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Reforming 'free movement': Does the UK have a point?

This is the long version of a blog published by the ESRC’s UK in a Changing Europe Initiative

Today David Cameron will meet the heads of other EU member states to continue his efforts to renegotiate the UK’s relationship with the EU ahead of Britain’s upcoming referendum on EU membership. The discussion will focus on the UK’s demand to reform the rules for the ‘free movement’ of EU workers, and specifically its proposal to restrict EU workers’ access to in-work benefits and social housing for four years.

David Cameron’s negotiating team clearly has its work cut out. The current signs coming out of Brussels suggest that most if not all EU member states are, at present, opposed to the UK’s proposal. Various commentators in the UK and EU have pointed out that there are at least three reasons why the welfare restrictions the UK is proposing do not make much sense: first, they will not significantly reduce the number of EU migrants employed in the UK because welfare benefits are not among the key drivers of labour immigration (I agree); second, the restrictions are unlikely to save the UK exchequer much money in the context of total government spending on in-work tax credits and the overall fiscal effects of immigration (this is, in my view, more debatable because what constitutes a “small” or “large” saving is always somewhat subjective); and, third, the proposed restrictions are, in any case, incompatible with EU laws and principles of non-discrimination (I defer to the lawyers).

There seems to be a popular view, among commentators in both the UK and the rest of the EU, that the UK’s perceived “problems” with EU immigration and access to welfare benefits for EU workers are simply due to “politics”, “the media” and “ill-informed public opinion on immigration”. While all these factors surely play a role, it is important not to dismiss the idea that there may be some important “structural factors” across EU countries that can contribute to variations in both the scale and effects of EU immigration, and to different policy responses.

In a recent working paper, I argue that there are at least three institutional factors – the nature of the labour market, the type of welfare state, and social norms on the meaning and boundaries of “citizenship” – that differ across EU countries and can help explain why the UK has taken the lead in demanding reform of free movement.

Labour markets

In a free movement area with unrestricted labour migration across countries, the nature of the labour market plays an important role in shaping the scale of immigration in particular countries. More flexible labour markets tend to attract more migrant workers, especially for employment in lower-waged jobs, than more regulated labour markets. This is partly because flexible labour markets are characterized by fewer employment rights and protections, and thus make it easier and less costly for employers to hire and fire workers, than more regulated labour markets. As shown in Figure 1 below, using a standard OECD measure of labour market protection, the UK has one of the most flexible labour markets among the EU 15 countries.

Figure 1

Welfare states.

The nature of the welfare state, especially the extent to which it provides non-contributory benefits (i.e. welfare benefits that are paid regardless of whether the beneficiary has made prior contributions or not), impacts on the net-fiscal contribution that new migrants make. In countries with welfare systems characterized by a high share of non-contributory benefits, low-skilled immigration will, everything else being equal, create a smaller net-benefit (or greater net-loss) than in countries with welfare states that include a greater share of contributory benefits (i.e. benefits that are only paid if the beneficiary and their employer has made a prior contribution), at least in the short run. The fiscal effects of immigration also depend on a range of other determinants (including, critically, the level of welfare benefits provided) but the role of non-contributory benefits is an important factor.

Another reason why immigration can create greater challenges for less-contributory benefits systems relates to public opinion and perceptions of fairness. One narrow but popular idea of fairness toward migrant workers involves the idea that newcomers should not receive benefits without prior contributions or qualifying period. Of course, this approach could also be applied to citizens who enter the low-waged labour market for the first time but it is likely to be voiced even more strongly in the case of new migrants because of their status of “outsiders”.

While all migrants who are working “contribute” through their employment and income taxes, the idea of “no benefits without prior financial contribution or waiting period” may be more easily implemented (and communicated to the public) in countries whose welfare states are dominated by social insurance programmes that provide benefits to all people primarily based on prior contribution rather than based on “means”. Social insurance programmes are, by design, more exclusionary toward migrants than means-tested welfare policies.

The ‘contributory basis’ of a welfare state is a complex and multidimensional concept that cannot be easily summarised in a single set of numbers. Using the share of social contributions in total social expenditure as a crude and imperfect proxy, Figure 1 suggests that, in addition to having a highly flexible labour market, the UK also has one of the least contributory welfare states in the EU. While more detailed empirical research is clearly needed (for a recent critique of the approach above, see this paper), I argue that the broad picture Figure 1 paints is likely to be correct and not particularly surprising given what we know from the existing research literature about labour markets and welfare states in the EU.

In countries that have both a relatively flexible labour market and a relatively non-contributory welfare state – which, according to Figure 1, is the case in the UK and Ireland – ‘free movement’ can generate specific fiscal costs, economic tensions and concerns about “fairness” that are not present, at least not to the same degree, in countries characterised by more regulated labour markets and/or more contributory welfare states.

In principle, addressing these tensions and concerns does not necessarily require reducing immigration or migrants’ access to the welfare state. It could instead involve “domestic solutions” such as reducing the flexibility of the labour market (which would likely reduce labour immigration) and/or making the welfare state more contributory for everybody i.e. including citizens (as has been suggested to the UK by the European Commission and many other EU countries).

Social norms on “citizenship”

Whether the combination of flexible labour markets and less contributory welfare states leads to calls for policy reform in a particular country in practice, and the extent to which “domestic solutions” to perceived tensions arising from free movement are likely to be politically feasible, critically depends on whose best interests free movement is meant to serve. This is where cross-country differences in social norms on the meaning and boundaries of “citizenship” matter.

If there is widespread agreement within the domestic policy spheres of an EU member state that the primary (or at least an important) aim of free movement is to maximize the net-benefits for the EU as a whole (i.e. for all EU citizens), the relatively greater costs incurred from immigration by selected member states, especially those with flexible labour markets and less contributory welfare states, will be less important as these costs will be easily offset by the very large gains that employment abroad generates for EU migrants and their families. I suggest that this may be the policy approach in Ireland where, according to the latest Eurobarometer the majority (57%) of people see themselves as “European” in one way or another (52% say they feel “Irish and European”) and only 43 percent see themselves as “Irish only” (see Table 1 below). Despite its similarity to the UK in terms of labour market flexibility and contributory basis of the welfare state, Ireland has not been an advocate for reforming the current rules for free movement.

If, on the other hand, there are strong domestic political pressures in a country to maximise the net-benefits from free movement for its own citizens the combination of flexible labour markets and less contributory welfare states is more likely to result in domestic political pressures for changing the rules for free movement (and it would probably make it less likely that “domestic solutions” will be acceptable). Arguably, this is the case in the UK where almost two thirds of people consider themselves as “British only”. The relatively “un-European” identity of British people has been a fairly constant feature for many decades.

Data table

These three institutional differences across EU member states – labour markets, welfare states and social norms on the meaning and boundaries of “citizenship” – can help explain the UK government’s leading role in calling for reforms to free movement. I am not saying that, on their own, these institutional differences can necessarily be used to justify reforms of the current rules for intra-EU labour migration – but anybody interested in the political sustainability of the free movement of workers within an EU that includes the UK would be foolhardy to ignore them.

This blog is based on my recent working paper: Ruhs, M. (2015) ‘Is unrestricted immigration compatible with inclusive welfare states? The (un)sustainability of EU exceptionalism’, COMPAS Working Paper No. WP2015-125, Oxford. Download here