An Unnoted Effect of a Social Welfare Transfers Program on Unskilled Migration

Abstract

We consider a link between a country’s social welfare transfers program, SWTP, and the attractiveness of migration to the country by unskilled workers. The existing literature maintains that a SWTP attracts unskilled migrants, and explicitly or implicitly that excluding unskilled migrants from the SWTP neutralizes the effect of the program on unskilled migration. We reason differently. Even when unskilled migrants are excluded from SWTP, for example because they are undocumented, the program still affects the said attractiveness, and it does so negatively. The explanation for that is that the program encourages native workers to choose unskilled work: for example, the program provides a cushion against unemployment, which otherwise could be guarded against by skill upgrading. The consequent increased supply of native unskilled workers translates into a lower wage for unskilled work. As a result, the lure of unskilled migration is dimmed. In sum then: in the presence of a SWTP there will be less unskilled migration than in the absence of an SWTP, even when unskilled migrants are excluded from the program. We conclude that the optimal SWTP involves less income redistribution when the relationship between the SWTP and unskilled migration is taken into account than when it is not.