Unemployment in Germany will Rise Next Year Mainly Because of Migrant Inflow, Say German Economists Working at Banks

by Dirk Ehnts, Econoblog101

I read an article some days ago about the unemployment trend in Germany. The article was published at heise.de, which features mainly IT-related news.

The article states:

Die Zeiten stagnierender oder sogar sinkender Arbeitslosigkeit in Deutschland gehen nach Einschätzung von Volkswirten großer Geldinstitute allmählich zu Ende. [..] Für 2016 rechnen viele Wirtschaftsexperten aber bereits mit leicht steigenden Arbeitslosenzahlen. Das geht aus einer Umfrage der Deutschen Presse-Agentur (dpa) hervor. Die befragten Fachleute führen die erwartete Entwicklung vor allem auf den anhaltend starken Zustrom von Flüchtlingen zurück.

An abridged translation would read like this: economists working at big banks think that unemployment will stop falling next year in Germany. Unemployment is forecasted to go up in 2016 by a bit. This has been the result of a survey conducted by press agency dpa. The interviewed experts think that the cause for this development is the sustained strong inflow of immigrants.

Let me explain why I strongly disagree with this assessment. First of all, there is no empirical evidence that an inflow of migrants per se cause unemployment to rise. In the long-term, nations which consist to a very large extent of migrants, like the US, Australia and others, seem to have higher GDP per capita, not lower GDP per capita. Also, these countries do not seem to have a persistent unemployment problem.

Second, from the theoretical perspective it is important what happens to government spending as a result of the inflow. The German government will cut some of its spending to make fiscal room for the financial effort needed to host the immigrants. This is not technically necessary, since the government can increase its debt, but this is what Schäuble seems to be planning (source). However, Schäuble also plans to use the forecasted budget surplus to spend on the issue. This means that according to the German newspaper SZ €6 billion will be spent on the additional immigrants. This constitutes a classic example of expansionary fiscal policy and as such is expansionary.

Of course, other parts of the economy might contract, so the net effect of this expansionary fiscal policy is far from clear. €6 billion is about a quarter of a percentage point of the German GDP, so it is not a large program that would be able to pull the economy upwards by itself. If exports are stalling and investment slumps, then economic growth in 2016 might still slow down. However, the reason will not the “sustained strong inflow of immigrants” but the weakness of domestic or foreign demand.

Even if argued from the supply side this should be the result. More potential workers are likely to increase output and not diminish it. If you think it through, why should an influx of potential workers into an economy lead to less production? Historically, GDP grew in parallel with population, though not 1:1. A negative correlation would be highly unlikely. A case in point is the migration inside Germany, where regions that lost workers – mostly in the east – have grown slower than the receiving regions in the west.

The economists of German banks that were interviewed are not reported to have explained why they thing that the inflow of migrants increases unemployment. As it stands, the whole thing smells of a cheap political trick to find a scape goat for the potential rise in unemployment in Germany which is due to other causes, mostly the austerity policies imposed on Europe and the consequences of the depreciation of the euro for the world economy. Whereas austerity policy has been imposed directly by the German government, the QE program by the ECB is an indirect consequence of its refusal to use fiscal policy to stimulate the economy.