after-tax)
broken down between the change in private income in 2025 over the base case. However,
consumption and the change in the consump- the dollar increase in income overestimates the
tion of public services. welfare gains for migrants. Essentially, an
Natives in high-income countries gain additional $1 spent in the high-income coun-
$139 billion in real income, or 0.4 percent of tries does not provide the same amount of
the baseline, as a result of the rise in migration welfare as an additional $1 spent in the home
(table 2.3). Nonmigrating households in de- country, because prices are higher in high-
veloping countries see a rise in real income of income countries. Whereas the prices of
Table 2.3 Change in real income across households in 2025 relative to baseline
Real income adjusted for
Real income cost of living
Private Public Total Private Public Total
Change, $ billions Change, $ billions
Natives in high-income countries 139 –1 139 139 –1 139
Old migrants in high-income countries –88 0 –88 –88 0 –88
Natives in developing countries 131 12 143 131 12 143
New migrants 372 109 481 126 36 162
World total 554 120 674 308 48 356
Change, % Change, %
Natives in high-income countries 0.44 –0.01 0.36 0.44 –0.01 0.36
Old migrants in high-income countries –9.41 –0.02 –6.02 –9.41 –0.02 –6.02
Natives in developing countries 0.94 0.44 0.86 0.94 0.44 0.86
New migrants 584 607 589 198 203 199
World total 1.20 1.15 1.19 0.67 0.45 0.63
Source: World Bank model simulations.
34T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
traded goods (for example, cars and electron- using purchasing power parity (PPP) exchange
ics) are the same worldwide, at least in princi- rates from the World Bank’s database.20 Thus
ple, the prices of nontraded goods and services instead of an increase of $481 billion, the rise
(for example, housing and haircuts) are much in welfare for new migrants is $162 billion.21
higher in high-income countries. Table 2.3 shows the change in these com-
A simple example may clarify the idea. ponents for the four household groups and the
Take a household of two persons living in world. Measured in national accounting
their home country. One works and earns terms, that is, with no adjustments for the dif-
$200. The other does not work. Each spends ference in the cost of living for the new mi-
$100, half on tradable goods (each priced at grants, global real income rises under the
$1) and half on nontradable goods (likewise model by 1.2 percent relative to the baseline,
priced at $1). Now the worker moves to a or 0.6 percent with the cost-of-living adjust-
high-income country and earns $700. Assume ment. Global private consumption increases in
that spending patterns do not change. The real terms by $308 billion in 2025 (with the
worker remits $200 back to the home country, cost-of-living adjustment), with real govern-
so the income (and welfare, in money terms) ment expenditures increasing by an additional
of the other doubles. The new migrant buys $48 billion. The total real gain—with equal
the same goods—50 units of tradable goods weight for high-income—and developing-
and 50 units of nontradable,19 but the price of country gains—is $356 billion, with just
the latter is now $9 and not $1. The migrant under half accruing to the new migrants,
thus spends $500, but welfare is unchanged, though natives in both high-income and devel-
because the basket of purchased goods is oping countries also are better off. In percent-
identical. age terms—where relative weights between
Welfare evaluations are of course more high-income and developing countries are
complex than this simple example illustrates. irrelevant—the scenario clearly indicates that
For one thing, new migrants will have to adjust the relative gains are much higher for
their spending patterns to deal with their new developing-country households than high-
environment. Heating oil and warm clothes income country households, rivaling gains
are necessities that will not boost a migrant’s from global reform of merchandise trade.
welfare above what it was in the home coun- Obviously, global income and global gains
try. For another, the decision to migrate is not would also be larger if expressed in PPP terms.
taken for simply static reasons; there are sig- As the percentage increase in welfare for mi-
nificant dynamic reasons for migrating—for grants living (originally) in developing coun-
example, better opportunities for one’s chil- tries is larger than the percentage increase for
dren that are not captured in this simple frame- those living in high-income countries, a switch
work. Nonetheless, the difference in purchas- to PPP measures would also increase the
ing power illustrated in the example is a strong global gains as a percentage of global income.
motivation for migrating, even on a temporary If in the migration scenario presented here the
basis. The more wage income earned in high- gains are PPP-adjusted, the global gains would
income countries that can be spent in lower- amount to 0.9 percent of global income in the
income countries, the greater will be the wel- baseline, instead of 0.6 percent using the EV
fare benefits. Box 2.2 provides additional aggregation. This scenario illustrates that mi-
detail on the computation and interpretation grants living (originally) in developing coun-
of global welfare gains from migration. tries gain the most from migration in percent-
To account for the change in prices faced age terms.
by the new migrants, their “new” consump- The impact of higher migration on prices is
tion in the destination country is adjusted to mild in aggregate in high-income countries,
account for differences in the cost of living, with a small decline in the average price of
35G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Box 2.2 Calculating and interpreting global welfare
gains from migration
T wo sets of issues arise with respect to the so-
called global gains from a policy shock. First,
how should the gains of specific groups be evaluated
national accounting standards. However, the stan-
dard real income measure is still a good approxima-
tion of the welfare gains for the other households in
and how do the gains compare with traditional mea- the model.
sures, such as GDP or national accounting stan- To the extent that new migrants remit part of
dards? Second, how should the gains be aggregated their income to their country of origin and that
over groups and countries, and how should the income is spent in that country of origin, the increase
aggregated gains be interpreted? in the cost of living that new migrants face is not
Evaluation of the welfare gains of specific relevant. Therefore, the EV measure of remittances is
groups. In standard applications of general equilib- larger than the same nominal income spent by the
rium (GE) models, the welfare impacts of specific new migrant in the host country. This difference
groups are evaluated using a concept from welfare illustrates the incentive for new migrants to remit
theory called equivalent variation (EV). The con- income home.
cept is relatively straightforward. Welfare changes Aggregation. The second issue relates to the inter-
as a result of changes in nominal income and pretation of the “global” gains. Typically, to derive
changes in prices. EV calculations summarize this aggregate or global gains, EV (expressed in a com-
welfare change in terms of an equivalent change mon currency, typically the U.S. dollar) is summed
in income alone, showing by how much income across all households. For individual persons or ho-
at original prices would have to change to mogeneous groups this EV aggregation, expressed as
achieve the same change in welfare as observed in a percentage of original income, is a good approxi-
a simulation.a mation of the change in welfare (or more precisely, it
For most households, the standard notion of the is a good indication of the change in welfare).e
change in real income, that is, the difference in nomi- However, no clear link exists between global wel-
nal income adjusted by the change in the CPI, is a fare and the aggregation of EV across heterogeneous
good approximation of EV.b groups, because we do not know how to weigh indi-
This is not the case for new migrants, however. vidual welfare across heterogeneous groups (a partic-
There is no standard price index that can be used as ularly difficult issue in aggregating across countries
a deflator for the change in the nominal gains for the at very different stages of development, as is done
new migrants, since the prices they face in their new here). For example, while most groups gain from mi-
host country have no linkages to the prices they paid gration in the scenario discussed in the text, some
in their home countries. GE and macro models typi- lose. The fact that the change in global welfare (ex-
cally calibrate base-year prices in each region to one pressed as the aggregation of EV across groups) is
(or unit value) by choosing corresponding volume positive does not mean that the welfare gains of the
units.c winners are considered more important than the wel-
This approach does not allow one to take into ac- fare losses of the losers. Thus, global gains as ex-
count the price increases that new migrants face as pressed in aggregate EV should not be interpreted as
a result of their migration. In the simulations, the a value judgment on how to weigh individual or
macro PPP exchange rate (as an approximation of local welfare gains.
the rise in prices faced by migrants from developing The aggregation of EV across groups does,
to high-income countries) has been used to adjust the however, have a useful interpretation, which is
gains to the migrants—although this is just an ap- linked to the notion of compensation and Pareto
proximation of the true welfare gains.d optimality. As long as the global gains are positive—
Because of the cost-of-living adjustment to the using the standard practice of adding up EVs across
welfare gain of new migrants, the real gain reported households—then it is possible through redistribu-
is no longer equal to real income gains of tion to compensate households that lose (so that no
countries—and real output gains—measured using one is worse off relative to the baseline scenario),
36T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
Box 2.2 (continued)
when some households are better off. In that sense developing countries in global aggregates would in-
the global gain can be compared with an equal rise crease in the measurement of both global income
in global output plus redistribution. levels and global welfare gains. However, the per-
In this report we maintain this standard practice centage increase in income for developing countries
of reporting EV aggregates, making the gains compa- would not be affected.
rable to global gains in many other studies.
An alternative approach to calculating global aOne of the advantages of the EV measure is that it trans-
gains would be to add up changes in income mea- forms the ordinal concept of welfare into a cardinal concept of
sured in PPP terms. The rationale for that alterna- income. While it is impossible to measure how much one welfare
level differs from another (one can only conclude that one level is
tive is that because prices of nontraded goods are
preferred to another), the corresponding increase in income can
lower in developing countries, the addition of a dol- be measured, and the size of the increase has a clear meaning.
lar to a developing country would enable the pur- bFor example, in trade-reform scenarios, the change in the
chase of a larger amount of goods and services than price index is a relatively good approximation of the welfare
in an high-income country. In that case, both base impact, since the new price is approximately the old price less
income and gains for new migrants and for those the tariff.
cThere are exceptions. For example, in the case of climate-
who remain in developing countries would be
change models, it is necessary to know the relative prices of the
roughly three times as large as reported here. This different fuels to accurately determine the carbon tax.
is true for all gains, whether they come from migra- dSee Timmer and van der Mensbrugghe (2005) for more
tion itself, from remittances, or from changes in details.
eThe size of the change in individual welfare is undeter-
wages and prices in developing countries. As a re-
sult, the share of those who live (originally) in mined, since welfare is an ordinal concept.
absorption (private consumption, private in- For the new migrants, the real income
vestment, and government spending) of 0.1 gains—cost-of-living adjusted—increase by
percent. However, prices of some key nontrad- nearly 200 percent. There are large differences
ables decline by larger amounts—0.8 percent across regions, with the highest gains (in per-
on average for public services (including centage terms) accruing to migrants from Sub-
health-related services) and 0.2 percent for con- Saharan Africa (619 percent) and the lowest
struction and recreational services. These price to migrants from the Middle East and North
declines will be even sharper for specific sub- Africa and Europe and Central Asia. The main
sectors where migrant workers are concen- reason for the disparity is the relative differen-
trated (for example, household help), for which tial between wages in origin and destination
we currently have no comprehensive data. countries. Variations in wages paid to mi-
The allocation of the gains across develop- grants from different regions in destination
ing countries depends on various factors, in- countries are minor, whereas there are very
cluding the skill loss and the resulting impact wide variations in wages in countries of ori-
on production, the locations to which mi- gin. For example, the average wage for a mi-
grants move and the relative wage differential, grant in Europe in the base year is about
and the propensity to remit. By developing re- $16,500—with only minor variation across
gion, the gains to households under the model migrants. However, the average wage in Sub-
vary from 0.6 percent for Europe and Central Saharan Africa is only $470, whereas in the
Asia to 1.1 percent for South Asia and Latin Middle East and North Africa it is $2,700.
America and the Caribbean (table 2.4). Thus, the migrant from Sub-Saharan Africa
37G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Table 2.4 Real income impacts across developing regions
Change in 2025 relative to the baseline, adjusted for differences in cost of living
Natives in region New migrants from region
$ billions Percent $ billions Percent
Total developing 143 0.9 162 199
East Asia and Pacific 37 0.7 32 215
South Asia 21 1.1 2 175
Europe and Central Asia 14 0.6 25 138
Middle East and North Africa 18 0.9 11 134
Sub-Saharan Africa 7 0.9 7 619
Latin America and the Caribbean 47 1.1 85 224
Source: World Bank model simulations.
will gain much more in both absolute and per- several channels, some of which increase, and
centage terms than one from the Middle East others that decrease, trade flows:
and North Africa.
• First, the rise in incomes due to migra-
The impact of migration on trade tion produces a small rise in global trade
would be mild flows, with regional differentiation (be-
Whether migration and trade are substitutes cause income gains differ considerably
for each other is an old debate. For exam- among regions). In addition to higher in-
ple, in the discussions leading up to the sign- comes, the rise in migration changes the
ing of NAFTA—the free trade agreement size of regional economies, with implica-
among the United States, Canada, and tions for their demand for imports and
Mexico—one of the key arguments was that ability to export.
trade would replace migration and reduce • Second, the nature of the shock assumed
the pressure for Mexicans to migrate to the in our model differs from the standard
North. Likewise, allowing for increased debate over trade and migration. The
migration—for example of unskilled share of skilled workers in total migrants
workers—could reduce trade, because it is larger in the shock than in actual mi-
would enable the high-income countries to gration over the recent past. A large
continue producing low-skill-intensive prod- proportion of skilled workers will find
ucts at competitive cost. employment in nontraded sectors—for
Evidence of the link between trade and example, as doctors and nurses—rather
changing the comparative advantage emerges than in producing traded goods. This
in the migration scenario described here. For will have general equilibrium effects to
example, the largest gains in export revenue the extent that the price of nontraded
for high-income countries come in agriculture, goods will decline by more than the price
clothing, other manufacturing, recreational of traded goods. Thus there will be a rel-
services, and public services—all labor- ative shift to nontraded goods and a
intensive sectors, the first four being relatively potential reduction in demand for im-
intensive in unskilled workers and the last in ports of traded goods. Overall, the larger
skilled workers. share of skilled versus unskilled workers
Change in comparative advantage has only does tend to reduce trade flows.
a mild impact on trade flows in this scenario, • Third, the increase in remittances pro-
however, as migration affects trade through vides an opportunity for developing
38T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
countries to import more and export less, Migrants’ impact on government fiscal
as their current-account balance will in- accounts is broadly neutral
crease by the size of the remittances ($98 The assumption concerning the level of
billion in net terms). The model results consumption of public goods and services by
show that total imports into developing new migrants has important implications for
countries would increase by $58 billion individual gains, and global gains, under the
in 2025 (1.1 percent relative to the base- modeled scenario. We assume that the new
line), as aggregate exports decline by migrants’ level of consumption of public
$40 billion (0.7 percent).22 The change goods and services equals the amount they pay
in remittances leads to an appreciation of in taxes, that is, their impact on the public
the real exchange rate and therefore a budget is revenue-neutral. This is broadly con-
loss in relative export competitiveness.23 sistent with the available evidence (box 2.3).
For instance, the output price index in To provide some sense of how different ap-
developing countries rises by 0.6 percent proaches would affect the scenario results, we
on average, whereas it declines by 0.1 per- present two alternative assumptions regarding
cent for high-income countries. the distribution of public goods and services
to the new migrants (table 2.5). The default
In summary, the scenario provides evidence assumption had a largely neutral impact for
that changes in comparative advantage due to existing residents in the host country. Under
migration do influence trade flows. However, another assumption—new migrants pay taxes
overall migration and trade are not substitutes but receive no benefits from public goods and
for each other, because migration has many services—existing residents, native and mi-
other economic effects that have more power grant, enjoy a rise in real incomes of $126 bil-
to stimulate or reduce trade. One implication lion ($117 billion for natives and $9 billion
of this finding is that migration policies should for existing migrant households). Note that
not be pursued because of their specific impact the global welfare gains increase as well, since
on trade flows. Likewise, in trade policies the the income accruing to natives (and existing
impact on migration should not be a main migrants) is not adjusted for the differences in
focus.24 Trade and migration policies should the cost of living between developing and
be evaluated on their own merits. high-income countries.25 A second extreme
Table 2.5 Impact of different assumptions on the consumption of public goods
and services by selected groups in 2025
Change in cost-of-living-adjusted real income in 2025; billions of dollars
Default
assumption—
“New” migrants “New” migrants
receive benefits receive no public “New” migrants
equal to their benefits but pay receive per capita
taxes taxes average benefit
Private Public Total Public Total Public Total
Natives in high-income countries 139 1 139 117 256 85 54
Old migrants in high-income countries 88 0 88 9 79 6 94
Natives in developing countries 131 12 143 12 143 12 143
New migrants 126 36 162 18 108 75 201
World total 308 48 356 120 428 4 304
Source: World Bank model simulations.
39G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6
Box 2.3 The impact of immigrants on fiscal balances
60s generally imposed a long-term burden. Studies
I mmigrants’ net contribution to fiscal revenues is
usually considered to be small. The net fiscal im-
pact of immigration on the United States has been
that follow immigrants over time generally conclude
that in net-present-value terms, immigrants and their
minimal (Coppel, Dumont, and Visco 2001; descendants tend to contribute more in terms of tax
Auerbach and Oreopoulos 1999). The U.S. revenues than they absorb in expenditures, but the or-
Binational Study on Migration (1997) found that ir- ders of magnitude are typically small (OECD 1997).
regular migrants did impose a significant fiscal bur- Intergenerational models are sensitive to the discount
den on state and local government. However, school rate used and assumptions concerning the allocation
expenses accounted for the bulk of these costs, and of the fiscal burden over future generations.
(as the authors note) education is an investment Third, the computation will depend on the level
that may readily be recovered in greater future pro- of skills, experience, education, and fertility of immi-
ductivity. Moreover, Lee and Miller (2000) found grants. Rowthorn (2004) calculates that skilled mi-
that the overall fiscal consequences of altering the
grants to the United States typically make a large
volume of immigration to the United States would
positive contribution to the fiscal balance, whereas
be quite small. Gott and Johnston (2002) and
unskilled immigrants cost more on average than the
Sriskandarajah, Cooley, and Reed (2005) estimated
that immigrants made a positive contribution to taxes they pay. Storesletten (2000) calculates that the
public finances in the United Kingdom. Gustafsson net-present-value contribution of the average high-
and Osterberg (2001) found that new immigrants to skilled immigrant to the U.S. budget is $96,000; the
Sweden generated a net fiscal cost, but this turned medium-skilled immigrant’s contribution is $2,000;
into a positive contribution after a few years. Nana and low-skilled immigrant’s contribution is
and Williams (1999) found that immigrants to New $36,000.
Zealand had a positive fiscal impact. Bonin, The results may change over time, as migrant
Raffelhuschen, and Walliser (2000) found that the characteristics and government policies change. The
net fiscal contribution of immigrants to Germany probability that an immigrant to the United States
could be significant if the government selects for will receive public benefits has risen since the 1970s,
skills. probably due to an increasing share of immigrants
Calculations of the net fiscal cost of immigration from poorer countries (Gustmann and Steinmeier
are fraught with difficulties, for several reasons. 1998).
First, the computation at any point in time An issue of particular concern has been the im-
depends heavily on the methodology used, what pact of migration on government-financed pensions.
expenditures and revenues are included, which public Likely increases in immigration can make only a
services should be regarded as pure public goods (and small net contribution to strengthening the financing
the extent of economies of scale in expenditures), and of pensions in the United States (Fehr, Jokisch, and
whether households or individuals are considered. Kotlikoff 2004), although selecting immigrants for
Second, static calculations of the current net fiscal working age and high skill levels could improve the
impact fail to take into account the age structure of picture (Storesletten 2000). By contrast, increases in
the immigrant population. Smith and Edmonston immigration could make a significant contribution
(1997) found that immigrants arriving between the to financing pensions in Germany (Bonin, Raffel-
ages of 10 and 25 years produced fiscal benefits under huschen, and Walliser 2000) and Spain (Collado,
most scenarios, while immigrants arriving in their late Iturbe-Ormaetxe, and Valera 2004).
assumption is that new migrants receive the taxes.26 In this case natives in high-income
same amount in public benefits as the average countries would lose $85 billion in aggregate
household in the destination country. This public goods and services, although this
would imply a net positive transfer to the new amount would not translate one-for-one into a
migrant households, since they would receive benefit for new migrants due to the cost-of-
more in public benefits than they paid in living adjustment. These simulations underline
40T H E P O T E N T I A L G A I N S F R O M I N T E R N A T I O N A L M I G R A T I O N
the effect of public policy on the distribution those from an increase in migration, and those
of gains from migration. from global trade reform—are scaled to the
same reference year, 2001, the gains from
trade reforms are $155 billion versus $175 bil-
Additional gains from migration lion from the migration scenario.29 This
can be substantial leaves little doubt that easing restrictions on
The gains for migrants from this scenario the movement of labor could provide a sig-
essentially provide the same message as ear- nificant boost to the global economy. More-
lier estimates. In their seminal paper, Walmsley over, in comparison with the most recent
and Winters (2003) estimate that a relax- work on global merchandise trade reform,
ation on the movement of temporary work- the gains from an increase in migration are
ers on the same order as that modeled more balanced toward income increases for
here—that is, 3 percent of the labor force of developing countries relative to developed
the high-income countries—would yield countries. In a study by Anderson, Martin,
global income gains of $150 billion (using a and van der Mensbrugghe (2005), the gains
1997-based comparative static model). The to high-income and developing countries are
result from our scenario that is roughly 0.6 and 0.8 percent, respectively, relative to
comparable to their figures (that is, global baseline income. In the scenario modeled
gains before adjustment for cost of living here, the income increases are 0.4 percent
and measured relative to 2001, rather than for native households in high-income coun-
2025) are more than double their results.27 tries and 1.8 percent for developing coun-
However, our figures are comparable with tries (including the new migrants).
the more recent work done by Walmsley
and her colleagues.28 One of the key reasons
for the increase in the global welfare impact Returns to factors of production
is a reevaluation of the assumed wage dif-
ferential between the home and host coun-
try. In their initial work, Walmsley and
F our critical factors determine the distribu-
tion of gains from migration among skilled
workers, unskilled workers, and owners of
Winters had assumed that new migrants capital: (a) the size of the increase in migra-
made up 50 percent of the difference be- tion; (b) the distribution of nonwage income
tween the home and host country’s wages. (profits); (c) the degree of substitution between
Their new assumption (used in our model as workers by region of origin; and (d) the degree
well) is 75 percent, based in part on the fact of substitution or complementarity between
that the migrants are permanent rather than workers and capital. We have already posited
temporary. Hamilton and Whalley (1984) that the increase in migration is large, with an
and Moses and Letnes (2004) have shown average increase in the migrant labor force of
that removing all restrictions on labor around 50 percent over a 20-year period, and
movement, admittedly not a realistic sce- comparable (if somewhat less) to the rise in the
nario, would yield a huge increase in world share of migrants in high-income country pop-
output. Overall, these papers suggest that ulation over 1970–2000. In the absence of any
labor-market restrictions are imposing a specific data on the source of migrant income,
much larger burden on the global economy we assume that migrants—both existing and
than are trade restrictions. The World Bank’s new—receive no nonwage income. In essence,
trade model suggests that removing all re- their real income will be driven by changes in
maining merchandise trade barriers would wages. The effects of this simple assumption
yield $287 billion in global real income gains on the distribution of gains are significant, and
in 2015. For the purpose of comparison, when the implications of relaxing it are discussed
the gains from the two different scenarios— below.
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