How much do refugees cost the taxpayer?

The supposed fiscal burden of refugees (how much they cost the state) is often touted as a reason to rein in refugee resettlement programs. This doesn’t seem to be the case for adult refugees in the United States, according to a new paper released in June by the National Bureau of Economic Research. It shows that adult refugees aged 18-45—the majority of the researchers’ sample—make a net fiscal contribution over their first 20 years in the U.S.

The authors argue that current literature examining social and economic outcomes for refugees “tends to concern very specific populations, uses very small samples, relies on data from a small number of countries with high refugee totals, or focuses on very short-term outcomes.” But this study was different. It tracked a group representative of refugees in general and was based on an extremely large, diverse sample. The NBER Digest explains:

They separated refugees from other immigrants using Department of State data, and created a sample of 20,000 refugees who entered the country in 1990-2014. Their sample represents a third of refugees who arrived during the period.

The initial fiscal impact of refugees was (unsurprisingly) negative due to resettlement costs, low human capital, and high welfare use. However, this was only the case for 8 years after arriving in the country:

Using the NBER’s TAXSIM model, the study estimates that “refugees pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.” This may well be a low estimate of refugees’ positive net fiscal impact:

...we assumed that refugees paid the same amount in sales taxes as they did in state income tax. Data from the Quarterly Summary of State and Local Tax Revenues, between quarter 1 of 2010 and quarter 4 of 2014, indicates that revenues from state income tax and sales tax have been essentially the same over this period, with only a 2% aggregate difference. This most likely understates the amount of sales tax paid by refugees, as it is a regressive tax.

The authors also found that many child refugees enjoy positive educational outcomes, although older teenage refugees tended to fare worse:

Among young adults, we show that refugees that enter the U.S. before age 14 graduate high school and enter college at the same rate as natives. Refugees that enter as older teenagers have lower attainment with much of the difference attributable to language barriers and because many in this group are not accompanied by a parent to the U.S.

What does this new evidence mean for the UK’s approach to refugee resettlement? Firstly, it shows the importance of conducting more research into the net fiscal impact of refugees arriving in the UK; data on this topic is remarkably hard to find. The closest thing we have is estimates of the net fiscal impact of general immigration flows, and these estimates tend to be static rather than employing the NBER study’s dynamic approach.

Some evidence from Australia does suggest a negative fiscal impact of refugee immigration; although refugees became net contributors after 10-15 years, they were net drains on public finances over the course of a full 20-year period. However, it’s vital to view refugees’ fiscal impact in comparison to that of natives; if a country is running a budget deficit, the average natives will also have a negative net fiscal impact that may be similar in magnitude to the average refugee.

Any discussion of fiscal impacts must also include potential for positive effects on natives not captured by narrow measures of fiscal impact. My colleague Sam Bowman has previously referenced an innovative paper on Denmark’s experience with refugees:

Mette Foged and Giovanni Peri looked at refugee influxes from Yugoslavia, Somalia, Iraq and Afghanistan to Denmark between 1985 and 1998.

These refugees were distributed evenly across the country’s municipalities without any regard to labour market conditions. This counts as an ‘exogenous shock’ a new influx of refugees to the UK would.

Forty to fifty percent of these immigrants had only secondary school education or lower and “were in large part concentrated in manual-intensive occupations”. By allowing for a deeper division of labour, the “refugee-country immigrants spurred significant occupational mobility and increased specialisation into complex jobs, using more intensively analytical and communication skills and less intensively manual skills.” That meant that native workers who might otherwise have done low-skilled jobs were able to move into more specialised, productive, highly-paid work.

These considerations aside, there are various external factors that could hamper the ability of refugees to make a positive contribution to public finances. Compared to the United States, many European countries have notoriously inflexible markets and generous welfare states, posing a dilemma for progressive supporters of immigration. As IMF analysts have put it, negative fiscal impact could also partly reflect “the existence of legal obstacles preventing refugees from starting to work quickly upon arrival.” There are sensible ways to maximize the benefits of refugee influxes, such as ‘keyhole solutions’ and private refugee sponsorship schemes.