Author: Joan Monras
Studies have shown that granting work permits helps immigrants settle and integrate into host economies, but we know relatively little about how host economies are affected by the mass legalisation of immigrant workers. This column uses one of the largest and most unexpected legalisations in the world – by the Zapatero government in Spain – to show how legalisation can increase public revenues, but can also have distributive consequences for other workers in the economy.
Many countries host large numbers of undocumented immigrants. Leading the pack is the US where, according to the Pew Research Center, there were as many as 11.1 million unauthorized immigrants in 2014, representing 26% of all immigrants in the country. The US is not alone in hosting undocumented immigrants. Migration Watch UK estimated the undocumented immigrant population in the UK to be 1.1 million in 2010, representing more than 13% of all immigrants in the country. Clandestino (2009) estimates that, in 2008, there were between 1.9 and 3.8 million undocumented immigrants in the EU27, representing between 7% and 13% of the total immigrant population. These large numbers of undocumented immigrants have led recent administrations in many countries to consider, not without controversy, either legalising these immigrants or deporting many of them to their countries of origin.
Despite the prominence of undocumented migration in public debates, we know relatively little about the impact of legalising the work status of immigrants. Most academic research has focused on understanding how legal status affects immigrants themselves (e.g. Devillanova et al.(2017, Pinotti 2017, Mastruoboni and Pinotti 2015, Amuedo-Dorantes and Bansak 2011, Amuedo-Dorantes et al. 2007, Kaushal 2006). We know from this work that gaining legal status is beneficial to immigrant workers in a number of ways.
However, we still know relatively little about how the mass legalisation of immigrants affects the overall host economy. In a recent paper, we address this gap in the literature (Monras et al. 2018).
A unique natural experiment: The Zapatero reform
In the early 2000s, Spain experienced an incredible boom in immigration. The share of immigrants in the working-age population increased from less than 2% in 1995 to around 10% in 2004. Many of these newly arrived immigrants lacked work permits. By 2004, there were close to 1 million undocumented immigrants in a country of around 43 million inhabitants.
Despite this large number of undocumented immigrants, the government at the time, led by Jose Maria Aznar (Popular Party) and with Mariano Rajoy in its cabinet, was unlikely to legalise the work status of immigrants. Traditionally, the Popular Party had been proposing tougher policies against immigration. Its main stance was to avoid implementing policies that could attract new waves of immigrants. In this context, in the early 2000s, immigrants were granted work permits mostly on the basis of family reunification.
On 14 March 2004, voters in the Spanish general election had to determine whether the Popular Party would continue in power or be replaced by the Socialist Party. In the week before the election, the outcome seemed clear: the polls were forecasting that Zapatero of the Socialist Party was trailing Rajoy by seven percentage points.
Yet, something completely unexpected happened just three days before the election which, as shown by Garcia-Montalvo (2011), changed the final outcome: Madrid suffered the largest terrorist attack in Spanish history, a tragedy that was poorly managed by the Popular Party. As a result, the Socialist Party came to power, and one of the first policies it implemented was the legalisation of nearly 600,000 immigrants already living (and working illegally) in Spain.
This episode thus offers a natural experiment to study the effects of policies that grant work permits to immigrants already working illegally in a host economy. In the paper, we show that the legalisation of a large number of mainly low-skilled immigrants meant that:
- newly legalised workers started to contribute to the social security system, thus increasing public revenues;
- immigrant low-skilled workers became more than 30% more expensive, while still remaining cheaper than low-skilled natives; and
- immigrant low-skilled workers became closer substitutes for native low-skilled workers as they gained work permits.
These three insights guide our exploration of the impact of legalising immigrant workers on public revenues and on the labour market.
Using data on tax revenues andlabour market outcomes
In order to analyse the impact of this policy change, we start from the realisation that changes in local payroll tax revenues per newly legalised immigrant can be broken down into the direct contribution of legalised immigrants through payroll taxes and, indirectly, the changes in the contributions of all other workers in the economy. That is, legalising undocumented immigrants means that they will start to pay payroll taxes, but it may also mean that other workers’ wages, employment or both will change, thus impacting their public revenue contributions.
We use administrative payroll tax revenues to show that the legalisation of immigrants’ work status increased revenues locally — i.e. at the province level — by around €4,189 per newly legalised immigrant. This amount is only 55% of what we would have expected if newly legalised immigrants had shared the same characteristics as previous contributors to the social security system and had enjoyed similar labour market experiences.
Two factors may explain this. First, newly legalised immigrants were perhaps disproportionately low-skilled and had worse labour market experiences than natives. Second, the legalisation may also have affected previous workers. In the paper, we show that these two factors are extremely important in understanding the effects of this legalisation.
Using very detailed administrative and survey data on wages and employment, we show that the policy change disproportionately affected the labour market outcomes of workers in high-immigrant locations relative to low-immigrant locations. In particular, it worsened employment opportunities for both low-skilled natives and immigrants, while it improved them for high-skilled workers. Among low-skilled natives, those who lost their jobs were negatively selected — the policy change negatively affected employment prospects of native low-skilled workers at the bottom of the wage distribution. Putting together all the labour market changes and comparing them to payroll tax revenue changes, we show that this negative selection is crucial to fully understand the effects of the reform.
We also show that, following the reform, many immigrants moved from high- to low-immigrant locations. This is important since these immigrants also contributed to payroll tax revenues, but in traditionally low-immigrant locations. This, in turn, means that comparing local payroll tax revenues in high- relative to low-immigrant locations to evaluate the effect of the policy may underestimate the true impact of immigrant legalisation on payroll tax revenues. Once we take into account internal migration and selection, we argue that the true contribution was almost €5,000 per newly legalised immigrant, i.e. substantially higher than what we would have been able to estimate on the basis of local tax revenue data alone.
In sum, the evaluation of this unexpected mass legalisation of undocumented immigrants reveals two important insights. First, it uncovers important public revenue losses derived from not granting work permits to immigrant workers already in the host country. Second, it also highlights that these policy changes are likely to have distributive consequences for other workers in the economy: native workers who share characteristics with undocumented workers face tougher competition, while native workers with other skills may gain as a result of the policy.