Profiles of Estonian immigrants and their participation in the Finnish welfare system 1

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1 Profiles of Estonian immigrants and their participation in the Finnish welfare system 1 Mari Kangasniemi* and Merja Kauhanen* *Labour Institute for Economic Research, Helsinki, Finland September 2010 Abstract The purpose of this paper is to investigate the profiles of Estonian immigrants in Finland and the consequences of immigration from Estonia for Finland with a special emphasis on the welfare aspect. The Estonian-Finnish country-pair provides an interesting case for analysing East-West migration patterns and their consequences. Finland and Estonia represent neighbouring countries which have similar languages, but between which the wage and welfare gaps are of significant magnitude. Composition of immigrants plays an important role in the welfare consequences. Utilising a register based panel data of new Estonian immigrants in Finland from years we provide a description of Estonian immigrants with respect to their demographic characteristics (gender, age, education etc.), and compare it to the corresponding information on native working-age population. Furthermore, we analyse welfare utilization of newly arrived Estonian immigrants and its determinants in comparison to Finnish natives and the net fiscal impact Estonian immigrants exert on the Finnish welfare state. Key words: east-west migration, composition of immigrants, labour market performance, welfare consequences, taxes, income transfers 1 This paper is part of the Norface project Migrant Diversity and Regional Disparity.

2 1. Introduction Immigration and consequences thereof have long been subject to major concern in many European countries. Economic recession and the austerity measures that are required to restore the balance of government budgets in the near future have also served to boost the discussion on the stress that the inflow of immigrants places on public finances in European countries. The pressures that migration causes for public spending and infrastructure investments are particularly relevant for countries with extensive welfare states and public services. From the receiving countries point of view it is naturally desirable that immigrants contribute to the economy rather than just consume its resources. The aim of this study is to investigate the role of a significant immigrant group, Estonians, on the Finnish welfare state. In particular, we put under scrutiny welfare utilization of Estonian immigrants and its determinants, and the net fiscal impact they exert on the Finnish welfare state, i.e. whether they pay more direct taxes than receive as welfare transfers. We study in more detail the labour market performance and benefit recipiency of Estonian immigrants in Finland and how they compare to natives in terms of their characteristics. Estonians constitute a large share of immigration into Finland, being the third largest group after Russians and Swedes. During the period of investigation there has also been a change in the Finnish immigration policies concerning Estonians as Estonia became a member of the EU in There is an extensive economic literature on the reasons and consequences of migration (for a survey, see for example Borjas 1994, Dustmann et al 2008). In Finland the structure of the welfare state is problematic for the composition of migrant inflows as the extensive social safety net may attract low-skilled immigrants. The level of inward migration is still low compared to many other European countries. The share of work based immigration is low and, consequently, the share of immigrants dependent on social welfare is relatively high. However, it is not obvious that this is the case for Estonian immigrants: for example linguistic similarities imply that they are relatively likely to find work and may be motivated by realistic employment opportunities. Hämäläinen et al. (2005) found that immigrants from Russia and Estonia indeed integrated more quickly than immigrants from other country groups. Earlier literature has shown that weaker employment prospects of immigrants may lead immigrants to depend more on social security than natives (Pekkala Kerr and Kerr, 2008). In the context of im- 2

3 migrants participation in the welfare system the possibility of the welfare magnet effect (e.g. Borjas, 1999) has also been brought up, i.e. high welfare benefits in the host country might exert influence on the choice of the migration destination country. Evidence from many European countries such as e.g. Sweden, Denmark and Germany has shown that immigrants rely more on welfare benefits than natives (Hansen and Lofstrom, 2003; Blume and Verner, 2003; Riphahn, 2004). This phenomenon is less obvious in the United States or Canada (Pekkala Kerr and Kerr, 2008). Neither do all European countries follow this pattern: Barrett and McCarthy (2007) found that immigrants in Ireland tend to receive less welfare payments relative to natives. A question that has received less attention in the empirical literature is how immigrants welfare participation changes with the time spent in the host country. There is evidence that in Sweden welfare participation as measured by social assistance recipiency 2 decreases with the time spent in the country but is still higher relative to natives and there exists differences between work immigrants and refugees in this (Hansen and Lofstrom, 2003). Hämäläinen et al. (2005) found that the assimilation of immigrants in Finland in terms of welfare recipiency increases by the time spent in Finland, but that there also exists heterogeneity in this by the country groups. Sarvimäki (2008) found that social assistance recipiency of non-oecd households increased over the stay in Finland. Borjas and Trejo (1990) found the welfare participation of the immigrants to increase with the time spent in the United States and so did Baker and Benjamin (1995) with the Canadian data. How Estonian immigrants in Finland are selected from the sending population and how they compare to natives is an important factor in determining their welfare participation. There are several relevant economic theories of the selection of migrants. They can be positively selected (compared to those staying behind) as moving itself is costly (Chiswick 1999, 2000). There may also be differences in returns to skills or ability between countries which results in selection of those moving. According the Roy (1951) model (applied specifically to migration) selection of immigrants is positive from countries where returns to skills are low, for example because of equal distribution of income, and negative from countries, where distribution of income is more unequal, if there is a positive correlation between expected earnings in the sending and the receiving country (Borjas 1987, 1991). 2 The variation in results might also reflect the fact that different indicators of welfare participation have been used in these studies. For example, some studies have focused on the recipiency of social assistance (which is often meanstested) and some studies have used the total recipiency of welfare transfers. 3

4 Migration policies are likely to be highly relevant for how migrants are selected: ultimately returns to skills in the receiving country only matter for those who have access to the country. Migration policies can also effectively raise the cost of migration so that positive selection due to the cost becomes more relevant. The case of Estonia and Finland provides an interesting case study as the costs of moving are not high due to geographical proximity and as pointed out above, immigration policies have changed due to the enlargement of the EU. The wage and welfare gaps between these two countries are also of significant magnitude. Finland belongs to the Nordic welfare states in which there is a relatively high level of social security and the universalism of the social benefits whereas in Estonia the level of benefits is lower. Migration between Estonia and Finland also provides a representative example of the patterns of East West migration in Europe as there is a significant income gap and yet very short geographic distance between Finland and Estonia. Quantitative studies on the long run impacts of immigration as well as the integration of migrants in Finland are still scarce (the few existing studies include Sarvimäki 2008, Hämäläinen and Sarvimäki 2008, Hämäläinen et al 2005) and mainly concern the period prior to None of this earlier research related to welfare consequences of immigration have provided evidence on the impact exerted solely by Estonian immigrants on the Finnish welfare state. In this study we aim to complement some of this work as well as produce new information regarding the impact of immigration on Finland from the welfare state perspective. The structure of this paper is the following. In section two we discuss the institutional setting or the Finnish immigration policy. In section three we describe the data and provide some descriptive statistics on profiles of Estonian immigrants. In section four we present the results with respect to welfare utilization of Estonian immigrants relative to those of Finnish natives and in section five we give evidence of the fiscal net impact of Estonian immigrants on the Finnish welfare state. Section six concludes. 2. Finnish immigration policy and Estonian immigrants The current influx of Estonian immigrants to Finland started after the collapse of the Soviet Union in the early 1990 s. Figure 1 shows the inflow of Estonians and the share of Estonians of the total inflow. Both increased steeply in 1991 and 1992, followed by an equally steep decline as a result of the deep recession of the 1990 s. After the year 2000 the inflow has gradually recovered to its earlier level and even risen above it. 4

5 Figure 1: Migration of Estonians to Finland Share of Estonians of all immigrants, % Share of Estoninan immigrants of all immigrants Source: Statistics Finland Number of Estonian immigrants The Finnish legislation concerning immigration and more specifically the rules that apply to Estonian citizens have gone through several changes during this period. The Finnish Aliens Act which went through a major reform in 2004 specifies the rights and obligations of those moving to Finland. The previous aliens act dated back to Estonia became a full member of the EU in May Estonians who arrived prior to that were subject to the rules that applied to non-eu members, stated in the aliens act that was in force prior to They were required to obtain both a work permit and a separate residence permit. A work permit was granted if the labour administration stated that workers with similar skills were not available in the Finnish labour market within a reasonable time Number of Estonian immigrants During a transition period the citizens of the new EU member countries still needed a work permit in order to take paid employment in Finland. Their work permit applications, however, were given priority over non-eea citizens but they did not have right to unemployment benefits. Free mobility of services has allowed Estonians to do short term work in Finland without work permits since 2004 and therefore the EU membership may have actually reduced the number of work permit applica- 5

6 tions rather than increased it. There are limited data on the extent of this type of short term immigration. These individuals would naturally not be allowed the access to any social security. After the period of transition or since 2006, Estonians as EU citizens have right to reside in Finland as long as they have sufficient means of subsistence or are employed or self-employed. EU citizens in general have right to stay for a period of less than three months looking for employment. However, they have to register their right of residence if their stay exceeds three months. After five years of residence they automatically receive a certificate of the right to permanent residence. Non-EU citizens right to reside in Finland is most often based on either employment, studies or being a family member of a person already residing in Finland. A residence permit for an employed person includes a work permit, and people possessing certain other types of residence permits also have limited or unlimited right to work. Generally, social security and public services are available for those whose residence is of permanent nature, i.e. they have a permanent or at least two years fixed term contract for employment or they have spouse or other close family member who resides permanently in Finland. They also need to have a residence permit granted for at least one year. Students, for example, are not considered as permanent residents. If residence is of temporary nature, the individual normally does not have access to social security. EU citizens can be granted residence based access to certain social security benefits upon application unless they are covered by another EU country s social security system. Generally, however, the sufficient means of subsistence required for residence permit would not include for example income support received while in Finland. EU citizens also have automatically access to emergency medical care if they possess the European Health Insurance Card. 6

7 3. Data and profiles of Estonian immigrants The empirical analyses are based on micro-level register data of new Estonian working-age immigrants and similar data on Finnish working-age native from years ( observations and individuals). The data was constructed as follows. A random sample (40%) of the new Estonian immigrants during was extracted from the Finnish population register and this sample was followed from their entry to year 2007 or to the possible exit. The Finnish population register includes information of those immigrants whose stay in Finland lasts at least for a year so short-term temporary immigrants are not included in our data. Register data on Estonian immigrants employment performance (employment status etc.), income and social security transfers etc. while staying in Finland was collected from different Finnish registers (e.g. from the employment register, the tax register and the register of Social Insurance Institution) by Statistics Finland and matched to the sample. For comparison purposes similar data was collected for a random sample (0.5%) of native Finnish working-age population. As pointed out in the introduction, the composition and selection of immigrants largely determines the economic impact of immigration on the host country. In what follows we show some descriptive statistics on how Estonian immigrants compare to the working-age Finnish population and the working-age population in Estonia (see Table 1). The gender composition of the new Estonian immigrants appears to be very similar to that of the Finnish population, but compared to the Estonian working-age population males are overrepresented among the immigrants we study. The age structure of Estonian immigrants is favourable: the Estonian immigrants are on average younger than the Finnish working age population. The largest age groups are those between years of age (Table 1 and Figure 1). Compared to the Estonian population year-olds are clearly overrepresented among the emigrants to Finland. In the migration literature the age structure of the immigrants is regarded as one of the most important factors that explain the economic impact of immigration (viittaus). In addition, newly arrived Estonian immigrants are less often married and have fewer children under 18 years of age relative to the Finnish working age population. Our data contains information on educational level only for about a third of the immigrants. On the basis of this tentative inadequate information those with primary education and those with tertiary 7

8 education seem to be overrepresented among the newly arrived Estonian immigrants compared to the whole Estonian population. The look at the main activity (i.e. labour market status) at the end of the arrival year shows that the majority of the Estonian immigrants (61.9%) were employed at the end of the year, the second largest group (around 30%) were outside the labour force, and around 8 per cent were unemployed. Compared to the Finnish working age population the newly come immigrants are less often employed and more often outside labour force. The employed male immigrants worked most often in the construction sector and the female immigrants in real estate, renting and business activities. It should be noted that the main activity status at the end of the year does not imply that the labour market status of an immigrant has been stable over the course of the year. When considering the labour market status of the immigrants it would be interesting to combine this information with the reasons for immigration. Unfortunately our data does not include information on why Estonian immigrants moved to Finland. However, Krusell (2009) in his article about Estonians abroad points out that Finland has been the most popular country of destination in terms of work migration. According to his results Estonian immigrants have been drawn to Finland especially due to the higher level of wages. Table 1. Profiles of new Estonian immigrants in comparison, Whole population living in Estonia Estonian new immigrants in Finland Working-age Finnish natives Sex: Men Women Age: year-old year-old year-old Education: Primary * 29.5 Secondary * 42.3 Tertiary * 28.2 Labour market status (year-end situation): 8

9 Employed Unemployed Outside labour force Married Children under 18 years of age * unreliable data Figure 2: Age profile of new working age Estonian immigrants compared to working age Finnish natives, average % 20,00 15,00 Estonian Finnish 10,00 5,00 0, Source: Statistics Finland 4. Welfare participation of Estonian immigrants As pointed out in the introduction the pressures that migration causes for public spending and infrastructure investments are particularly relevant for countries such as Finland with extensive welfare states and public services. A crucial determinant of the economic impact of immigration on the host country is to what extent immigrants are able to provide themselves and to what extent they become a financial liability for the welfare state, i.e. receive income transfers (i.e. different kind of social security benefits) and consume welfare services. If immigrants are using welfare transfers and wel- 9

10 fare services more (less) intensively than natives, they will have negative (positive) impact on the public finances relative to natives (Barrett & McCarthy, 2007). In the following we next analyse Estonian immigrants welfare participation and its determinants. Our data on Estonian immigrants include only those new Estonian immigrants who reside permanently in Finland and are therefore entitled to social protection. According to the Finnish legislation persons permanently resident in Finland are covered for pensions, healthcare services and health insurance, parental allowances and family benefits. Further conditions are attached to the award of some benefits to persons resident in the country, relating mainly to the duration of residence. The earnings-related pension scheme and accident and occupational disease insurance are based exclusively on employment. As regards the social welfare our data contain a summary variable describing the total sum of all received income transfers annually and separate information about the following social benefit categories: unemployment benefits (which include all types of unemployment benefits), the general housing allowance, sickness allowance, maternity allowance, home care allowance, and student financial aid. In addition, we have information on the pension income. Of these benefits the general housing allowance 3 is means-tested and only low-income households are eligible to receive general housing allowance towards the costs of living in a home which is used year-round. Figure 1 compares the welfare participation rates of Estonian immigrants and Finnish natives during the period Welfare participation rates are separately presented for new Estonian immigrants, all Estonian immigrants and Finnish natives. As a whole, the welfare participation rate of the Finnish natives was larger compared to that of the Estonian immigrants 4. But the picture changes when we look at the welfare participation rate by social welfare type. On average the Estonian immigrants received more frequently unemployment insurance, general housing allowance and family related benefits such as child home care allowance 5 and maternity allowance during the period , whereas the participation of Finnish natives in student allowance (11,7 % vs. 3.7%) and sickness allowance is distinctively larger than that of Estonian immigrants. 3 In this paper our unit of observation in welfare recipiency is an individual not a household. 4 This might partly be explained by the different age structure of the working-age finnish natives and the new Estonian immigrants. 5 Child home care allowance which can be paid to families that have a child under age 3 who is not in municipal day care 10

11 Figure 1 also demonstrates that the welfare participation of new Estonian immigrants is lower than that of all Estonian immigrants in our data. This suggests that the welfare participation rate of Estonian immigrants changes over the duration of their stay in Finland. Figure 2 depicts welfare participation rate of Estonian immigrants by the years spent in Finland and compares it to the average welfare participation of Finnish natives during period This figure confirms that the welfare participation rates of Estonian immigrants indeed increase over their stay in Finland and approach the participation level of Finnish natives. Assimilation of Estonian immigrants occur in this respect. Our finding with raw data is similar to the results of Borjas and Trejo (1990) who found that the longer an immigrant household has been in the United States the more likely it is to receive welfare and to Baker and Benjamin (1995) whose results suggest that welfare participation grows with years in Canada. Earlier work on Finland (Hämäläinen et al 2005) which concerned the period indicates that for Estonian and Russian immigrants the average amount of transfers (excluding pensions) 6 consistently decreases with the duration of stay in Finland. Their results related to Estonian and Russian immigrants (grouped together in their analysis) deviate from our results related to recipiency of social transfers. One explanation for these differences might be that the period they studied is very exceptional in the Finnish history: it coincides partly with the major recession of the early 1990 s with massive increase in unemployment and the recovery period after the recession. Assimilation into welfare may be due to improved knowledge of social institutions of the host country (Pekkala Kerr and Kerr, 2008). It is also possible that the assimilation of welfare participation by the years in Finland is influenced by the non-random selective return migration of Estonian immigrants, i.e. those immigrants who return Estonia and who stay in Finland might differ in their profiles and also by the welfare participation rate. For example for Sweden Edin et al. (2000) found that immigrants who stayed in Sweden were more likely to receive welfare than those who left. 6 The measure of transfers they use has been adjusted to take into account the size of the household. 11

12 Figure 3: Recipients of social transfers by transfer type, % 60 % Estonian new immigrants Estonian immigrants Finnish All welfare transfers Unemployment insurance General housing allowance Child home care allowance Maternity allowance Student allowance Sickness allowance 60 % Figure 4. Welfare participation rate of Estonian immigrants by time spent in Finland, % Estonian immigrants Finnish natives Time spent (years) in Finland 12

13 Our data (as shown in the above figures) implies that there exist differences in welfare participation between Estonian immigrants and Finnish natives. These differences can be due to different characteristics or different behaviour with regard to benefit take-up. In the empirical analysis we aim to find out whether these differences are due to differences in observable characteristics such as gender, age, family composition and labour market status and to what extent they are due to unobserved heterogeneity. Examples of unobserved heterogeneity leading to differences in the welfare participation rates include behavioural differences in benefit take-ups and differences in the labour markets faced by the two groups (Hansen and Lofstrom, 2003). For this purpose we estimate random effects probit models which can be described as follows: (1) * y it = x it + v it, n=1,2,, n, t=1,..., T, y it = 1 if * y it >0 y it = 0 if * y it 0 where v it = i + u it y* denotes the unobservable variable, x is the observable time varying and time invariant vector of strictly exogenous characteristics that influence y*. is the vector of coefficients associated with the x, i denotes the individual specific unobservable effect and u it is a random error, u it ~ IN (0, 2 σ u ). In our different models y it = 1 represents welfare utilization, recipiency of unemployment benefits and recipiency of housing allowance. In the model we control for a number of observable characteristics, i.e. variables related to personal (gender, age), household (marital status, children under 18 years) and labour market status characteristics (employed, unemployed, out of labour force). A dummy for Estonian immigrant distinguishes immigrants from the Finnish natives. We have excluded those year olds who receive pension. The results of the estimations are presented in tables 3A-3C. Table 3A shows that working-age Estonian immigrants are less likely to receive welfare transfers when we control for observable characteristics and unobservable heterogeneity. The first column includes only immigrant dummy, gender and age. The second column adds family related variables such as marital status and the number of children aged under 18 years, and the third column includes labour market status variables, income and regional variable. Depending on the model speci- 13

14 fication Estonian immigrants are percent less likely to receive welfare transfers than Finnish natives at the mean of all covariates. As regards recipiency of unemployment insurance allowance participation probability of Estonian immigrants is only percent smaller compared to Finnish natives (Table 3B). The results show that the time spent in Finland decreases the probability of unemployment insurance participation. This might be an indication of the improved labour market performance of the Estonian immigrants over their stay in Finland. Table 3C reports results for the probability to receive housing allowance. These results suggest that there is no statistically significant difference between Estonian immigrants and Finnish natives when we control for observable characteristics and unobservable heterogeneity. Table 3A. Random effects probit estimation results on social welfare participation (dependent variable: social welfare recipient) Estonian immigrant Woman Age: Years since immigration Married Has children under 18 years of age Province: Uusimaa Labour market status: ( 1A) ( 2A) ( 3A) Coefficient Marginal Marginal Coefficient Marginal Coefficient effect effect effect *** *** *** (0.036) (0.036) (0.035) 1.227*** 1.201*** 1.161*** (0.025) (0.025) (0.023) *** (0.021) *** (0.02) 0.042*** (0.002) *** (0.022) *** (0.032) 0.052*** (0.032) 0.102*** (0.020) 0.490** (0.015) *** (0.023) *** (0.024) *** (0.035) 0.051*** (0.003) 0.122*** (0.020) 0.679** (0.016) *** (0.022) unemployed *** (0.090) outside labour force *** (0.019) logwage *** constant *** *** *** (0.024) (0.025) (0.024) 14

15 lnsig2u Number of obs Log likelihood 0.834*** (0.019) *** (0.019) *** (0.022) Notes: 1. Standard errors are in parenthesis. 2. ***: difference significant at 1 % level, *: difference significant at 10 % level. 3. : one year lag. Table 3B. Random effects probit estimation results on unemployment insurance participation (dependent variable: unemployment insurance recipient) Estonian immigrant Woman Age: Years since immigration Married Has children under 18 years of age Province: Uusimaa - ( 1B) ( 2B) Coefficient Marginal effect Coefficient *** *** (0.046) (0.046) 0.393*** 0.425*** (0.031) (0.030) 0.165*** (0.026) 0.541*** (0.039) *** (0.003) - - Labour market status: unemployed - - outside labour force *** (0.027) 0.570*** (0.040) *** (0.032) *** (0.024) ** (0.020) *** (0.029) Marginal effect constant lnsig2u Number of obs Log likelihood *** (0.032) 1.123*** (0.023) *** (0.033) 1.060*** (0.023) Notes: 4. Standard errors in parentheses. 5. ***: difference significant at 1 % level, *: difference significant at 10 % level. 6. : one year lag. 15

16 Table 3C. Random effects probit estimation results on housing allowance participation (dependent variable: housing allowance recipient) Estonian immigrant Woman Age: Years since immigration Married Has children under 18 years of age Province: Uusimaa - Labour market status: ( 1C) ( 2C) (3C) Coefficient Marginal Marginal Coefficient effect effect Coefficient (0.060) (0.061) (0.064) 0.386*** 0.503*** 0.514*** (0.039) (0.041 (0.041) *** (0.033) *** (0.065) (0.004) - - unemployed - - outside labour force - - logwage - - constant lnsig2u Number of obs Log likelihood *** (0.041) 1.601*** (0.022) *** (0.033) *** (0.067) (0.004) *** (0.037) *** (0.0380) *** (0.029) *** (0.044) 1.490*** (0.023) (0.039) *** (0.08) (0.005) *** (0.045) *** (0.034) *** (0.041) 1.109*** (0.055) 0.388*** (0.032) *** (0.012) *** (0.076) 0.980*** (0.040) Notes: 7. Standard errors in parentheses. 8. ***: difference significant at 1 % level, *: difference significant at 10 % level. 9. : one year lag. Marginal effect -8.13e-16 16

17 5. The fiscal net contribution of Estonian immigrants Migrants pay taxes, claim benefits and consume publicly provided goods and services for the time they stay in the host country (Gott and Johnston, 2002). Their fiscal net contribution to the host country economy can be positive (negative) depending on whether the value of the welfare transfers and services they use exceeds (is lower than) the value of taxes they pay. Migration can also produce indirect fiscal effects by influencing the pre-tax income of the natives through impacts on the level of production, productivity and economic growth so that even if they do not make a direct fiscal contribution migrants may still generate fiscal gains (Gott and Johnston, 2002). Next we investigate whether newly arrived working-age Estonian immigrants make a positive or negative contribution to the welfare state by looking at the fiscal net effects; i.e. direct taxes paid and the welfare transfers received by the Estonian immigrants during the first eight years of their stay in Finland. Due to lack of data we cannot take into account the public services used by Estonians and the indirect taxes paid by them in this exercise. The bulk of earlier empirical studies (summarised in Pekkala Kerr and Kerr 2008) have found the fiscal impacts of immigration to be very small, and that on average immigrants have a minor positive net fiscal impact on host countries. There also exist large differences across different migrant groups. For example, for Netherlands Roodenburg et al. (2003) found that fiscal net effects varied to great extent by immigrant group but that the average impact remained small. Hämäläinen et al. (2005) found for Finland that there exist differences in the fiscal net effects by country group of immigrants. The most favourable impact in this respect was exerted by the immigrants from OECD countries which might also reflect the reason for immigration to Finland. Importantly, one must also remember that it is probable that an immigrant s contribution to welfare state will change over time in response to changing conditions (Gott and Johnston, 2002). Also with the stay in Finland the behaviour of immigrants as to welfare participation might change which accordingly might also change the fiscal net effect. In our data there is a larger share of working-age new Estonian immigrants (13.6%) who did not either pay any direct taxes or receive any transfers compared to Finnish working-age natives (5.3%). According to our results average working-age Estonian immigrant paid around 1300 euros more direct taxes than what he/she received as direct income transfers during the year of arrival. After six years this fiscal net impact is over 2000 euros. Figure 5 tracks how the fiscal net effect of 17

18 Estonian immigrants change with the stay in Finland. From the perspective of welfare state the newly arrived Estonian immigrants do not appear to be a burden to the Finnish welfare state: they pay more direct taxes than they get as welfare transfers, although the positive impact is quite small. It is noteworthy, however, that in our inspection we do not measure the Estonian immigrants total contribution over the total length of their stay in Finland. It also appears that the positive fiscal net impact increases over the stay in Finland 7. This result is in accordance with the improved employment and earnings development of Estonians by the length of their stay in Finland (see figures 1A and 1B in the Appendix). Economic activity employment and earnings can be regarded as a key driver of an individual s direct fiscal impact determining the amount they pay in taxes and receive in benefits (Gott and Johnston, 2002) Figure 5: Average fiscal net impact of an Estonian immigrant by the length of stay in Finland years in Finland 7 After seven years the positive net fiscal impact starts to decrease, but it must be recalled that this result concerns only those Estonians who immigrated in (tama alaviite kaipaa uudelleenmuotoilua). 18

19 6. Summary and conclusion This paper analyses welfare utilization of newly arrived Estonian immigrants and its determinants in comparison to Finnish natives and the net fiscal impact they exert on the Finnish welfare state using a large micro-level register data of new Estonian working-age immigrants and similar data on Finnish working-age natives from years Our main findings suggest that working-age Estonian immigrants are less likely to receive welfare transfers (as measured by the total of all different types of welfare transfers) compared to working-age Finnish natives when we control for observable characteristics and unobservable heterogeneity catching behavioural differences. The longer the Estonian immigrant has lived in Finland the more likely he/she is to receive welfare transfers. This assimilation into welfare might be due to improved knowledge of social institutions of the host country. As to unemployment insurance participation probability of Estonian immigrants it is only slightly smaller compared to Finnish natives at the mean of all covariates, whereas there does not exist a statistically significant difference in the utilization of housing allowance. Our inspection of the fiscal net effect exerted by newly arrived working-age Estonian immigrants in the short run reveal that Estonian immigrants contribute to the welfare state by paying slightly more taxes than getting welfare transfers and that this positive impact seems to increase with the time in Finland. Literature Baker, M. and Benjamin, D. (1995), The receipt of transfer payments by immigrants to Canada, The Journal of Human Resources 30(4), Barrett, A. and McCarthy, Y. (2007), Immigrants in a Boomimg Economy: Analysing Their Earnings and Welfare Dependence, Labour 21(4/5), Blume K. & Verner M. (2003), Welfare dependency among Danish immigrants, Working Paper. Borjas, G. J. and Trejo, S.J. (1990), Immigrant Participation in the Welfare System, NBER Working paper no Borjas, G. J. (1987), Self-Selection and the Earnings of Immigrants. American Economic Review. 77(4), Borjas, G. J. (1991), Immigration and Self-Selection. 19

20 Borjas, G. J. (1994), The Economics of Immigration, Journal of Economic Literature, American Economic Association, vol. 32(4), Borjas, G. J. (1999), Immigration and welfare magnets, Journal of Labor Economics, 17, Chiswick, B. (1999), Are Immigrants Favorably Selected? The American Economic Review. 89(2), Chiswick, B. (2000), Are Immigrants Favorably Self-Selected? An Economic Analysis. IZA Discussion Paper no.131. Dustmann, C., Glitz, A. & Frattini, T. (2008), The Labour Market Impact of Immigration, Oxford Review of Economic Policy, vol. 24(3), Edin, P-A., LaLonde, R. & Åslund, O. (2000), Emigration of Immigrants and Measures of immigrant Assimilation: Evidence from Sweden. Swedish Economic Policy Review. vol. 7, Gott, C. and Johnston, K. (2002), The migrant population in the UK: fiscal effects. RDS Occasional Paper No 77. Hansen, J. and Lofstrom, M. (2003), Immigrant Assimilation and Welfare Participation: Do Immigrants Assimilate into or out of Welfare?, The Journal of Humand Resources vol38 no.1, Hämäläinen, K., Kangasharju, A., Pekkala, S. and Sarvimäki, M.. (2005), 1990-luvun maahanmuuttajien työllisyys, tuloverot ja tulonsiirrot, Työpoliittinen tutkimus No. 265, Helsinki. Pekkala Kerr, S. and Kerr, W. (2008), Economic Impacts of Immigration: A Survey. Working paper Riphahn, R. (2004), Immigrant participation in Social Assistance Programs: Evidence from German Guestworkers, University of Basel. Roodenburg H., Euwals R. & ter Rele H. (2003), Immigration and the Dutch economy, CPB Netherlands Bureau of Economic Policy Analysis. 20

21 Sarvimäki, M. (2008), Assimilation to a welfare state: labor market performance and use of social benefits by immigrants to Finland, VATT Discussion Papers 454, Helsinki, Appendix. Economic activity (employment and earnings) of Estonian immigrants by the time in Finland Figure 1A: Employed over 6 months annually, % 80 % Estonian immigrants Finnish natives length of stay in Finland (years) 21

22 30000 Figure 1B: Average annual earnings of the employed Estonian immigrants by the length of stay Estonian immigrants Finnish length of stay in Finland (years) 22