A multiple regression model for migration in the EU, 2005- 2012 Ascending flow from East to West

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A multiple regression model for migration in the EU, 2005- 2012 Ascending flow from East to West
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  Vol 20, No. 12;Dec 2013 255office@multidisciplinarywulfenia.org    A multiple regression model for migration in the EU, 2005-2012 Ascending flow from East to West Bálint Molnár* (Corresponding author) and Mária Lakatos** *Eötvös Loránd University, Faculty of Informatics, Information System Department , Pázmány Péter sétány 1/C, Budapest, 1117, Hungary , Tel: +36 1 372-2500 / 8042 , e-mail: molnarba@inf.elte.hu **Budapest University of Technology and Economics, Faculty of Economic and Social Sciences, Department of Finance 1117, Budapest, Magyar Tudósok körútja 2. Tel: +36 1 4632342 lakatosm@finance.bme.hu Abstract:  In 2004, when 10 new EU member nations entered the labor force, a potentially homogeneous market emerged: an irresistible magnet to EU and non-EU immigrants alike. Therefore, analysis of the impact of this phenomenon seems inevitable, specifically an analysis which enables social welfare systems to adjust their budgets in response to the rising influx of immigrants. In order to accomplish this, one must 1) analyze the direction of migrant flow; 2) to show the main factors for motivation to migrate. The authors has created a model that explicitly and implicitly incorporates the complex mutual dependencies. This model should also enable us to make predictions, specifically short-term predictions which are reasonably accurate. For this analysis, a multiple regression model with meaningful regressors were selected, which shows the hidden dependencies. We focused our study on two main factors, firstly the differences of social welfare systems within the EU and often referred as the motivation for social tourism and secondly the unemployment rate as regressor data. Once the model's forecasting accuracy has  been established, the model can also be used for short term predictions that underpins the empirical observation of migration flows. Keywords:  Migration, social tourism, multiple regression model 1.   Aim of the study The migration process has received the increasing attention of politicians and economists, who have emphasized the advantages of newcomers over ageing societies. However, the point of view changed during the 2008 economic crisis: nowadays the main focus is different. The issue is how to measure the number of potential migrants and highlight their motivation: why do people decide to move to another country? They have an abundant variety of reasons, so during our research we analyzed the recent situation in the EU to discover whether only greater job opportunities and higher wages attract millions of newcomers from Europe's poorer side to its most developed side. We wondered whether this process would accelerate or not. If this tendency remains unchanged during the next few years, or speeds up, not only will the brain drain cast its shadow on these countries, but tax base erosion will follow, creating a burden on the central budget equilibrium, and making the fight against growing deficits in both srcin and receiving countries very difficult (Ben-Gad, 2004). If the immigration flow did not achieve its basic aim (luring young people to the receiving country), then the societies of the host countries might not diversify and maintain their flexibility, and income taxes paid by immigrants would not help the host society to cover its future public expenses, i.e. mainly the age-dependent retirement pensions (Lee and Miller 2000). Furthermore, the remittances that immigrants sent back to their homelands would not finance  Vol 20, No. 12;Dec 2013 256office@multidisciplinarywulfenia.org    development in the home countries, raising income from the existing balance of payments.(Ratha and Shaw 2007) But if the number of immigrants from EU10 rises fast in the short term, EU15 governments might concede to their voters' demands and use administrative tools to restrict the inflow of legal and illegal immigration. (Recently a new direction occurred in analyzing migration in CEE countries:  because of the income premiums for work experience at home, emigration from CEE countries was followed by return migration [Martin, Radu 2012]). 1.1.    Introduction Europe and the Middle East count altogether 43 million people as part of an estimated worldwide 215.6 million immigrants. (World Bank 2011a). Loosely speaking, this means that 3 percent of the world's population lives in a country other than their birth country, while 10 percent of the total  population of Europe and the Middle East is working abroad. Dramatic changes have taken place in migration in European countries; the most significant one is that Russia as one of the host countries is offering asylum to the former Soviet Union member states' migrants, who escape from civil strife or political upheaval, or simply seek better economic opportunities in their former homeland. Lagging behind the USA in pole position, Russia received 12.3 million immigrants till 2010. Both former soviet countries are within the top ten of emigrant srcin countries as well. They suffer from a special type of population change, and basically differ from the other emigrant-immigrant flows in Europe. (MIRPAL, 2011) Europe and the Middle East are grouped together by the World Bank migration reports, and neither the World Bank (World Bank 2011b) nor the OECD (OECD 2011) offer a coherent database for evaluating migration inside the EU. The European Union forms a politically and economically separate unit, which is why we have mapped the regional differences in the directions of immigration and emigration flow within this closed circle, and showed their motives. (Jennissen, 2007) Using a traditional statistical approach, multiple regression modeling, we have  proved that the number of emigrants from EU10 will grow in the middle term, mainly because of the countries development and social welfare gap. The migration movement would reflect immigration from third countries mainly to Spain, to Portugal, and the United Kingdom, but there are no statistics about the size of the flow of illegal workers. To measure the EU internal migration, we assume the level of third-party migration to the EU remains unchanged. Our study relates to the studies published starting in the early 60's, when social and political research focused on the phenomenon of globalization and its subsequent results. The main areas for analysis were the USA, Australia and Canada; they were the traditional receiving countries for Asian, Caribbean, and African refugees. (Massey, Arango, Hugo at al 1993). In one decade, the group of host countries extended to Spain, Portugal, Italy, and Greece, because the aforementioned emigrants tried to find a much closer destination country; therefore, the former srcin countries  became receivers. The opening of the borders in the 90's stimulated a new era of immigration, as citizens of the former socialist countries sought a better life in the EU. The financial crisis in 2008 briefly reduced the number of immigrants. Furthermore, some of the EU 15 countries: Great Britain, Germany, Spain, Italy, and Austria, responded with special restrictions, mainly to control illegal immigration. For instance, since the crisis, Spain has made  burdensome the process of hiring migrant workers (Peixoto 2009). Another example is Great Britain, which tries to prevent immigrant workers from bringing their families into the country if they are earning less than a prescribed amount. Some other countries have taken steps to reduce labor migration from non EU countries, by cutting  back labor migration quotas, or creating an administrative barrier for employers, i.e. an enterprise that wishes to hire employees must first prove that there are no appropriate native workers, even if the potential foreign employee comes from another, less developed country. Following these  Vol 20, No. 12;Dec 2013 257office@multidisciplinarywulfenia.org    measures, the arrival of immigrants mainly from Third World countries has reached not hundreds of thousands, but tens of thousands year by year. (World Bank 2011c) But according to the latest data, the emigration from EU10 countries has begun to rise again, but the roles have changed; European countries which had been worker-exporters to the most developed countries, have  become the main destinations of immigrants. Inevitably, for putting the brake on migration, or at least controlling it, its causes must be investigated. Studies in literature focusing on migration use various methods to examine the same thing: why migration begins, and how it can be slowed down. (Todaro, and Maruszko, 1987).  Neoclassical economists focus on the gap between wages and unemployment rate for the srcin and receiver countries. They even take into account the cost of migration, earnings against migration cost, and risk. This group of experts seeks the motivation of the individuals as income-maximizing units and views migration as a micro-level decision in the household taken by individuals or the whole family, as small units. Another group of experts, namely the dual labor market theory  supporters, ignore the micro-level decision making process (Piore 1986). They focus on the problem of globalization and explain migration by the structural changes and job market demands of highly developed countries, which motivate workers from underdeveloped countries. (Massey at al 2011) Families on the same level form a community that will make the decision, albeit as separate units. These different points of view explain the motivation of migration flow individually, (Dumont at al, 2010) on the family level, nationally, and internationally, in addition to influences on national migration policies. Generally, however, the migration of workers is explained by differences in wage rates between countries. Furthermore, the elimination of wage differentials could stop the movement of labor force from underdeveloped countries to developed ones. That is because mainly the labor market demand induces the flows of immigrant workers, and the social welfare system plays an unsubstantial role in it. In spite of macroeconomic models, the individual decisions on migration issues remains on the microeconomic level. Individual decisions as whether to migrate or stay are based on cost–benefit calculations. In this approach, the social welfare system appears as a risk minimizing factor. (Stark 1991) and (Taylor 2007). Individuals who join groups which calculate the cost and benefit of the migration will act differently even in the same country. This more sophisticated approach clarifies the motivation of a family in migration; households are in a position to control the risks of their living standards, and will diversify the household resources to maximize the benefit and minimize the risk. Migration is just one of many potential methods. Households send family members abroad not only to improve their living standards, but also to increase income relative to other households, that is, to reduce their degree of deprivation compared with others. (Stark and Taylor 1991). Recent research has revealed a new model of migration within the EU as a whole. (Düvell, 2012) The European Union offers unique opportunities for its citizens to work abroad, but some studies (Ekberg 2011a) have revealed that immigration will cause an increasing burden on the public welfare system instead of helping the ageing society to cover its future costs. The fiscal impacts of immigration flow depend on its size, the age structure of foreign-born persons, and the level of their labor market integration. Ekberg says the future fiscal impact of immigration might be negative, and the immigrants’ contributions to the public sector will be reduced by the increasing costs of social expenses that are generated by the additional population coming along with immigrants. For the long term, two factors determine the positive or negative effect of net contribution to the public sector: the number and the age differences between natives and immigrants, and differences in their employment situation. According to the latest studies on migration, the unemployment rate of the immigrants is considerably higher than that of the natives within a destination country of migration, while their share  from social security allowances is high  also. Moreover, the immigrants with a higher unemployment rate will contribute less in taxes and social security than they receive from the public expenditures.  Vol 20, No. 12;Dec 2013 258office@multidisciplinarywulfenia.org    Several studies have tried to measure the fiscal contribution in the social sector. They revealed a reciprocal effect (Simon 1984) during the 80's when there was a positive effect on fiscal balance via taxes and social security, while in the 90's the situation changed dramatically. Blau observed (Blau 1984) a neutral impact which transferred a negative effect (Weintraub 1984) in the U.S. Their view was shared by Straubhaar and Weber (1994) in Switzerland also. Greater positive fiscal effects, namely considerably more public revenue from immigrants, would demand a higher level of immigration, which is thought to be unrealistic.  2.   Direction and magnitude of migration within the eu on a multilateral basis In our analysis, which was compiled on the basis of empirical evidence, we wanted to predict the direction and magnitude of migration  occurring only in the European Union in an economic context. (Jennissen, 2007) (Note 1) To achieve these targets, we complemented the bilateral approach with multilateral aspects and created an EU multilateral migration matrix  that shows the individual's choice in emigration decisions based on special parameters. The EU community has a special framework for immigrants, so any of the models reflecting the situation should include these features. Financial conditions on the labor market vary, but other conditions are the same in the EU labor market, because the community's citizens enjoy the same rights and obligations as natives of the host country, such as individual decisions affecting their livelihood is influenced by salaries and social allowances. The motivation for migration - we predicted on the base of earlier analyses - was linked with relative differentiation between the income level of separate EU countries citizens to the EU average. In the micro-economic approach, the relative gap on the individual level is one of the main motivational factors we considered, but our hypothesis widened the number of explanatory and economic factors used for the matrix. The reliability of the forecast called for the use of geo- politically and economically limited units, since data show that the European Union migration is significantly different from the inflow from the Eastern part of Europe, or the traditional North-South, East-West route characteristics. According to the definition in literature, those who belong to an immigrant group  are people who were born in another country, or citizens of any other country than where they currently live (Note 2.). For the purpose of analyzing federal taxes, citizenship remains neutral. That is because the tax liability and the related social security charges are determined usually by place of residence (OECD 1977). Furthermore, employees’ salary is taxable from the very first day of employment. We accumulated 25 potential independent  x ijn  (predictors, regressor variable) assuming a linear approximation of the relationship between  x ijn  and  y in   (response) variables, where i  is the year,  j  is  predictor type, and n is one from 27 EU countries, and  y i  means disparity between   immigration and emigration   in the predicted year (net migration) for EU. A linear relationship was proved with scatter plot matrix, and we created several models with different standard macro-economic  parameters, while using the Backward elimination method to reduce the number of variables. The models with the different predictors  x ijn  have the following assumptions: The EU as a community forces its member states to harmonize their economic and financial  policies, budget revenues and expenditures, and social redistributive policies, including social care systems. One of the pillars of the EU is non-discrimination, and within the member countries, individuals as well as business units enjoy the same rights. For migration decisions, however, this framework significantly reduces the risk of emigrants, and as opposed to micro-economic conclusions, the risk of all individuals is at nearly the same level. Consequently their decision will  be affected primarily by the income gap between sending and receiving country citizens, however this factor is not confined only to wages, but also reflected in another figures, like in the money from social benefits as well. Taylor and Patrick underlined the yield from the social welfare system as a decision-making factor, but considered only its risk minimizing role. We accepted and used this result. We considered the social benefit as a direct influencing factor on the income level, instead of insisting on its indirect, risk-minimizing role.  Vol 20, No. 12;Dec 2013 259office@multidisciplinarywulfenia.org    Summarizing our perception, since the level of income depends in equal parts on wages and public transfer payments, the latter factor might be considered as a dependent’s income. Welfare expenditure is comparable on two bases, firstly the per capita base, where expenditure contains: social benefits, which consist of transfers, in cash or in kind, to households and individuals to relieve them of the burden of a defined set of risks or needs; administration costs, which represent the costs charged to the scheme for its management and administration; and other expenditures, which consists of miscellaneous spending by social protection schemes (payment of  property income and other). Among those for whom access to the social welfare system is not equal, the cost per capita method can cause distortion. Since the labor market situation is still weak in Europe, with some exception, the unemployment rate among immigrants is higher than for natives, and the access to retirement is limited (eligibility for pension is earned with a fixed number of employment years, which usually is not fulfilled). Two optional ways exist for using data, firstly cost per capita figure – this approach not taking into account the different access levels, and secondly, restriction of the model to the family's direct beneficiary from the social welfare system. This approach is independent of the labor market status of the individual, e.g. the child care allowances. If the access to child care allowances is equal in this geo-political entity, it seems obvious that direct beneficiaries play a fundamental role in the micro-level decision making  process, in addition to wages and the unemployment rate as indicators for the labor market. However, the politically affected exodus has already penetrated the EU, so the movement of the  population reflects individuals' decision-making hierarchies based on lower risk. The group of predictors combine micro and macro level factors, and first of all, minimum wage. On the other hand, individuals' incomes might be compared with each other only after deducting taxes. Usually the tax wedge offers the basis of comparison for regular distribution of income among the different income groups of a population. The income distribution is not regular among immigrants; all studies have proved that immigrants typically work at lower wages, generally just about minimum wage level. A number of studies have been performed to prove (UN, 2010) that immigrants can find only seasonal work in agriculture or tourism, and have not yet been fully integrated into the labor market. The employment gap between natives and immigrants has been widening; non-native workers have often been concentrated in sectors that have experienced the most serious decreases during the financial crises (Migration Policy Institute 2010a). The high unemployment rate in the most vulnerable group keeps the wages under pressure. Average wages of immigrants fluctuate around minimum wage level–and not only in Europe. (Newland 2010) Competition in tax rates, or effective tax rates, should motivate individuals in their decisions. If the minimum wage is exempt of taxation, the impact of the tax rates is neutral, so we did not use deduction. Afterward we have included the social welfare system as regressor factors. Secondly, to avoid the statistical bilateral approach, our model includes all EU member countries, as their citizens are free to move, and enjoy the same legal rights all over the EU. To achieve a dynamic model, we incorporated the predicted y i-1,n factor (i=years) as independent regressor in the i year, using the predicted value as fact for the following year.(DeMaris 1946) The multiple regression model was based on differentiation of country data x ijn  from the EU average level, so that we could exclude the basic trend, and show the multiple connections among y in  and x ijn  factors, (labor market, unemployment rate, minimum wage, and social allowances cost). The model indirectly includes such non-numerical features as administrative burdens, which will limit the labor force flow from one country to another. 2.1 Preparation of the data set Migration research studies focus on country level databases collected by the World Bank, the IMF, and the United Nations, using each other’s data. They contain some inconsistent data received from member countries, or data which was missing and was subsequently restored by estimation. We have used the World Bank latest Migration and Remittances Factbook, 2011, IMF Balance of
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