This paper examines the macroeconomic and distributional effects of the 2015-16 migration wave to Germany. During this period, approximately 2 million political and economic migrants, predominantly low-skilled refugees, arrived in the country.
The authors identify four main channels through which migration affects native welfare: (1) migrants increase labor supply, lowering the capital-labor ratio and wages, and raising rates of return in a closed economy; (2) migration alters the supply of low-skilled foreign workers relative to natives and high-skilled labor, with ambiguous effects on unskilled native wages depending on labor substitutability; (3) the inflow of young migrants reduces the old-age dependency ratio, boosting returns on the social security system; and (4) increased low-skilled migration raises tax-financed administrative expenditures, reducing natives’ welfare.
The study employs a quantitative overlapping generations (OLG) model with a time-varying demographic structure and neoclassical production to analyze the economic impacts of the 2015-16 refugee inflows into Germany. The model is calibrated using micro data from the German Socio-Economic Panel Study (SOEP), which provides detailed information on wages and assimilation speeds of migrants from different geographic origins over an extended period (1984-2017). The analysis incorporates aggregate migration flows, the skill composition of migrants, and estimates of the elasticity of substitution between different groups of natives and immigrants.
In addition to the SOEP, the study utilizes data from the IAB-SOEP Migration Sample (2013-2017), which oversamples immigrants from Arab and Islamic countries, the primary source countries of the 2015-18 immigration wave. Additionally, the IAB-BAMF-SOEP Refugee Sample (2015-2017) is used to specifically analyze the refugee population that arrived in Germany during the years of interest.
Main results:
- Low-skilled natives experience welfare losses from labor market competition from low-skilled migrants. Gross wages of unskilled natives deteriorate due to increased competition from equally unskilled refugees. This effect is only partially offset by lower effective contributions to social security, resulting in a decrease in net wages for low-skilled natives throughout the projection period.
- Medium and high skilled natives experience significant welfare gains. Short-run gains by medium and high skilled natives exceed the losses of the low-skilled.
- The overall welfare effects are positive, small initially, and increase over time. However, this aggregate effect masks significant differences across skill levels: low-skilled natives face welfare losses, while medium and high-skilled natives see gains. Specifically, a young low-skilled native in 2013 experiences a −0.2 percent welfare loss, whereas young high and middle-skilled natives gain 0.2 percent. This suggests that compensating low-skilled natives is possible.
- Gains for future low-skilled cohorts start to materialize for cohorts entering the labor market in 2018. While current low-skilled natives face mild welfare losses, future low-skilled cohorts increasingly benefit from the inflow of low-skilled refugees. The positive effects from the younger age distribution of migrants eventually outweigh the negative wage effects, leading to overall welfare gains for these future cohorts.
The authors conclude that net wages of unskilled natives decline in the short run due to increased competition from unskilled refugees and higher fiscal costs. However, these losses are outweighed by gains for other groups. Key lessons for other countries include: (1) the skill segment of migrants is crucial, and a binary distinction between college and non-college educated workers may be insufficient; (2) the relative magnitude of the substitution elasticities across worker skill types, and across regions of origin of workers are crucial for determining wage and welfare impacts; (3) migration’s welfare effects vary over time, necessitating a dynamic transition analysis; (4) initial aggregate welfare effects may be small but mask significant redistribution, requiring compensation for losers; and (5) over time, welfare effects become more positive, benefiting even low-skilled native newborns due to the younger age distribution of immigrants in an aging society.