The creative minds competition – Danish labour

market and the foreign experts

Nare HakhverdyanUniversity of Southern Denmark

2012

Introduction

• International migration of highly skilled workers(HSW)• Globalization• Respond to labour market shortages• Knowledge economy• HSW possess special knowledge

My paper

• Firm level• Critically review the international theory about the HSW’s

impact on firm’s productivity and wages• Description of the theory and a discussion of the used methods

in the empirical part

• National level• Review what OECD countries do to attract and retain HSW. • Study whether the used instruments have an empirical

impact on the mobility pattern of HSW• Case study of Denmark: Danish schemes for attracting

HSW? How competitive is DK compared to other countries?

Highly skilled workers’ impact on productivity and wages

• Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen and Trofimenko, 2007 )• Investigate the relationship between foreign

experts and firm’s productivity and wages • Data: Colombian firms for the years 1977-

1991 • Result: hiring of foreign experts increases firm

productivity and wages of the local employees.

Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen

and Trofimenko, 2007 )

• Theory:• Dynamic model:• 1st period firms hire foreign experts • 2nd period foreign experts leave the firm• Assumption: knowledge transfer takes place

productivity increases permanently • Worker specific learning domestic workers can

transfer the knowledge to other firms in the 2nd period• Low wages in the 1st period BUT wages increase in

the 2nd period to make sure that the workers do not transfer the knowledge to other firms

Teaching locals new tricks: foreign experts as a channel of knowledge transfers (Markusen

and Trofimenko, 2007 )

• Empirical part:• Statistically insignificant and relatively lower

unskilled wage and skilled wage while foreign experts are at the firm

• Skilled wage increases after the foreign experts leave

• Productivity• Value added per worker while the foreign experts are

at the firm 8.1%, after foreign experts leave: 11.3%

Econometric method

• Fixed effects to estimate the effects:• Advantage: control for unobserved time-invariant

factors• Disadvantage: Cannot control for unobserved factors

that are not time-constant

• Difference-in-differences • Many control variables have an impact on different

levels • Advantage: eliminates the effects of differences in

exogenous productivity and other changes that have an impact on the firm’s productivity and wages

Do Foreign Experts Increase the Productivity of Domestic Firms?

(Malchow‐Møller, Munch, Skaksen, 2009)

• Analyse the impact of highly skilled foreign workers on domestic firms’ productivity and wages

• Data: Danish population of workers and Danish private firms for the years 1995-2007.

• Results: firms with foreign experts are more productive compared to firms without foreign experts.

Do Foreign Experts Increase the Productivity of Domestic Firms?

(Malchow‐Møller, Munch, Skaksen, 2009)

• Theory:• O-ring model is extended in four ways• Wages are firm-specific which is due to rent

sharing • Gap between the actual skills of workers and the

optimal skill that is required by a firm • Hiring foreign workers is costly • Firms differ in terms of their exogenous

productivity parameter

Do Foreign Experts Increase the Productivity of Domestic Firms?

(Malchow‐Møller, Munch, Skaksen, 2009)

• Empirical results:• Average wage is used to measure the productivity

affect in firms that hire foreign experts to firms without foreign experts • Firm level:• The third year following the hiring of foreign experts ”

average wage increases with 2.4 % more compared to firms hiring only domestic experts • Indicates that productivity increases

• Worker level:• Wage benefits are strongest and most positive for the

highly skilled workers

Econometric method

• Difference-in-differences• Compare firms that hire foreign experts to

firms without foreign expert and try to find equivalents between the firms’ productivity level where everything apart from the variable of interest, namely hiring foreign experts, is assumed to be the same.

OECD countries and the schemes

• Competitive behavior among nations • Current policy approaches: • Passive and active schemes• Passive: Demand vs. supply driven schemes• Active: Tax concession and non-economic

benefits

Demand-driven schemes: Most European countries

• EU Blue Card (all EU member countries except Denmark, UK, Ireland),

• Researchers scheme (Germany, The Netherlands, Austria, Belgium, Finland, Ireland, Luxemborg, Portugal, Slovak Republic and Denmark)

• Other schemes where initiatives are undertaken by an employer with a need for a particular skill. The employer offers a specific job with some requirements such as specific education level, previous work experience and wage level.

Advantage of demand-driven schemes

• Meet the specific needs of the current labour market, especially in industries where there is a high demand for labour• Give the employers the right to self-access

whether the migrant possesses the required skill and work experience

Supply-driven schemes

• Schemes based on point systems• Canada, Australia, New Zealand and Denmark

• Advantage • Small firms who do not have the resources to recruit

abroad can easily find the necessary labour force

• Disadvantage• Requires a considerable administrative infrastructure

to process and assess applications for admission.

Active schemes - tax concession

• 15 OECD countries by 2010 had introduced tax concession• Reduced tax rates on labour income • General deductions, allowances and

exemptions from personal income tax • Specific deductions and/or exemptions for

employer provided fringe benefits • Exemptions from foreign sourced income

Active schemes – non-economic benefits

• The Netherlands:• ACCES: arrange social events, provide information

about school system, near supermarket • Expat centers: help to integrate into the local

community etc. • Norway:• New in Norway: Provides information about school

system, healt system etc.• Interational Network of Norway: helps with home

finding, school finding for children, help the family to establish social network

Empirical evidence on tax concession on migration

decisions

• Paper by Kleven, Landais, Saez, Schultz, 2011 • Data from Danish Researchers’ Tax Scheme• Highly paid foreign workers are tax-sensitive

and hence respond positively to favourable income taxation.

• The scheme has doubled the number of foreigners with earnings above the threshold in Denmark compared to slightly less paid ineligible foreigners

Empirical evidence on tax concession on migration decisions

• Paper by Liebig, Puhani, Sousa-Poza, 2006 • Data from Switzerland • Highly educated individuals are more tax

sensitive compared to older, less educated persons

Evidence for non-economic benefits

• Well-being a key determinant for migration• Social engagement• Good quality of educational and social system

The Danish labour market

• Demand-driven schemes:• The Positive List • The Pay Limit Scheme • Corporate scheme • The Researchers’ Tax Scheme

• Supply-driven scheme:• Green Card

How competitive is Denmark?

• In most areas of research and educational quality DK does well

• One of the leading destination for highly skilled migrants from OECD and other countries alike

• Recommendation: • Keep the passive schemes flexible and reasonable• Evaluation of policies and their effects should be

based on their consequences for well-being