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Integrating refugees in the labor market is key

21.09.2015

Last week, Chancellor Merkel said that the issue of refugees is a “key challenge” and “a task for the nation as a whole”. Integrating a high number of asylum seekers in the German society is indeed an enormous task. After the latest influx of people in July and August, the government revised upward its projection to 800,000 this year after 200,000 applicants in 2014. A plus of 800,000 would be nearly twice the number of the previous record-high seen in 1992 with 438,000.

The question whether the influx of refugees to Germany will become a success story certainly depends on a multitude of factors. However, there is one which really stands out: the labor market and its integration capabilities. Smooth absorption will only be possible if asylum seekers are able to find new jobs within a reasonable period of time.

In the following, I will argue that the chances of success are high, although it will take some time. Making reasonable assumptions shows that the German economy will benefit in the medium-term from integrating asylum seekers in the labor market. Major reason is the increase in the working age population and employment. According to our calculations, GDP will be lifted by at a total of 1.7% by 2020 compared to a scenario in which there is not any additional immigration to Germany.

Before analysing the longer-term impact on the supply side, a few figures are presented to show what GDP effects can be expected for this and perhaps next year.

Short-term economic impact

The short-term impact on GDP will stem from a classic demand effect, since government spending for refugees will increase. Examples are housing, food, etc. Last year, the German government spent EUR 2.4bn for a total of 360,000 asylum seekers. In the first seven months of 2015, an additional 220,000 arrived in Germany. If one assumes another 600,000 in the remaining months of this year and does some simple extrapolation, public spending will rise by a total of 5-6bn, or 0.2% of GDP. If one postulates some additional outlays by both the central government and municipalities, the short-term impact will probably not exceed 0.3% of GDP in the next 12 to 18 months. In any case, such demand effects are one-off ones which will influence economic activity only a temporary basis.

Estimating the integration effects by 2020

To understand the more important longer-term economic benefits of immigration, one has to decompose real GDP in its components on the supply side. In the following, I briefly refer to a recent working paper of Robert Gordon (2014) who is the godfather of such calculations (A new method of estimating potential real GDP growth: Implications for the labor market and the debt/GDP ratio, NBER Working Paper, August 2014). Gordon decomposes real GDP into several components. For illustration purposes, I will focus on the four most important ones: productivity; working age population; employment (compared to working age population) and hours worked (per employee).

One example illustrates how the German economy generated growth in recent years. From 2008 to 2014, real GDP rose by a total of about 4¼%. However, only two of the four components contributed to growth: productivity (+1¾%) and especially a more flexible labor market. Employment in relation to the working age population rose a high 7%. In contrast, the lower number of hours worked per employee (-3¼%) and the decrease in the working age population (-1¼%) weighed on economic activity.

In other words, the demographic development already hampered growth significantly. In the next few years, the working age population will even decline more strongly. A higher productivity and participation in the labor market may not be able to outweigh these negative effects any longer. For instance, activating additional people might become increasingly difficult. According to the OECD, the participation rate in Germany has already been at a far higher level than in other countries. While 73% of the labor force had been employed or had actively been looking for a job after reunification, it was more than 81% recently. This compares to participation rates of 76% in the UK, 75% in Spain, 70% in France, 65% in the US and 63% in Italy. As a result, bottlenecks on the German labor will increasingly emerge, as qualified personnel is missing. Just as a reminder, the number of vacancies already hit a level of more than 570,000 last month.

The Gordon composition can be used to derive the longer-term effects of refugees on German GDP. The following assumptions were made (which are, of course, debatable). The number of refugees will be 800,000 this year and then decline to 500,000 per year. The positive net effect on German GDP then depends on how well the integration in the labor market works. Not all of the refugees will probably find a job due to missing qualification, language problems, etc. Furthermore, some of the asylum seekers do not belong to the working age population, since they are too young or too old. If one postulates that about one in two gets employed the positive GDP will be a cumulated 1.7% by 2020. In less technical terms, the real GDP level will be 1.7% higher in 2020 than compared to a scenario in which no additional asylum seekers come to Germany. There is some reason to believe that the 50% ratio can indeed be reached. In a recent paper, the Institute for Employment Research said that 55% of the refugees in the past found a job in the longer term (IAB, Asyl und Flüchtlingsmigration in die EU und nach Deutschland, Aktuelle Berichte, 8/2015).

What has to be done

The rise in employment of foreigners (excluding asylum seekers) has already been a success story in Germany. The number of new jobs increased far more strongly in the last ten years (+26%) than employment of Germans (+11%). However, integrating refugees in the labor market has been handled restrictively until recently. Only in November of last year, the working prohibition for refugees was reduced to three months after it had temporarily been up to five years. Despite the latest mitigation, access to the labor market remains restricted. After the first three months, refugees are allowed to apply for a job in general. However, in case there is a German or EU citizen who looks for this particular employment, he gets the job and not the asylum seeker.

Such special regulations are bureaucratic and hamper integration. After all, the company which looks for an employee should decide and not the government. Furthermore, more than 120,000 apprenticeship positions are currently vacant. Since the majority of refugees might not be bound to a certain place in Germany, there is potential for reducing bottlenecks and creating additional mobility on the labor market. Recently, Mr. Weise, the head of the Federal Employment Agency, argued in favour of temporarily suspending the work regulation for refugees.

Besides easing restrictions on the labor market, additional money for language courses are needed. Learning German is the meat and potatoes of a successful labor market integration. On Monday, the government announced to increase expenditures on training measures. As is the case for education spending, providing training courses has to be seen as public investment which will pay off in the future. Besides money, the educational capacities exist in Germany. Last month, a total of more than 11,000 teachers were unemployed. Although not all of them are German teachers, they underwent educational training and could be mobilized for such purposes.

Conclusions

Increasing numbers of refugees and immigrants are not a panacea for solving the demographic problems in Germany. When the baby boomers are retiring between 2025 and 2035, the old-age dependency ratio will increase strongly. A persistently higher number of refugees and immigrants cannot prevent this but will at least dampen the negative effect.

Germany is not regarded as a classic country of immigrants and refugees such as the US or Canada. However, it has a great tradition of integrating people in the last few decades. After World War II, more than 12mn refugees came to the Federal Republic and the GDR. Another 2.7mn fled from East Germany to West Germany until the Berlin Wall was built in 1961. Without them, the famous “economic miracle” may have not been possible. Some observers may correctly point out that these refugees were native speakers which made integration easier. This is certainly correct. But learning German to some reasonable extent should not be an insurmountable obstacle. By providing the necessary means for that and easing restrictions on the labor market, Germany policymakers can lay the foundation for another success story.

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Der Beitrag Integrating refugees in the labor market is key erschien zuerst auf onemarkets Blog (HypoVereinsbank - UniCredit Bank AG).

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