Free Mobility with the EU and Immigration of North American Brains to Switzerland: What Consequences?

Gross, Dominique M. Article Free Mobility with the EU and Immigration of North American Brains to Switzerland: What Consequences? Swiss Journal of Economics and Statistics Provided in Cooperation with: Swiss Society of Economics and Statistics, Zurich Suggested Citation: Gross, Dominique M. (2012) : Free Mobility with the EU and Immigration of North American Brains to Switzerland: What Consequences?, Swiss Journal of Economics and Statistics, ISSN 2235-6282, Springer, Heidelberg, Vol. 148, Iss. 4, pp. 497-530, https://doi.org/10.1007/BF03399376 This Version is available at: https://hdl.handle.net/10419/186010 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ © Swiss Society of Economics and Statistics 2012, Vol. 148 (4) 497–530 a Professor, School of Public Policy, Simon Fraser University, Harbour Centre, 515 West Hastings St., Vancouver, V6B 5K3, Canada. I thank Kemi Alfolabi and Andriy Baransky for their invaluable assistance in compiling the dataset, seminar participants at the University of Neuchâtel and a referee, for their comments. I also thank the School of Economics at the University of New South Wales, Sydney, Australia, for its hospitality while writing this paper. 1 High-skill immigrants/expatriates/workers and brains are used interchangeably in this paper. Free Mobility with the EU and Immigration of North American Brains to Switzerland: What Consequences? Dominique M. Grossa JEL-Classification: F22, J21, J61. Keywords: High-skill immigration, free mobility policy, Switzerland, North America, incentives. 1. Introduction In this paper, I investigate the factors that drive North American brains to Switzerland before and after the implementation of the free mobility agreement with the European Union in 2002. The analysis is about immigrants in occupation categories requiring high education levels who came from Canada and the United States between 1990 and 2009. The main question is: Has the free mobility agreement led to substitution away from North American brains1 and did it change factors influencing non-European high-skill workers to come to Switzerland? The focus of the paper is the impact of the new policy on immigration flows from North America in terms of magnitude and incentives; some potential consequences for Swiss firms’ competitiveness on the world market are then discussed. After a decade of increasing free mobility with the European Union, there are mixed reactions in the Swiss society about the perceived impact of the policy especially on high-skill expatriates. Some argue that not only foreign university professors are taking jobs of Swiss citizens but the diversity of foreign academics’ origins is extremely low. Muller (2010), p. 78, for example, states: “The Swiss People’s Party […], a right-wing group notorious for its nationalist politics, accused the University of Zurich of having too many German nationals on its faculty.” Others, the business sector in particular, hold opposite views. When 498 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 2 It is worth noting that the perception about brain drain hindering competitiveness has been constant since the introduction of free mobility (7.43 in 2002 versus 7.5 in 2010), suggesting the degree of Swiss brains’ exodus has hardly change. asked whether skilled labor was readily available, business executives estimated that Switzerland was performing less well in 2010 than in 2002. In 2010, the index value was 7.01 on a scale to 10 compared to 7.25 in 2002 (IMD, 2010). Executives appear to blame the new immigration policy as the perception that immigration legislation prevented companies to employ foreigners has risen from 5.56 in 2002 to 7.55 in 2010.2 Yet, when asked whether foreign high-skill people were attracted to their country’s business environment, executives evaluated Switzerland at 9.12 in 2010 compared to 7.95 in 2002. So it appears that according to business executives Switzerland has become more attractive to high-skill immigrants but, hiring them has become more difficult despite the introduction of free mobility with the EU. These perceptions have been confirmed by an observed shortage of highly educated professionals and calls for easier immigration procedures for highly skilled individuals from non EU/EFTA countries (Swiss American Chamber of Commerce and Boston Consulting Group, 2008, pp. 54–55). Such divergences in opinions raise questions about the actual impact of the introduction of free mobility with EU countries on access to high-skill immigrants from other countries of the world. When skills are internationalised, substitution among brains from various origins may not appear to have costly consequences for the receiving economy. However, there are potential economic costs beyond the nationalistic argument against homogenous ethnic origins made by the Swiss People Party. Growing research shows that ethnic skilled diaspora contribute through several channels to the economic development of their host country. Skilled expatriates influence positively trade (see Rauch, 2001, for a survey) and they can also affect positively foreign direct investment (see, for example, Buch, Kleinert and Toubal, 2006; Javorcik et al., 2011). Also, in a recent paper, Foley and Kerr (2011) show that, skilled immigrants can improve the world competitiveness of their host country’s firms wanting to enter foreign markets. The argument behind the functioning of all three channels is easier access through better information thanks to expatriates’ networks. Hence, in the long run, by having to give priority to EU citizens Swiss firms clearly strengthen their access to the EU market but may miss on opportunities to build competitive advantage in other foreign markets. In this study the rest of the world is represented by Canada and the United States and the results show that the introduction of free mobility with the EU in 2002 has had a substantial negative effect on skilled immigrant flows from Consequences of Free EU Mobility and North American Immigration to Switzerland 499 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 3 For a detailed history of immigration policy in Switzerland and its impact on the foreign resident population, see Gross (2006). 4 The word “permanent residents” covers foreigners residing in Switzerland for a period of one year or longer (OFS, 2009, p. 5). This definition is different from the one used by settlement countries such as Canada and the United States where only people with unlimited authorizations are considered permanent. those two countries. The impact was not limited to a time-specific drop as the role of some factors influencing immigration changed significantly. Since 2002, North American highly skilled people are more influenced by a stimulating work environment at home and there has been a clear substitution away from them, in favour of Europeans and Swiss. In addition employers must now offer attractive financial conditions to North American high-skill candidates. So not only do Swiss employers have limited access to North American brains but they face stiffer competition to attract them. Finally, in addition to the adverse effects of the new policy, a negative trend in hiring of North American innovators due to labour market conditions might in the future diminish Swiss firms’ competitiveness on world markets. The rest of the paper is organized in the following way: Section 2 presents a brief survey of Swiss immigration policy since the mid-1990s. Section 3 describes changes in the composition of immigration to Switzerland since the implementation of free mobility. In Section 4, a model of skilled immigration from Canada and the United States is estimated to evaluate the nature and magnitude of substitution between North American and European brains and economic implications are discussed. Section 5 concludes. 2. Swiss Immigration Policy Swiss immigration policy experienced little change between the early 1970s and the late 1990s but the approval by popular vote of free mobility with the EU/EFTA in 2000 led to drastic changes to the law for citizens coming from third countries.3 Swiss policy has always been demand-driven and thus requires foreigners obtain a one-year or longer job contract prior to applying for a “permanent” work/residence permit.4 Another avenue, until 2002, was through conversion of temporary status (i.e., seasonal permits). Generally one-year permits (i.e., sojourn permit) were automatically renewed conditional on employment. After a certain number of years of residence with such permits, immigrants and their family could apply for an unlimited, unconstrained permit (i.e., establishment permit). Yearly annual quotas were set for the number of new sojourn permits, not including seasonal conversions. 500 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 5 See DFJP & ODM (2011a, 2011b) for brief descriptions and Confédération Suisse (2011a, 2011b) for the original documents. From 2002 a government order was in place until 2005. 6 EU-15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, the Netherlands, Portugal, Spain, Sweden, and the UK. In 2004, 10 countries joined the EU, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. EFTA members are Iceland, Liechtenstein and Norway in addition to Switzerland. Until the mid-1990s, there was no defined priority for the hiring of foreign workers. In 1995, the government developed the new circle-policy with priority given to citizens of countries similar in culture to Switzerland. Also, anticipating on the signing of an agreement with the EU, in November 1998, the government introduced the dual recruiting system by advising employers to give preferences to workers from the European Union; they could however, still prospect worldwide for skilled workers. Following approval by popular vote in 2000, the implementation of the free mobility agreement with the EU/EFTA countries started on June 1st, 2002 and a new immigration legislation was in place by December 2005.5 The most relevant component of the new legislation for this study is the specification of search priorities for employers who want to hire foreign workers: Third countries’ citizens can be considered only if they are skilled and no worker is available on the domestic or EU/EFTA labor markets. Hence, priority must be given to Swiss citizens, foreigners living in Switzerland with permanent status and residents in EU/EFTA countries. Employers must prove they have searched extensively before submitting a request for hiring from third countries. Furthermore, only skilled candidates (i.e., managers, specialists and workers with tertiary education) can be considered with a few exceptions, i.e., in case of intra-firm transfers or exchanges, acute shortages of labor in economically key occupations, or firm’s creation leading to local employment growth. The conditions may also be relaxed to gain access to new markets, expand exports or for non economic activities such as arts, culture, religion and international organisations. Once their hiring has been approved, third-country citizens receive a sojourn permit (livret B) valid for one year, renewable. They are eligible for an establishment permit generally after ten years, in some cases after five. From 2002, there was a five year transitory period with quotas before implementation of complete free mobility. Initially, the agreement concerned only 15 EU member countries and the EFTA countries. On June 1st, 2004 it was extended to the ten new EU members.6 By June 1st, 2007, the transition period was completed for the initial 15 countries plus Cyprus and Malta, and complete free mobility applied to their citizens. Since May 1st 2011, it applies to the remaining Consequences of Free EU Mobility and North American Immigration to Switzerland 501 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 7 In Figure1, skilled is defined according to the International Standard Classification of Occupation (ISCO) from the International Labour Office (ILO) and includes legislators, senior officials and managers (ISCO-1), professionals (ISCO-2) and technicians and associate professionals, (ISCO-3; ILO, 1990). eight members who entered in 2004. The latest step in the process has been the start of the transitory period for Bulgaria and Romania on June, 1st, 2009. By 2014, all EU/EFTA countries are expected to benefit from full free mobility with Switzerland. It must be noted that free mobility does not exempt foreign citizens from applying for permits. Their sojourn permit (livret B) is valid for five years after which period they can apply for an establishment permit. To obtain a sojourn permit they must be employed, show proof of independent activity or if inactive, have financial resources and health insurance coverage. The major change that is likely to have affected brain flows from third countries is priorities imposed on employers for hiring. Non-European skilled individuals are still eligible for immigration to Switzerland but only after potential candidates in Switzerland and the EU countries have been considered. Such regulation is expected to lead to substitution among skilled immigrants from various geographical areas. The remaining of this paper provides a descriptive and econometric analysis to identify whether the new legislation has actually led to substitution away from North American brains in favor of European and Swiss ones after 2002. 3. Brain Immigration to Switzerland The choice of Canada and the United States (US) to represent third countries is guided by the fact that the two countries have historically provided the most educated immigrants to Switzerland. In 2000, 49.7% of Canadian and 57.6% of American expatriates in Switzerland had tertiary education. Only immigrants from the United Kingdom and Sweden had a comparable levels of education with 50.1% and 52.2% respectively (Docquier and Marfouk, 2005). Also, their education standards are relatively similar to those of Europe and Switzerland which is likely to have made it easier for employers to follow the new legislation and substitute away from them in favour of Europeans and Swiss skilled workers. The legislation targets new immigrant workers and Figure1 shows the evolution of the inflows of workers (total and skilled) from Canada and the United States from 1990 to 2010.7 Not surprisingly at the beginning of the 21stcentury, there is a sharp drop in the total annual number of North Americans coming to Switzerland. In 2003, after nineteen months of implementation of 502 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 8 Unfortunately Australia and New-Zealand cannot be included in the analysis because no occupation specific data is available for the estimations. However, the facts presented in this Section suggest that the results from this study are likely to be relevant for those two AngloSaxon countries. the free mobility treaty with the EU/EFTA, the yearly number of Canadians migrating to Switzerland had fallen by 61.1% and that of Americans, by 52.2% (Table1, column6). The restrictions on hiring also affected skilled immigration yet slightly less drastically. By 2003, the annual flow of skilled Canadians had dropped by 49.1% and that of Americans, by 49.7% (Table2, column2). Note that some other non-European industrialised countries have experienced even sharper declines; the annual skilled flow from Australia and New-Zealand dropped by 51.8% and 71.4% respectively between 2001 and 2003. The flow from Japan also fell but less with –20.5%. Between 2001 and 2003 other factors than the introduction of the new legislation may have affected North American immigration to Switzerland as overall immigration decreased by 15.5% and that from EU15 by 11.6% (Table1, column6). However, by 2010, the inflow from EU15 countries, had grown back and passed the 2001-level by about 70%. The recovery has been most spectacular for Germany as total annual immigration in 2010 was 90.4% above the 2001level. France and Italy experienced slightly smaller increases. As a result, the share of EU15 in total immigration rose from 63.7% in 2001 to 85% in 2010 (ODM, various years). In contrast, by 2010, immigration from the US was about 2/3 of its peak 2001-level and immigration from Canada was only about 1/3 of it. Similarly, by 2010, the flow from Australia and New-Zealand represented only 46.5% and 65.1% of their 2001-levels.8 The sharp falls in the early 2000s followed a long period of steady increases especially in North American immigration. From 1994, a year before the introduction of the circle policy, until 2001 the total annual inflow of immigrants from Canada and the United States rose by 110.7% and 31.8% respectively (Table1, column5). During that period, immigration from EU15 countries grew only by 8.2%. However, when only skilled workers are considered in Table2, column1, the growth rates for European countries are much larger than for total immigration while they are close for North America. Hence, before free mobility at the end of the 20th century, the skill intensity of European migrants to Switzerland was growing quite fast while that of North American, already the highest, was constant. Generally, the government’s recommendation to give priority to European workers at the end of 1998 (i.e., dual recruiting) does not appear to have had Consequences of Free EU Mobility and North American Immigration to Switzerland 503 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) Figure 1: Immigration Flows of Americans and Canadians to Switzerland 0 200 400 600 800 1000 1200 1400 1600 1992 1995 1998 2001 2004 2007 2010 Total from US Skilled from US Total from Canada Skilled from Canada Source: ODM (various years) Table 1: Total Annual Immigration Flows from North America and Selected EU Countries 1. 1994 2. 2001 3. 2003 4. 2010 5. % change 1994– 2001 6. % change 2001– 2003 7. % change 2001– 2010 Total 40,331 41,867 35,396 53,193 3.8 –15.5 27.1 Canada 364 767 298 264 110.7 –61.1 –65.6 United States 1,037 1,367 654 891 31.8 –52.2 –34.8 EU15 24,651 26,681 23,574 45,235 8.2 –11.6 69.5 Austria 1,010 1,704 927 1,541 68.7 –45.6 –9.6 France 2,849 3,774 2,640 6,416 32.5 –30.0 70.0 Germany 4,727 9,892 7,132 18,830 109.3 –27.9 90.4 Italy 4,031 2,982 1,846 5,664 –26.0 –38.1 89.9 Source: ODM (various years) 504 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) much of an impact on employers’ hiring strategies. However, when the recommendation became law in 2002, the flows from many countries and North America in particular were reduced drastically and remained low throughout the decade. So, it is likely that substitution occurred in favour of European countries since the drop in North American immigration was permanent. Consistent with the new legislation, the shift in the origin of foreign workers has been accompanied by a shift in the skill composition: By 2010 the shares of high-skill immigrants in total were 86.4% for Canadians and 87.3% for Americans up from an average of 68.3% and 78.1% respectively between 1994 and 2001 (Table2, column7). Thus, North American immigration to Switzerland which had been historically high in skill content became even more skill intensive after the introduction of free mobility with the EU. Since employers could hire low-skill workers only from EU countries, it is not surprising that these countries have experienced a fall in skill intensity since 2001 after the 1990s’ rise. France and Germany show the largest falls: –12.5 and –25.2 percentage points respectively (Table2, columns5 and 7).9 Table 2: Skilled Immigration from North America and Selected EU Countries Growth skilled flowsaShare of skilled immigrant workers 1. % change 1994– 2001 2. % change 2001– 2003 3. % change 2001– 2010 4. 1994 5. 2001 6. 2003 7. 2010 Canada 110.2 –49.1 –55.7 67.3 67.1 87.9 86.4 United States 34.6 –49.7 –16.7 76.6 78.2 82.3 87.3 Austria 137.1 –40.3 –14.8 31.8 44.7 49.0 42.1 France 77.6 –29.2 33.3 43.0 57.7 58.4 45.2 Germany 134.5 –30.6 20.3 61.0 68.4 65.8 43.2 Italy 28.5 –33.1 75.6 19.7 34.2 37.0 31.6 a Skilled is defined according to the ILO International Standard Classification of Occupation (ISCO) and includes legislators, senior officials and managers (ISCO-1), professionals (ISCO2) and, technicians and associate professionals, (ISCO-3; ILO, 1990). Source: ODM (various years) 9 It is worth noting that Germany is the only border country for which the share of high-skill immigrants in 2010 is not only lower than in 2001 but also lower than in 1994 (43.2% in 2010 versus 68.4% in 2001 and 61% in 1994). Consequences of Free EU Mobility and North American Immigration to Switzerland 511 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 16 Statistically, it is not possible to enter the European and the Swiss labor force measures separately because of high correlation (about 0.980; see TableA.II.1). 17 Part of the reason for using a parsimonious model lies in the fact that the two North American economies are very similar in terms of the distribution of residents’ characteristics relevant to migration decision such as age or human capital intensity. citizens within the new priority set-up for immigrants. Also, immigrant workers from these four countries represented more than 90% of the European annual inflow and 60% of total annual inflow. The measure is the weighted sum of university trained labor supplies from the four countries with the weights equal to the share of each country in the total length of the border with Switzerland. The supply from eligible EU countries is the weighted sum of university trained labor supply with the weights equal to the inverse of the distance between the capital of each country and Bern, the capital of Switzerland. Each weighted labor force is introduced with the constraint of equality of coefficients with the Swiss labor force after 2002 which is consistent with the fact that employers must consider them as perfect substitutes.16 Finally a dummy is also tested for the introduction of the dual recruiting system (Policy 1998) which recommended giving priority to Europeans. The model is first estimated in its basic form then various policy specifications are used to test the robustness of the results. Because the time dimension of the sample is relatively long (20 years), before starting the estimations I ran unit-root tests. Table5 shows that the hypothesis of individual unit roots can be rejected at 5%. The case of a common unit-root process cannot be rejected but such a restriction is unlikely to be valid since hiring in different occupation categories has no reason to follow the same dynamics. Hence, the estimations are run in levels and spurious correlation is unlikely. The model is estimated by OLS even though migration rate is bounded at zero. In such context, zero-values represent information about the types of North American brains in demand in Switzerland and thus, cannot be eliminated. Since they do not represent censored data, estimations using Tobit are not considered appropriate. To avoid biased results and the possibility of negative estimated values, the estimations are done in log linear form such that the dependent variable is ln[( flow + 1) / LFUnich t−1], even though the number of zeroes is small (14observations). Some robustness tests and various experiments with the policy dummy for the introduction of free mobility are presented in Table6. Note that the results of an AR(2) serial correlation test require the use of serial correlation robust standard errors. One of the concerns with the rather parsimonious basic specification is potential omitted variables.17 For example, the empirical literature on 512 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) migration flows shows that geographical distance (proxy for cost of moving) and cultural determinants such as common language or former colonial ties are important determinants of the flows (see Clark, Hatton, and Williamson, 2007; Mayda, 2010). In column1, the fixed-effect test shows a strong contribution of source-country non time-varying factors to the size of the individual occupation-category flow rates. These factors may include the geographical distance and the fact that French is a common national language in Canada and Switzerland. Another factor may be international transferability of skills; employers for some occupations may have a preference for applicants of a given source country because of perceived better compatibility of training with demand. However, the fixed effect captures only mean effects and if time-varying source-country effects are not adequately taken into account, endogeneity translates into correlation between the fixed effect and the error terms (Wooldridge, 2002, Chapter 10). So, in column2, I introduce a time variable for each crosssection to control for possible source-country specific aggregate time-varying factors. They are not significant which is consistent with the fact that the Canadian and American economies are closely linked through high levels of bilateral trade flows. Also, this likely generates multi-collinearity as the value of the coefficients of the source-country labor force variable shifts substantially (even though it is still not significant) because it is trended. In column1 free mobility has a significant adverse effect on immigration flows from North America and results in column3, confirm there is no significant difference in the average fall in inflow of brains from Canada and the United States in 2002–2003; also the recommendation by the government to give priority to Swiss and EU citizens in 1998 does not have a significant impact (column4). Table 5: Unit Root Tests for Dependent Variable (lFLRateCH jit ) from 1990 to 2010 Specification with individual effects and time trend (1 lag) Specification with individual effects and time trend (2 lags) H0: there is a common unit-root process: Levin, Lin & Chu t (p-value) –1.25 (0.10) –0.52 (0.30) H0: there is an individual unit-root process: Im, Pesaran & Shin W-stat. (p-value) –1.76 (0.039) –2.67 (0.004) ADF-Fisher Chi-sq. (p-value) 63.74 (0.027) 69.07 (0.009) Source: see variable definitions in Appendix II. Consequences of Free EU Mobility and North American Immigration to Switzerland 513 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) Table 6: Immigration Rate from Canada and the United States to Switzerland (lFLRateCH jit) Fixed Effect Time trend Canada vs US Dual Recruiting EU Border 1. 2. 3. 4. 5. 6. lEarnCH it lEarnjit URUniCH t URUnijt lLFUniCH t lLFUnijt Policy 2002 1.50 (1.8) 1.16 (2.0)* –.090 (2.8)** –.063 (1.5) –1.69 (3.4)** .690 (1.4) –.504 (4.7)** 1.78 (0.9) .546 (0.5) –.084 (2.9)** –.079 (1.6) –1.22 (1.1) –2.41 (0.9) –.551 (3.8)** 1.46 (0.8) 1.02 (1.0) –.087 (2.9)** –.065 (1.4) –1.23 (1.9) .269 (0.3) –.619 (2.7)** 1.28 (0.6) 1.28 (1.2) –.139 (2.6) –.057 (1.2) –1.91 (2.3)* 1.34 (1.3) –.469 (3.1)** 1.42 (0.7) 1.02 (1.0) –.091 (3.0)** –.072 (1.6) – 1.59 (1.5) –.499 (3.3)** 1.40 (0.7) 1.10 (1.1) –.101 (3.2)** –.066 (1.4) – 1.41 (1.4) –.497 (3.3)** Time Canada × Time Canada × Policy2002 Policy 1998 – – – – .070 (0.6) .058 (1.7) – – – – .201 (0.8) – – – – –.246 (1.3) – – – – – – – – l (LFUniCH t × LFEUt ) l (LFUniCH t × LFBordt ) – – – – – – – – –1.27 (2.2)* – – –1.24 (2.3)* Adj. R2 N T Schwarz F(21,411): cji = c (p-value) 0.902 22 20 1.616 122.06 (0.000) 0.904 22 20 1.617 – 0.902 22 20 1.622 – 0.903 22 20 1.619 – 0.903 22 20 1.603 – 0.903 22 20 1.605 – Notes: Serial correlation robust standard errors in parentheses. The residuals show serial correlation in an AR(2) process such that 12 (0.75) (0.000) (0.001) = 0.006 0.436 0.174 ; jit jit jit eee −− −+ + with absolute t-values in parentheses. *, **, significant at 5%, 1% respectively. Sources: see variable definitions in Appendix II. 514 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) Hence, only legislated priorities have affected the inflow of North American brains. Finally, the 2002-policy, in addition to the impact effect, is modelled by augmenting the Swiss labor force with the two measures of the EU labor force alternatively (columns5 and 6). In both cases, the variable is significant but the coefficients are smaller and weaker than for the Swiss labour force alone. Overall these results suggest that the introduction of free mobility has led to changes beyond a simple impact effect and the basic model is likely to be under-specified. In Table7 all elasticities are allowed to vary after 2002 and several hypotheses are tested.18 In column1, the negative impact of Swiss unemployment embodying the condition of having a job contract does not vary after 2002; however, the gravity dynamics (i.e., Swiss and North American labour forces) does change. In columns2 to 4 alternative specifications for the new policy are tested and the results are robust. Before free mobility the network effect dominated even though it is statistically weak. An increase in skilled labor force in North America and in Switzerland (i.e., expansion of networks) attracted brains. After the introduction of free mobility with EU/EFTA, there is substitution with Swiss labor force and the European highly skilled labor force however it is measured. In column2, Swiss and EU labor force are allowed to be perfect substitutes after 2002. The magnitude of the post-2002 change in substitution is given by the coefficient on the Swiss-EU labor force (–1.36 significant at 1%). The weak attraction from Swiss skilled labor force before 2002 for North American brains is completely offset19 and growth in EU labor force lowers their inflow. Those are clear indications that employers have been following the priority rules in hiring. All the other results of the model preand post-2002 are stable with respect to column1 except the coefficient on Swiss earning which is now positive, significant; so, North American brains after 2002 respond to financial incentives in their decision to come to Switzerland. Limiting the labor force to border countries generates similar results (column3). This is not surprising since the border countries include three of the largest European economies and the simple correlation between the two measures is extremely high (0.998). Finally, rather than considering the whole European labor force as the potential pool of applicants for jobs in Switzerland, only unemployed Europeans are taken into account (column4) implying that only the unemployed would be interested in working in Switzerland. Even though this is an extremely restrictive assumption, there is 18 Note that the impact effect is dropped from the specification because of its high correlation with the labor force variables that change very slowly over time. 19 The Wald-test hypothesis that the after-2002 effect cancels the basic effect is: H0: (1.70 − 1.36) = 0 cannot be rejected; p-value = 0.757. Consequences of Free EU Mobility and North American Immigration to Switzerland 515 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) a significant yet smaller elasticity (0.997 versus 1.36 for the whole labor force) probably because the unemployed are less diversified and may not fit the demand characteristics as well. Because North American brains seem to care about network effects, I also test if the skilled labour force can be a proxy for quality of work environment (i.e. network). In column5, the source-country skilled labour force is weighted with innovations [(1 / patent) × LFUni]. The results clearly show that when innovation intensity increases at home (when patent applications by residents increase), immigration from North America decreases but when the labor force increases, immigration increases. So there is a quality and a quantity effect and the magnitude did not change with free mobility but it is strongly significant. It must be noted that the traditional factors of the push/pull model have very weak impact on North American skilled flows to Switzerland except for Swiss income and unemployment rate which characterizes the demand-driven policy. These results are, however, consistent with the findings of a paper comparing semi-skilled and skilled immigrant workers from 49 countries to Switzerland between 2000 and 2004. When many more source countries are considered, very similar results are found for skilled migrants (see Gross and Schmitt, 2006). Interestingly, a study of low-skill and high-skill immigration to France from 63 countries between 1983 and 2000 also finds that only financial attractiveness of the destination country is relevant to skilled immigrants (see Gross and Schmitt, 2012). The strong influence of financial incentives is also identified by Docquier, Lohest, and Marfouk (2006) for skilled immigrants to OECD countries. So high-skill migrants clearly do not respond to the same factors as low-skill migrants; their emphasis is on financial return to human capital and work environment. The next two experiments (columns6 and 7) consider whether the labor forces from the three regions (Europe, North America and Switzerland) were treated similarly when the legislation allowed employers to do so. In column6, the European labor force is assumed to be considered perfect substitute for the Swiss labor force before and after 2002 because of the Government’s recommendation about priorities in hiring in 1998. Before 2002, the effect is not significant and after 2002, the result hardly changes and there is substitution against North Americans in favour of Europeans and Swiss. So, European skilled workers were not considered equivalent to Swiss workers before 2002. In column7, North American and European workers are allowed to be considered substitutes before 2002 and European and Swiss, after 2002. Again, only the policy change after 2002 is significant. It is interesting that in these two experiments, after 2002, Swiss unemployment shows a much stronger impact. So, these two experiments suggest that prior 2002, skilled workers from the three regions were considered distinct 516 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) Table 7: Impact of Free Mobility with the EU on Immigration Rate (lFLRateCH jit) 2002-Policy 1. EU LF after 2002 2. Border LF after 2002 3. EU Unemployment 4. Patent weighted LF 5. EU LF 6. EU/CAN/US before 2002 7. lEarnCH it lEarnjit URUniCH t URUnijt lLFUniCH t lLFUnijt lEarnCH it × Policy2002 lEarnjit × Policy2002 URUniCH it × Policy2002 URUnijit × Policy2002 lLFUniCH t × Policy2002 lLFUnijt × Policy2002 2.24 (1.4) .429 (0.4) –.073 (2.8)** –.054 (0.8) 1.96 (1.1) –1.77 (1.4) 1.24 (1.8) .457 (1.5) –.260 (1.7) –.029 (0.3) –2.43 (2.5)** –.201 (1.5) 2.49 (1.7) .373 (0.4) –.076 (3.0)** –.068 (1.0) 1.70 (1.2) –1.58 (1.4) 1.85 (2.5)** .451 (1.5) –.240 (1.6) –.031 (0.3) – –.188 (1.4) 2.42 (1.6) .390 (0.4) –.075 (3.0)** –.062 (0.9) 1.85 (1.2) –1.68 (1.4) 1.65 (2.3)* .453 (1.5) –.250 (1.6) –.029 (0.3) – –.193 (1.4) 2.14 (1.3) .497 (0.4) –.075 (2.8)** –.034 (0.5) 1.95 (1.1) –1.69 (1.3) 0.96 (1.6) .459 (1.5) –.108 (0.7) .028 (0.2) – –.158 (1.2) 2.17 (1.4) .034 (0.1) –.113 (4.4)** –.121 (1.9) .079 (0.2) – 1.43 (2.6)** .525 (1.7) –.345 (2.8)** .109 (1.1) – – 2.28 (1.5) .364 (0.3) –.080 (3.1)** –.056 (0.9) – –1.03 (0.6) 1.47 (2.1)* .467 (1.5) –.324 (2.3)* .008 (0.1) – –.132 (0.8) 2.07 (1.3) .242 (0.2) –.096 (3.8)** –.043 (0.6) – – 1.18 (2.2)* .486 (1.6) –.379 (2.6)** .055 (0.5) – – l ( LFUniCH t × LFEUt ) × Policy2002 l ( LFUniCH t × LFBordt ) × Policy2002 – – –1.36 (3.3)** – – –1.41 (3.1)** – – –1.24 (3.9)** – –1.14 (3.1)** – – – Consequences of Free EU Mobility and North American Immigration to Switzerland 517 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 2002-Policy 1. EU LF after 2002 2. Border LF after 2002 3. EU Unemployment 4. Patent weighted LF 5. EU LF 6. EU/CAN/US before 2002 7. l ( LFUniCH t × UnempEUt ) × Policy2002 l ( LFUniCH t × LFEUt ) – – – – – – –.997 (2.5)** – – – – .394 (0.4) – – l ( LFUniCH t ) × Before 2002 l ( LFUnit × LFEUt ) × Before 2002 lLFUnijt × After2002 l ( LFUniCH t × LFEUt ) × After2002 – – – – – – – – – – – – – – – – – – – – – – – – –2.88 (1.5) .880 (1.3) .879 (1.3) –1.63 (5.1)** l ((1/Patent jt ) × LFUnijt ) l ((1/Patent jt ) × LFUnijt ) × Policy2002 – – – – – – – – .737 (3.6)** –.175 (1.0) – – – – Adj. R2 N T Schwarz 0.909 22 20 1.601 0.911 22 20 1.572 0.910 22 20 1.582 0.908 22 20 1.605 .912 22 20 1.560 0.910 22 20 1.580 0.911 22 20 1.575 Notes: Serial correlation robust standard errors in parentheses. The residuals show serial correlation in an AR(2) process such that 12 (0.66) (0.021) (0.000) 0.008 0.399 0.120 ; jit jit jit eee −− =− + + with absolute t-values in parentheses. *, **, significant at 5%, 1% respectively. Sources: see variable definitions in Appendix II. Table 7 continued 518 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) in hiring: Employers chose the most suitable high-skill candidates regardless of origin and only job availability was a constraint. After 2002, Swiss and EU skilled workers had to be given priority over North Americans and their incentives changed. North Americans now expect a financial reward in terms of higher earnings and they pay much more attention to the stimulating work environment at home. In conclusion all the experiments are consistent with a significant substitution away from North American brains in favour of European and Swiss ones once hiring priorities became legislated. 4.2 Future Economic Implications. One questions arising naturally from these results is: Does the evolution in the distribution of geographical origins of skilled immigrants to Switzerland have a potential impact on the country’s future economic performance? While this question is not directly addressed through estimation, it is shown that occupations which matter for innovation have been adversely affected and this may have consequences for the future of the Swiss economy. During the past decade evidence that a diaspora facilitates various economic links between their home and host countries has been growing. Expatriates have been shown to contribute to the expansion of trade between countries (Rauch, 2001). This aspect appears to have been taken into consideration by Swiss legislators through the provision that priorities in hiring can be relaxed for economic reasons such as access to new markets or expansion of exports (Confédération Suisse, 2011a). There is also growing evidence that ethnic networks contribute to foreign direct investment (see for example Buch, Kleinert and Toubal, 2006; Javorcik et al., 2011) and recently a new argument has arisen: Ethnic networks can increase firms’ competitiveness on world markets (Foley and Kerr, 2011). Skilled expatriates can provide an information advantage (directly or indirectly) to firms that employ them which lowers entry barriers on foreign markets. Foley and Kerr present evidence supporting the following three points: (1) Ethnic innovators have information advantage about the market and product in their home country and they can increase competitiveness of their firm abroad through better targeting; (2) firms with ethnic innovators are more likely to collaborate with inventors in their home countries associated with that ethnicity and gain information; (3) those gains in insight about foreign markets decrease the need for local partners in joint ventures which often generates additional costs. Foley and Kerr conclude that such evidence has clear implications for immigration policy. Consequently, if Swiss firms are constrained by law to hire skill immigrants mostly from the same region (i.e., the European Union) they might be Consequences of Free EU Mobility and North American Immigration to Switzerland 519 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) 20 Foley and Kerr (2011) use engineers and scientists. Academics are added because in Switzerland they are major contributors to innovations especially at the EPFL and ETHZ. 21 The sample being much smaller (120 observations) the efficiency of the results is expected to be weaker so coefficients with a p-value around 6% (absolute t-value around 1.9) can still be considered to be significant in their impact. penalized in their attempts to penetrate markets in other regions of the world. This could be a particularly important adverse effect of the immigration law given the rapid development of Asian economies and the fierce competitiveness among foreign firms to serve those markets. So, the next step is the estimation of the model for occupation categories of innovators (i.e., Engineers, E, Scientists, J, and Academics, L).20 Innovators have experienced smaller than average declines after 2002 but mixed evolutions. In Table3, the average annual inflow of Canadian engineers increased by 42.9% while that from the US fell only by 5.4%. Flows of academics decreased but their shares in total inflow grew: From 1.8% to 2% for Canada and from 2% to 2.8% for the United States (see Figure2). Scientists from both countries however experienced sharp declines. The results of the estimations for the innovators are somewhat different from those for all skilled immigrants which is consistent with the fact that other professionals, such as executives for example, are likely to respond differently since they are not necessarily subjected to the new constraints. However, the new immigration legislation did have some adverse effects on innovators.21 In Table8, while there is no significant fixed impact of the legislation (column1) there have been shifts in elasticities and the focus of discussion is column4 with the more favorable Schwarz criteria. There are three important points about the results. First, the impact of the state of the Swiss labor market on the probability to get a job is much larger after 2002 (i.e., the elasticity of the Swiss unemployment rate increases in absolute value from 0.170 to 0.944). So the hiring of North American innovators has become much more sensitive to the state of the labor market while it was slightly above average before 2002. The mean tertiary-educated unemployment rate while still low has risen over the sample from 2.27% between 1990 and 2001 to 2.49% between 2002 and 2009; this may have caused a lasting decline in North American brain inflows. Second, substitution with Swiss brains is lowered ceteris paribus after 2002 as the impact of the Swiss labor force changed from 6.78 to 5.69. So, the new legislation did not benefit local innovators even though European applicants from border countries may be complement to North American (i.e. positive coefficient after 2002). One possible explanation is the high level of specialisation in 520 Dominique M. Gross Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) Table 8: Immigration of North American Innovators (Scientists, Engineers, Academics) Fixed Effecta2002-Policy EU LF after 2002 Border LF after 2002 1. 2. 3. 4. lEarnCH it lEarnjit URUniCH it URUnijit lLFUniCH t lLFUnijt Policy2002 lEarnCH it × Policy2002 lEarnjit × Policy2002 URUniCH t × Policy2002 URUnijt × Policy2002 lLFUniCH t × Policy2002 lLFUnijt × Policy2002 .818 (0.7) –1.79 (0.7) –.155 (2.2)** –.081 (1.0) –2.02 (1.9) 1.15 (0.8) –.158 (0.8) – – – – – – –.576 (0.9) –4.33 (2.0)* –.170 (3.2)** –.128 (1.6) –6.79 (2.6)** 4.26 (2.1)* – –2.86 (6.9)** 1.47 (1.9) –.762 (2.7)** .383 (2.7)** 1.95 (1.8) .368 (1.9) –.501 (0.8) –4.32 (2.0)* –.169 (3.2)** –.130 (1.6) –6.70 (2.7)** 4.20 (2.1)* – –3.40 (6.5)** 1.47 (1.9) –.786 (2.7)** .407 (2.8)** – .383 (1.9) –.572 (0.9) –4.32 (2.0)* –.170 (3.2)** –.130 (1.6) –6.87 (2.7)** 4.30 (2.1)* – –3.27 (7.5)** 1.47 (1.9) –.774 (2.7)** .400 (2.8)** – .383 (2.0)* l (LFUniCH t × LFEUt ) × Policy2002 l (LFUniCH t × LFBordt ) × Policy2002 – – – – 1.11 (1.9) – – 1.18 (2.0)* Adj. R2 N T Schwarz F(5,107): cji = c (p-value) 0.741 6 20 1.650 23.05 (0.000) 0.778 6 20 1.647 – 0.778 6 20 1.647 – 0.778 6 20 1.645 – a Serial correlation robust standard errors in parentheses. The residuals show serial correlation in an AR(2) process such that 12 (0.80) (0.08) (0.07) 0.010 0.181 0.190 ; jit jit jit eee −− =− + + with absolute t-values in parentheses. *, **, significant at 5%, 1% respectively. Sources: see variable definitions in Appendix II. Consequences of Free EU Mobility and North American Immigration to Switzerland 527 Swiss Journal of Economics and Statistics, 2012, Vol. 148 (4) References Arthur D. Little (Switzerland) Ltd (2009), Headquarters on the Move— Benchmarking of Global and Regional Headquarters in Switzerland, November, Zurich. Bank of Canada (2011), Annual Average Exchange Rates, Financial Markets Department, Ottawa. 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WB, World Bank (2012), World Development Indicators, electronic database, Washington, DC. Wooldridge, Jeffrey M. (2002), Econometric Analysis of Cross Section and Panel Data, Cambridge, Mass.: The MIT Press. SUMMARY In 2002, Switzerland started to implement free mobility with the European Union and simultaneously immigration rules for citizens from the rest of the world became more stringent. Only skilled workers could be hired from third countries and employers had to give priority in hiring to Swiss and European skilled applicants. This paper shows that the new legislation has strongly adversely affected the size of high-skill immigration from North America. Also, incentives to leave those countries have changed as North Americans are more inclined to consider home professional networks and financial opportunities. The consequence is less geographical heterogeneity in immigrants which may decrease Swiss firms’ ability to gain information about non-European markets and increase their entry cost into those markets.