Essays on Immigrants and Institutional Change in Sweden

Essays on Immigrants and Institutional Change in Sweden

Acta Wexionensia No 160/2008 Economics Essays on Immigrants and Institutional Change in Sweden Mikael Ohlson Växjö University Press

Abstract Ohlson, Mikael (2008), Essays on Immigrants and Institutional Change in Sweden. Acta Wexionensia No 160/2008. ISSN: 1404-4307, ISBN: 978-91-7636-635-6. Written in English. This thesis consists of three self-contained essays about immigrants experiences in Sweden. They all focus on the interaction between institutional settings and effects on immigrants economic conditions. Essay I examines the effects of changed eligibility rules for disability pension in the 1979 Swedish pension reform on immigrant retirement behavior. The reform made disability pension in the form of basic pension available to a wider group of immigrants. Before the pension reform, the eligibility for a basic pension for foreign citizens living in Sweden was dependent on bilateral and multilateral agreements on social security between Sweden and other countries. Thus, immigrants who were not covered by any of these agreements had no access to a basic pension before the reform. Through the reform, all foreign citizens residing in Sweden were made eligible for a basic pension after a short qualification period. The results indicate a substantial impact on the retirement rate with disability pension on the immigrant group that was made eligible for a basic pension by the reform. These findings confirm previous research showing that the size of the benefit levels in the pension system affects early retirement behavior. Essay II analyzes the impact of the Swedish taxi and bus deregulations on the differences in labor earnings between Swedish born and foreign born workers in these sectors. The changes in the gap in labor earnings that are due to the deregulation are estimated. The results show that there was no significant decrease in the differences in labor earnings between Swedish born and foreign born workers in the bus sector as a result of the 1989 deregulation. As regards the taxi sector, the results show that, before the deregulation, there were only small differences in labor earnings between Swedish born and foreign born workers. After the deregulation, the real labor earnings of foreign born workers decreased substantially more than those of Swedish born workers. However, there was a larger increase in the inflow of foreign born workers than of Swedish born workers into the taxi sector after the deregulation, which may have changed the composition of immigrant workers in this sector. Essay III investigates the impact of becoming a Swedish citizen on annual labor earnings. The study finds a positive impact of naturalization on labor earnings, in particular for immigrants originating from Africa and Asia, an effect than cannot only be attributed to selection into citizenship. A clear trend of increasing labor earnings during the years before becoming a Swedish citizen is found. This trend also continued during the years after citizenship acquisition. The study also suggests that the effects of naturalization on labor earnings are larger for men than for women, and larger for individuals with very low income. Keywords: Retirement; disability; immigrants; wage inequalities; wage discrimination; product market deregulation; competition; naturalization; citizenship; economic impact and self-selection. Essays on Immigrants and Institutional Change in Sweden. Thesis for the degree of Doctor of Philosophy, Växjö University, Sweden 2008. Series editor: Kerstin Brodén ISSN: 1404-4307 ISBN: 978-91-7636-635-6 Printed by: Intellecta Docusys, Göteborg 2008

To Sofia

Contents Acknowledgments Introduction Essay I: Pension Eligibility and Early Retirement Behavior: Did the 1979 Swedish pension reform affect immigrant retirement behavior? Essay II: Is Deregulation A Cure Against Discrimination? An empirical study of the deregulations of the Swedish bus and taxi sectors and the gaps in labor earnings between natives and foreign born Essay III: The impact on labor earnings of becoming a Swedish citizen

Acknowledgements First, I thank my advisor Mårten Palme for giving me valuable guidance and encouraging support. Your immense optimism, skilled instructions, detailed and critical comments and your patience in explaining difficult econometric issues, has played a crucial role in making this thesis possible. Thank you! I am also indebted to my assistant advisors Jan Ekberg and Mats Hammarstedt for excellent suggestions, useful comments and for backing me up during my entire postgraduate studies. I am grateful to Thomas Lindh for helpful support, in particular during the last phase of the process. Your generous assistance and friendly encouragement helped me finish my thesis. Moreover, I have benefited from useful comments and valuable support from Ali Ahmed, Dominique Anxo, Lars Behrenz, Håkan Locking, Jonas Månsson, Maria Nilsson, Harald Niklasson and Ghazi Shukur. I am also grateful to Ulf Eklund and Arthur Micallef for all help with practical computer problems. Lena Nekby was the opponent at my final seminar. Your extremely careful and competent suggestions strongly contributed to my work. Thank you! I express my gratitude to Olof Åslund, who was the opponent for my licentiate thesis, for constructive comments. Christina Lönnblad helped me correct the English language. Thank you for your excellent suggestions. Now, all remaining errors are, of course, my own. To all colleagues at the Department of Economics, Växjö University, thank you for being there for me, for friendship and encouragement, in particular in periods of doubt. Especially, I want to thank my friends and fellow PhD students: Monika, Jonas, Susanna, Zangin, Maria M, Andreas, Lina, Joel and Hans. Mårten Bjellerup, my first room-mate at the Department of Economics, thank you for friendship and funny jokes. Thank you all for contributing to make my time as a post-graduate student a sunny time. I express my warm gratitude to all dear friends in Växjö, Göteborg and other places, in particular Jimmy, Maria, Martin, Göran and Peter. Financial support from the Swedish Council for Working Life and Social Research (FAS), the Swedish Integration Board (Intergrationsverket), and Jan Wallander s and Tom Hedelius Research Foundations is gratefully acknowledged. Finally, I wish to thank my family. Jan, Karin, Elisabeth, Stefan and Monica: thank you for always being close to me with love and support, believing in me, both in sunny days and rainy days. Also, thank you Christina and Mats for all 9

encouragement and help to our entire family to get through this process. However, my most sincere thanks go to my wife Sofia, for your encouragement, always with great love and oceans of patience and to our children Emil, Viktor and Jesper, for being inexhaustible sources of joy. Thank you all! Växjö, November 2008 Mikael Ohlson 10

Introduction The foreign born constitute a substantial share of the population living in Sweden. It is an established position by the Swedish government and parliament that equal rights and opportunities for all, regardless of ethnic and cultural background, constitute an integral part of the Swedish integration policy (Prop. 1997/98:16, p.1). The integration of the foreign born population into the labor market is a crucial part of the integration policy goals. To reach these goals, it is necessary for policy-makers to have a thorough understanding of the mechanisms influencing the labor market opportunities of foreign born. This thesis consists of three self-contained essays about immigrants experiences in Sweden. Although they deal with different topics, they nevertheless share some common features. They all focus on the interaction between institutional settings and effects on immigrants economic conditions. Changes in the population structure, such as an increasing immigrant population, may impose challenges to the institutional regulations. Regulations must sometimes be changed to adapt to new circumstances. One example is the Swedish 1979 pension reform. Among other things, this reform made disability pension, in the form of basic pension, available to a wider group of immigrants. The effects of this reform on immigrant retirement behavior are the topic of Essay I. These institutional changes were aiming at creating equal conditions for Swedish born and foreign born, as regards the eligibility for a basic pension. Poor health is the major determinant for disability pension, but empirical studies have shown that economic incentives also play an important role in the retirement decision. In Essay I, it is shown that the pension reform resulted in an increase in the early retirement rate among those immigrants who where affected by the reform. These results confirm that the Swedish pension system had to adapt to the increased number of foreign born living in Sweden. In the last few decades, large differences have been observed in the labor market outcomes between Swedish born and foreign born, as well as between different immigrant groups. Further, the labor market situation of foreign born, as regards both employment rates and earnings, has deteriorated during this period. One possible explanation is less Swedish-specific human capital, such as proficiency in the Swedish language, due to a short period of residence in Sweden. However, there is empirical evidence of persisting wage gaps between natives and foreign born even after living a large number of years in Sweden (see e.g. Aguilar and 11

Gustafsson, 1994; Edin et al., 2000; le Grand and Szulkin, 2002; Nekby, 2003; and Hammarstedt and Shukur, 2006 and 2007). Another possible explanation is labor market discrimination (see e.g. Rooth, 2002; Arai and Vilhelmsson, 2004; Ahmed, 2005; Åslund and Rooth, 2005; and Carlsson and Rooth, 2007). Due to differences in the labor market position between foreign born and natives, institutional changes may also affect the conditions differently for natives and foreign born. Institutional changes aiming at attaining other political goals, for example efficiency in the product markets, may have secondary effects on the opportunities on the labor market, effects that may be different for natives and foreign born. Essay II focuses on an example of such a policy change, namely the deregulations of the sector for public transport by bus and the taxi service sector, in 1989 and 1990, respectively. In this study, the changes in the differences in labor earnings between natives and foreign born from the period before the deregulation to the period after are investigated. According to theories of discrimination, increased competition on a product market will result in reduced discriminatory wage differentials (see e.g., Becker, 1957). On the other hand, it is plausible that increased competition on the labor market, due to a deregulation, may hit groups harder that have a weaker labor market position, such as foreign born. The study shows that the deregulation of the bus sector did not reduce the gap in labor earnings between native and foreign born men. For women, the results are more uncertain. As regards the taxi sector, the study shows that the gap in labor earnings between natives and foreign born before the deregulation, was very small. However, for those employed in the taxi sector both before and after the deregulation, the labor earnings decreased substantially more for the foreign born as compared to the natives. Thus, foreign born workers in the taxi sector were hit harder by the increased competition in the taxi sector due to the deregulation than natives. Essay II illustrates the importance for policy makers of considering potential effects of institutional changes, aiming at other policy goals such as market efficiency, on the labor market opportunities of foreign born. Some studies have shown that for immigrants from certain countries of origin, the labor market positions are better for those who have acquired Swedish citizenship, as compared to those who are foreign citizens (see e.g. Bevelander, 2000; and Scott 2008). Positive labor market effects of naturalization are also found in international studies (see, for example, Bratsberg et al. 2002, DeVoretz and Pivnenko 2005, and Fougère and Safi 2008). These findings raise the question of whether becoming a Swedish citizen has an impact on the individual s opportunities on the labor market. Does a citizenship help on the labor market? This is the topic of Essay III. More specifically, this study analyzes the effects of naturalization on annual labor earnings for those individuals that are gainfully employed. The results of this study suggest that there is a positive impact of naturalization on labor earnings, in particular for immigrants born in Africa and Asia. One policy implication of the results in this study is that the interrelationship between the naturalization process and labor market opportunities for immigrants must be considered in policy decisions regarding citizenship rules. 12

All studies in the three essays are based on registered data from Statistics Sweden (SCB). The database LINDA is used in Essays I and II. LINDA is a registerbased longitudinal database, consisting of a large panel database of individuals, representative for the total population in Sweden and their household members. The observation periods used in Essays I and II are 1976-1985 and 1980-1998, respectively. For Essay III, the longitudinal database LISA is used. This database integrates individual data from the labor market and the educational and social sectors. In this study, observations for the period 1990-2005 of all immigrants in the age group 20-64 who have immigrated to Sweden after 1970 are used. Essay I In the last few decades, large differences have been observed in the labor force participation rate, in the rate of disability pension between immigrants and natives in Sweden, as well as between different immigrant groups (see e.g. Ekberg, 1983; Gustafsson and Österberg, 2004; and Hammarstedt, 2001). The labor market situation of immigrants, as regards both employment rates and earnings, has deteriorated during this period (see e.g. Aguilar and Gustafsson, 1994; Edin et al. 2000; le Grand and Szulkin, 2002; Nekby, 2003; and Hammarstedt and Shukur, 2006 and 2007). In the same period, there was a substantial increase in the rate of disability pension; for some immigrant groups this increase was dramatic (Ekberg, 1996; Gustafsson and Österberg, 2004). There is also empirical evidence showing that the average health status differs between immigrants and natives as well as between immigrant groups (Leiniö, 1995). The Swedish pension system provides disability pension in case of reduced capacity for work. Poor health is the major determinant for disability pension, but economic incentives also play an important role in the retirement decision (see e.g. Lumsdaine and Mitchell, 1999; Palme and Svensson, 1999 and 2003). Economic incentives for retirement are partly determined by the social security system. For example, there is empirical evidence that the increased benefit levels in the disability pension may affect the labor supply (see e.g., Gruber and Wise, 2000). In this essay, the effects on immigrant retirement behavior of changed eligibility rules for disability pension in the 1979 Swedish pension reform are examined. The reform made disability pension in the form of basic pension available to a wider group of immigrants. Before the pension reform, the eligibility for a basic pension for foreign citizens living in Sweden was dependent on bilateral and multilateral agreements on social security between Sweden and other countries. Thus, immigrants who were not covered by any of these agreements had no access to a basic pension before the reform. Through the reform, all foreign citizens residing in Sweden were made eligible for a basic pension after a short qualification period. Using the LINDA database in a difference-in-differences model, the effects of the reform on the probability of retirement in the age group 35-64 are estimated. The results of the study indicate a substantial impact on the 13

retirement rate with disability pension on the immigrant group that was made eligible for a basic pension by the reform. These findings confirm previous research showing that the size of the benefit levels in the pension system affects early retirement behavior. Essay II This essay investigates the impact of the deregulations of the Swedish sector of public transport by bus and the taxi service sector, in 1989 and 1990 respectively, on the differences in labor earnings between native and foreign born workers in these sectors. This issue of the correlation between the level of competition in a product market and wage gaps between groups goes back to economic theories of discrimination (see e.g. Becker, 1957) which predict that increased competition on a product market will lead to reduced discriminatory wage differentials. This study can also be motivated from a policy perspective, since it examines secondary effects on labor market opportunities for foreign born of policy changes aiming at attaining other policy goals, in this case economic efficiency and the provision of transport services (Prop. 1997/98:56, p.1). Changes in the gaps in labor earnings caused by the deregulation are estimated by fixed effects regressions, using a difference-in-differences approach. The results show that there was no significant decrease in the differences in labor earnings between native and foreign born men in the bus sector as a result of the 1989 deregulation. The results for women are more uncertain. As regards the taxi sector, the study shows that before the deregulation, there were only small differences in labor earnings between native and foreign born workers. However, for those employed in the taxi sector both before and after the deregulation, there was a substantially larger decrease in labor earnings for foreign born than for natives. Thus, the study cannot find any empirical support, neither for the hypothesis that wage discrimination for foreign born occurred before the deregulation, nor for the hypothesis that foreign born benefited in earnings by the deregulation. On the contrary, it seems that foreign born were worse off than natives due to the deregulation of the taxi sector. The study also shows that the inflow into the taxi sector of foreign born workers after the deregulation increased more than for native workers, which may have changed the composition of immigrant workers in this sector. The study highlights the importance of considering secondary labor market effects of policy changes aiming at increasing economic efficiency in product markets. Essay III In this study, the effects of becoming a Swedish citizen on annual labor earnings are examined. There are several possible explanations for observed differences in labor earnings, even after controlling for observed individual characteristics be- 14

tween immigrants that are Swedish citizens and immigrants that are not. First, differences in unobserved characteristics between those who become naturalized and those who do not may affect labor earnings. Second, the naturalization process may be associated with a changed behavior of the individual. Many immigrants have expectations that a Swedish citizenship will increase their chances on the labor market (see e.g. Szabó, 1997, p.137). Since it takes some time from the personal decision to become a Swedish citizen to the date of citizenship acquisition, it is possible that this motivation effect affects the labor market outcomes. Third, becoming a Swedish citizen may have a causal effect on labor earnings which may occur for a variety of reasons: There are formal restrictions reserving certain jobs for citizens, but in Sweden these are relatively few. Employers may prefer to hire workers with a Swedish passport for positions where traveling abroad is an essential part of the job. Further, citizenship may work as a positive signal to employers in situations with incomplete information about the productivity of the job applicant. Swedish citizenship may be interpreted by employers as a signal that the individual plans to stay permanently in Sweden. This signal may be more important for a job position that is expected to last for a long period of time and in jobs where the employer invests heavily in on-the-job training to increase the human capital of the employed. It is also possible that the benefits of Swedish citizenship on the labor market differ between groups of individuals. For groups with a weaker connection to the labor market, a Swedish citizenship might be a relatively more important signal of integration into Swedish society. Several empirical studies have shown that there are positive labor market effects for immigrants of acquiring citizenship in the new country (see for example Bratsberg et al. 2002, DeVoretz and Pivnenko 2005, Scott 2008, and Fougère and Safi 2008). Panel data from the period 1990-2005 for all individuals in working age who immigrated to Sweden after 1970 are used to estimate whether there is a naturalization effect on labor earnings. The estimations sample only includes individuals who were registered as employed and who did not receive any kind of unemployment benefit. Since one important question in the study is whether there is a causal effect of naturalization, for instance through a positive signaling effect of productivity to employers, the estimation samples are restricted to observations for individuals who are not self-employed. Furthermore, to be certain that the individuals have fulfilled the qualification period for Swedish citizenship, only individuals who have been living in Sweden for at least five years are included. In the first estimations, a sample consisting of both immigrants who became Swedish citizens during the observation period and immigrants who did not is used. The results of these estimations of the effects of being a Swedish citizen on labor earnings indicate that there is a positive selection into citizenship. However, the results also indicate that the naturalization effect cannot only be attributed to a selection effect. To isolate the causal effects of naturalization on labor earnings from the selection effect, the naturalization effect is also estimated on a restricted sample, only including individuals who became Swedish citizens dur- 15

ing the observation period. In this way, the contamination of the estimated naturalization effects through selection into citizenship is avoided. The timing of the naturalization is exploited to separate the effects of year trends and the effects of time of residence in Sweden from the naturalization effect. In the estimations, fixed effects regressions are used and both leads and lags of the naturalization indicator are included to analyze both motivation effects before naturalization and dynamic effects on labor earnings after naturalization. The study finds a positive impact of naturalization on labor earnings, in particular for immigrants originating from Africa and Asia. An increase in the labor earnings during the years preceding the citizenship acquisition is also found, which would possibly indicate a positive motivation effect of naturalization. The naturalization process in itself seems to be a working mechanism in the integration of immigrants into the Swedish labor market. These findings are of relevance for policy makers. It is vitally important in all policy decisions regarding citizenship rules to consider potential labor market effects of policy changes in this respect. The possibility of changed labor market opportunities through, for example, changed qualification rules for citizenship, cannot a priori be ignored. 16

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