Wealth gap in Europe: Most immigrants are worse off than natives | Munich Center for the Economics of Aging - MEA

Especially those who migrated at older ages and intra-European migrants suffer from migration in terms of wealth

Especially those who migrated at older ages and intra-European migrants suffer from migration in terms of wealth, finds a new MEA-study.

January 2017 - Wealth is generally considered a long-run indicator of well-being. Particularly older families may rely on their wealth and on pensions as a major resource. For migrant households these resources might substantially differ from those of natives. This is due to differences in, for example, savings behaviour, rates of return or access to social welfare and social security. Given the surge of reforms aimed at reducing the generosity of the social security system all around Europe, immigrants form a large group that is potentially at risk of poverty in retirement. In order to face this issue, it is fundamental to assess whether there is a wealth gap and, if yes, what its main drivers are.

A new study by Irene Ferrari estimates the gap between native, mixed and migrant households. Furthermore, the study goes beyond the average gap and explores whether some of the immigrant groups are better off than others.

Potential reasons for a wealth gap between immigrants and natives
Researchers expect individuals with a migration history to be worse off than natives for various reasons; the following three are among them: First, in terms of wages, immigrants face a relative earnings gap at arrival. This is caused by a lack of information about the host countries and barriers such as language skills or an uncertain legal status. Second, recent studies have shown that immigrants receive less private transfers such as gifts and inheritances, and they are less likely to be home owners. Finally, countries' regulations covering immigrant welfare eligibility may also contribute to a wealth gap. The access to social welfare programs is often limited for immigrants and some social security or pension rules require a minimum number of contribution years. Even when immigrants are able to meet eligibility criteria, they may only reach lower benefits because of lower earnings or fewer contribution years.

Wealth gap varies over wealth distribution
The study finds evidence that immigrant and mixed households are on average worse off than comparable natives. However, the wealth gap varies along the wealth distribution: The gap is higher for lower wealth levels, then decreases and finally becomes big and negative for the top 20% of wealth distribution. In other words: immigrants in the top percentiles exhibit higher wealth values than natives. Hence, households in the lower part of the wealth distribution especially suffer from this wealth gap. It is particularly pensions which drive this bigger gap of migrant households with a low wealth level. This reflects the difficulties of immigrants to meet the required minimum of contribution years and the lower benefits due to lower earnings. Migrant households in the upper part of wealth distribution, on the other hand, are significantly better off than natives.

Socioeconomic factors play an important role
The analysis further suggests that immigrant households which are worse-off are more likely to have migrated from countries outside of Europe. Additionally they are more likely to have a lower income, are less healthy, less educated, and are more likely to come from poorer families. Furthermore, the analysis indicates that the gap at lower wealth levels is driven by early childhood conditions, such as the size of the house. Better-off immigrant households, on the contrary, are more likely to have migrated from other European countries, have a higher income, are better educated, are healthier and come from richer families. For this reason, the study conducts an additional analysis that considers the heterogeneity of the migrant population.

Heterogeneity of migrant population in terms of age at migration and origin
For this analysis, the study distinguishes between individuals who migrated from another European country or from a non-European country, and between individuals who migrated before or after the age of 18. This distinction makes sense considering that intra-European immigrants should face lower migration costs and that young immigrants should benefit from schooling in the host country and have more time to settle. The results of the analysis are surprising: Whereas the assumption regarding younger immigrants can be confirmed, intra-European immigrants seem to suffer more from migration in terms of wealth than non-European immigrants. With a median wealth of 327,000 Euro, they are on average still better off than non-European immigrants with a median wealth of 158,000, but they exhibit a bigger gap when compared to a peer group of natives.

Costs of migration are better absorbed by non-European households
A likely explanation for the bigger gap between intra-European immigrants and natives with comparable characteristics is that highly-educated individuals moving to a foreign country may have more difficulties in finding a job that fits their education level than lower-educated individuals. The well-documented gap in wages that migrants experience at their arrival may thus be bigger for better-educated migrants, who may consequently suffer a permanent wealth loss. Further research is needed in order to understand the origin of the gap.

The full MEA Discussion Paper can be read here.