Unemployment benefits and immigration: evidence from the EU

Abstract

Purpose: Economic theory predicts that unemployment benefits may increase expected income and reduce its volatility, thereby attracting immigrants to countries which implement such programs. This article aims to explore whether and how changes in countries’ unemployment benefit spending (UBS) affect immigration.Design/methodology/approach: Data are collected for 19 European countries over the period 1993‐2008. The relationship between immigration flows and UBS is first tested using the OLS technique. Instrumental variable (IV) and generalised method of moments (GMM) are then used to address reverse causality.Findings: While the OLS estimates suggest the existence of a moderate within‐country welfare magnet effect for the inflows of non‐EU immigrants, the IV approach reveals that the impact is substantially smaller and statistically insignificant when GMM techniques are implemented.Research limitations/implications: Since information on the immigrants’ country of origin is not available, it is not possible to exclude that for immigrants coming from certain areas, unemployment benefits constitute a strong incentive to immigrate. This hypothesis awaits further research, once detailed data is available.Originality/value: This paper complements previous literature on immigration and welfare by exploring the endogenous nature of welfare spending. The empirical results provide insights into the interaction between immigration and welfare policies.