Europe & Immigration

Europe & Immigration

Up until now I have been relatively skeptical of the growth in right-wing nationalist movements of Europe. From the historic approach it has always been present in Europe regardless of the century, the shape it has taken and the consequences have changed. In this it is essential to see how this time is different.

UKIP has a growing political platform in the U.K. and the party is clearly giving rhetoric that appeals. In this we may examine that central to their platform is “leaving” Europe and moreover tightening our controls on immigration. My question is why do the main political parties ignore the clear economic potential of lowing barriers to immigration?

There are clear potential gains from reducing barriers to immigration. The table below gives a clear comparison how immigration barriers stack up against reducing trade and capital barriers. Even if we argue that these figures are exaggerated they are still so substantial that the avenue should surely be explored at the least.

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This calls for a natural experiment with immigration. Israel is a country that had a very specific yet clearly open immigration policy, if one were Jewish they could commit themselves to an Aliyah and become an Israeli citizen. This option is still open to Jewish people from around the world today. Originally this had been an integral factor in the acceleration of Israeli economic growth from the 1960s, alongside the flow of capital and aid from the United States. However, more recently one can examine the sudden influx of Ethiopian Jews. Israeli media was split upon the economic affect this additional population, with essential resources such as water in the region already scarce. The skeptic’s fears were not met, with strong government intervention citizenship enabled them to find jobs and make a living. With their wages in many cases greater than the average Ethiopian.

One important aspect of this immigration is that entire families had immigrated; it was not just children or parents. This is important in the perspective of keeping the consumption within the economy. Gross national product is a popular indicator for developing countries such as the Philippines, as citizens immigrate to Western countries and repatriate their earnings. Since entire families had moved to Israel there was no repatriation of these earnings or if any it was limited, so there was increased consumption in the economy. Israel had hugely benefitted from an increase in population through immigration. All the while the country has not lost its natural identity or culture.

In regards to wages between two countries opening up to immigration we may observe the following case whereby wages in the developed country decrease, and wages in the developing country effectively increase. In this it is important to note how the marginal decrease is smaller in comparison to the marginal increase.

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The affect on wages is dependent on the elasticity of demand for the wage-labor market. We can see how the mixture in quantity of labor changes through immigration in the movement from L to L’. While the shaded areas are a representation of the efficiency gained through immigration.

Immigration is not an economic evil; we tend to be averse to it due to the ignorant fear that immigrants “steal jobs”. Closing of our economies and returning to super-nationalism is not the solution, we would be stepping back 100 years.

In the wake of Charlie Hebdo there is going to be increasing support for these nationalist groups. However it is important to remember the benefits of immigration. Fox News came under heavy fire as a commentator suggested that Birmingham was a Muslim city, and a no-go zone for non-Muslims. The greatest problem with this is that the comments came from Steven Emerson who was educated in Brown University and is seen as an expert on counter-terrorism and terrorism. There is a glaring misconception of Muslim population is Western countries. They are all part of a mutually beneficial working economic society. Of course new immigrants are not going to call themselves British or French, but their children will.

There are real economic benefits to opening up to immigration and reducing barriers, especially in the case of highly skilled migrants. I am not in favor of eliminating all barriers; this would eradicate the benefits shown in the model above. It has to be a gradual process in order to allow the population to naturalise. The relatively young United States would do well to remember how it become an economic superpower through the influx of people in the early 18th century.

Copyright Almog Adir © 2015 · All Rights Reserved · My Website

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Eurozone Round-Up

No surprises this morning as the Bundesbank has slashed the German growth forecast to 1%. This has followed the past few months where there has been tangible uncertainty about Germany’s macroeconomic vision. With criticism coming from those suggesting that Germany has regularly failed to provide a level of investment, which would lead any kind of recovery, coupled with bullish behaviour in keeping its high trade surplus.

The interdependence of the Eurozone has become increasingly clear since the crises, and it was well understood that Germany maintaining its surplus had constrained the growth of the weaker Eurozone members. The German hopes were that this would still help drive growth, but shown through interdependence the German economy is slumping.

Continuing with the lack of surprises the European Central Bank informed us that the expected inflation for this year would be 0.5% with a forecast of 0.7% for 2015. The last target of the ECB that I can recall was that of inflation being 2%. Germany is clearly causing a whole host of trouble due to its economic weight on the Eurozone, but shows no insight into the potential change of policy as they are still predicting growth to rally to 1.6%. Jens Weidmann throws some spurious figures and he then claims to be surprised by a lack of performance, although nothing has been out of the ordinary for the past two years.

Moreover, it is clear that the only person in the ECB that needs more support is Mario Draghi. I would go as far as to claim that he is the Eurozone’s only hope, with his desire to pursue quantitative easing in a strategic and defined manner in aiding structural reform is essential. With an overall aim of returning the size of the ECB’s balance sheet to that of 2012. It is fair to state that asset purchases do not have defined results, but it would be an improvement in comparison to Weidman’s insistence on a more passive approach. I am not the biggest advocate of quantitative easing, and more in line with structural reform to European labor law and the ease of businesses, but I believe that Draghi is representing an interventionist mixture that will lead Europe to sustained and reliable growth.

It will be interesting to see how the year closes off and what 2015 has to offer in terms to tangible change in our approach to modern economies which no longer fall in line with some of the traditional approaches still used and insisted upon.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Eurozone Unemployment

As a result of the financial crisis in 2007 countries within the European Union have struggled to maintain low levels of unemployment, this is the outcome of retracting economies and austerity measures. Across the Eurozone the average unemployment rate has reached a peak of 12%. The article identifies the occurrence of this peak as countries such as Greece, Spain, and Portugal all have unemployment rates around 25%. There are also fears that unemployment will further increase during April as a result of the Cypriot crisis.

Unemployment can be defined as “Those out of work, actively seeking work at the current wage rate”. This can be calculated in two ways, the first being through a claimant count (those requiring unemployment benefits) and the second being through a labour force survey. The labour force survey most often releases figures higher than through the claimant count, which is why governments tend to publish the claimant count unemployment rate.

Analysis:

As the current unemployment rate of the Eurozone is at 12% it is understood that there is a clear surplus of people willing to work. This can be clearly shown through the demand and supply relationship for labour.

Picture1

The highlighted triangle represents the unemployment as labour is demanded at LD but supplied at LS. This shows a simple representation of the current unemployment, but it does not display the causes of it.

The causes of this unemployment can be recognised through the article as cyclical and structural. Germany maintains to be the manufacturing powerhouse of the Eurozone helping keep unemployment of the country down, however countries such as Greece and Portugal do not have strong industry. This is the presence of structural unemployment as the economies require people to work jobs that they are not trained for or overqualified. The cyclical unemployment was initially the result of the initial financial crisis recession, but double-dip recession has magnified the impact on unemployment. Countries that struggle to create economic growth tend to struggle creating jobs.

The article identifies that as a result of this continuous unemployment, the Eurozone has fallen back into recession. Manufacturing industries and other business have seen a decline in business activity, thereby showing a lack of aggregate demand throughout the European Union.

Picture2

The graph above shows how unemployment in the region has affected growth prospects for the future, as shown through the movement from Eq to Eq1. The shift in aggregate demand inwards is a result of unemployment, as when people do not have a salary their effective demand is further restricted.

Evaluation:

There are clear limitations to the initial demand and supply of labour model above, this model fails to show where the unemployment is allocated (i.e. agriculture, finance, or manufacturing). Furthermore, it does not accurately represent the actual quantity of those currently unemployed. However, it does help establish the significance of unemployment as it contributes to understanding that there is a fall in aggregate demand, and therefore a dampening on growth prospects for the European Union.

The aggregate demand and supply diagram clearly shows the effect of unemployment on the European economies, and it also shows how the price level has gone down. This is true to an extent as European inflation is estimated to be at 1.8%. This identifies that in the short run disinflation is occurring within the Eurozone. This low level of inflation as a result of the drop in aggregate demand signifies that the European Union economies are struggling to achieve growth and employment. However, in the long run there may be the occurrence of reflation as the economies pursue growth, through creating more jobs and reducing unemployment.

The continuous unemployment and resultant fall in aggregate demand will have a negative effect on European manufacturing. There are already signs that business activity is diminishing (PMI=46.8 Contraction), and further unemployment will only hinder European manufacturers.

Currently across the Eurozone governments are pursuing austerity budgets to attempt to reduce debt, and climb out of recession. However, this is keeping unemployment at high rates. This attributes to a Keynesian solution of spending more to save more. If governments were to create more debt in pursuit of structural investments there may be a spur in economic growth. This can take the form of updating road networks, creating new airports, and building factories. This would help significantly aid in reducing unemployment rates in countries such as Greece, which need an infrastructural upgrade regardless.