The Economic and Fiscal Effects of Granting Refugees Formal Labor Market Access

Michael Clemens, Cindy Huang and Jimmy Graham

Center for Global Development, Working Paper 496, October 9, 2018


Most refugees, especially in developing countries, do not have formal labor market access. Even when permitted by law, administrative and practical barriers often limit access. The authors argue that granting refugees formal labor market access has the potential to create substantial benefits for refugees and hosts, including reduced vulnerability and higher incomes for refugees, improved labor market outcomes and higher incomes for natives, and positive fiscal effects for host governments. Even short of formal labor market access (where legal and de facto barriers to access are minimal or nonexistent), greater rights and fewer barriers around work and business ownership enable greater benefits. In many cases, policies restricting access to formal work can exacerbate negative effects rather than mitigate them, e.g. restricting refugees to certain geographies and/or informal sector intensifies competition between refugees and hosts in those areas, increasing the likelihood of negative effects on wages and employment. However, there may be some costs associated with granting formal labor market access for certain groups in the host population (e.g. some degree of labor market competition between refugees and natives, governments may have to marginally increase spending to accommodate refugees if donors do not provide enough support, and quality of services can decline if the right policies are not in place), and the full range of benefits is not guaranteed. Formal labor market access itself can mitigate labor market impacts on hosts (e.g. by reducing competition in the informal labor market), and complementary policies can mitigate or eliminate the costs to host workers associated with formal labor market access for refugees. For example, freedom of movement minimizes the concentration of any negative impacts while allowing refugees to maximize their potential for productivity in the economy. For those natives that experience job displacement, programs can be implemented to help them find new employment opportunities and upgrade to higher-paying positions.

The existence and magnitude of benefits and costs is shaped by: (a) the current extent of informal labor market access for refugees; (b) characteristics of the labor market; (c) the skill and demographic profiles of refugees; (d) the geographic location and concentration of refugees; and (d) policy choices and the political context. The authors argue that once a country is hosting refugees, there will be many more benefits to letting them work than to not letting them do so. Policymakers can amplify the benefits of formalization and mitigate the costs by creating and implementing policies that: (1) help natives adjust to and benefit from changes (e.g. by facilitate occupational upgrading, supporting the most vulnerable native populations, and supporting government spending on refugees); (2) facilitate labor market integration for refugees (through livelihood support, skill verification and recognition, lower administrative barriers to formal labor market access, and by creating a perception of stability); and (3) grant refugees complementary rights (e.g. freedom of movement, financial access, and access to education) that minimize the concentration of any negative impacts while increasing refugees’ productivity by enabling them to find jobs that better match their skills and experience.