The Economic Consequences of Immigration to Germany

The Federal Republic of Germany does not belong to the set of “classical” immigration countries like Australia, Canada or the United States. Nevertheless, migration has become a topic of increased interest for the whole of western Europe and, in particular, for Germany. This interest has arisen from the expectation of massive migration flows in the near future: migrants from the new democracies in East Europe, migrants moving within the growing European Community from the south to the north, and migrants trying to escape war and starvation in many countries of the Third World. It is believed that these flows will particularly affect Germany because of its ties to East Europe and its relative affluence.

This paper studies the economic effects of immigration on the income of natives. We assume a world with flexible prices. The price reactions guarantee the full employment of all inputs at any time. Our model is a one sector growth model with two homogeneous inputs, capital K and labor L. The technology is described by the CES-production function: with A < 0 and 0 > α > 1.

Most West European countries have experienced high immigration and growing ratios of foreign-bora residents among their populations in the last decades. The social security system is highly developed in this region. It redistributes a large part of the gross domestic product. Immigrants are often entitled to social security benefits and they pay contributions if they are gainfully employed. Immigrants are not totally homogeneous to natives in their socio-economic and demographic structure. Although it is obvious that they influence the social security system the direction of this influence is a priori not clear.

There have always been concerns about the labor market consequences of immigration. In Germany, with the open borders of the European Community, this debate has gained the ever-increasing attention of politicians and employees alike. Are there costs and/or benefits to increased immigration for the host country? Are some job groups or industries affected more than others or are these effects shared equally across the economy? Most economists support the position, that for allocative reasons, free international movements of labor are beneficial for the economy as a whole, as is the free movement of capital and goods. This judgement is based on the standard competitive model of labor migration. However, native labor may be adversely affected and with increasing unemployment prevalent in the host country, increased immigrant labor may be politically and fiscally undesirable.

Compared to other immigration countries, the German guest worker system is peculiar in various respects. The great majority of guest workers migrated to Germany from Turkey, (the former) Yugoslavia, Italy, Greece and Spain in the late sixties and early seventies, when the federal labor office was actively hiring guest workers through recruitment treaties. At that time it was expected, both by the German authorities and by the guest workers themselves, that the workers would stay only temporarily in Germany. The dominating factor for temporary migration was believed to be the so-called “savings motive”, implying that guest workers would return to their home countries after they had saved enough money either to set up a small private business or to live in retirement back home. However, a considerable number of them became permanent residents, either because economic and/or political developments in the source countries rendered return migration unattractive, or simply because of successful integration in German society. Although expected duration of stay varies among individuals, guest workers have similar earnings/experience profiles as natives. This can be interpreted as strong evidence for their successful integration into the German labor market (Licht/Steiner, 1992).

Germany has a long history of attracting immigrants. This is reflected in the substantial portion of the population accounted for by immigrants. In 1989, foreigners constituted between 7.3% and 7.9% of the population in West Germany.² This figure, however, underestimates the inflows of population: In the German statistics, foreigners do not include foreign-born who are ethnic German or foreign-born who have received a German passport. In addition to the inflow of “foreigners,” there has been a large migration of ethnic Germans to West Germany since World War II (before 1950 the inflow was more than 12 million; between 1950 and 1988 it was 4.8 million; and between 1989 and 1990, 0.779 million). Therefore, the number of foreign-bora persons in Germany is comparatively high.³ This was conscious policy choice. Germany has a “law of return” for “ethnic” Germans and a long history of actively attracting “guestworkers.”⁴

At the end of the eighties the immigration of ethnic Germans from Eastern Europe to Germany increased sharply. This group constituted a substantial share of the recent immigration wave to Germany. The legal position of the Aussiedler is different from the position of other groups of immigrants, since they are considered to be German citizens. Several public programs have been created to promote the integration of these resettlers.