Immigration, Income and Unemployment: An Application of the Bounds Testing Approach to Cointegration
Feridun, Mete, The Journal of Developing Areas
This study aims at investigating the nature of the causal relationship between immigration and two macroeconomic indicators, GDP per capita and unemployment, in Sweden using autoregressive distributed lag (ARDL) bounds testing procedure and Granger-causality within vector error correction model (VECM) based on annual data spanning the period between 1980 and 2004. Results of the ARDL bounds test are supportive of the theory that the variables are in a long-run equilibrium level relationship. On the other hand, results of the Granger-causality tests support the existence of a long-run, bidirectional causality between immigration and GDP per capita. However, results do not support the hypothesis that immigration causes unemployment. On the contrary, evidence suggests that unemployment causes immigration.
JEL Classifications: F15, B28
Keywords: ARDL bounds test, Granger-causality, immigration, unemployment
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Sweden is reputed to have a high level of living standard and a well-developed social welfare system. This reputation has made the country center of attraction for the immigrants from less developed countries from all around the world. Another striking feature of Sweden is its ageing population. It is estimated that low fertility rates, demographic effects of the baby booms, and high life expectancy rates will lead to a fall in the labor supply and a risk of insufficient manpower in the near future (Wallin and Kvam, 2000). This has serious implications for, not only the sustainability of the pension and benefit systems, but also for the labor market where employers will have to replace domestic employees with immigrants. On the other hand, as in many other developed countries, inflow of aliens has made immigration a major public issue in Sweden. People are concerned that immigration reduces their employment opportunities, depresses wage rates, and financially strains the welfare systems. In this respect, it is essential to assess the impact of foreign workers on per capita income and unemployment to guide policy-makers in designing policies regarding immigration. International migration and the role that it plays in the economies of the originating and receiving countries has frequently been a topic of interest. However, such study does not exist in the literature for Sweden. Therefore, the present study aims at filling this gap in the literature through investigating the nature of the causal relationship between immigration and two macroeconomic indicators, GDP per capita and unemployment, using ARDL bounds testing approach to cointegration introduced by Pesaran et al. (2001).
There exists a rich literature on the economic impact of immigration. Hence, it is not possible to revise all of the earlier studies here. Instead, only major studies will be mentioned. Interested readers are referred to Feridun (2004) for a more detailed review of the literature. A number of studies in the literature has focused primarily on the effects of immigration on the unemployment of domestic workers. For instance, Marr and Siklos (1994) studied the relationship between immigration and unemployment in Canada using quarterly data for the period 1962-1990. They used Granger-causality tests and found that before 1978, changes in immigration levels did not affect the Canadian unemployment rate, but after 1978 immigration rates contributed to changes in the unemployment rate. In another study, Marr and Siklos (1995) investigated the relationship between immigration and unemployment in Canada, this time using annual data from 1926 to 1992. They used both Granger-causality tests on unemployment and immigration and the unrestricted VAR approach on unemployment, immigration, wage (per capita total labor income), and real GDP. The Granger-causality tests revealed that immigration was not caused by past unemployment; however, past immigration did cause unemployment. …