The Political Economy of Immigration and Welfare State Effort: Evidence from Europe 13 For the analysis, pooled time-series cross-sectional analysis is used to explore the association between stocks of migrants, the foreign-born population, on the two different indicators for welfare state effort, social welfare spending as a percentage of gross domestic product (GDP) and the total welfare generosity index. The empirical analysis shows that increases in the foreign-born population are positively and statistically significantly associated with social welfare spending, while there is no significant relationship with the generosity index. The results survive a number of robustness checks and provide no evidence for the efficiency hypothesis. Instead, the findings are in line with researchers who argue that the compensation hypothesis is the prevailing mechanism between globalisation and welfare state effort (Brian Burgoon, 2001; Gaston & Rajaguru, 2013; Walter, 2010). In the following section, the political economy literature surrounding immigration and welfare state effort in the context of globalisation is examined. This section includes the formulation of hypotheses on immigration’s role in the retrenchment or expansion of the welfare state. Section 3 focuses on the research design and contains the data and method used to approach the research question. The results and a discussion are presented in section 4, which is followed by a sensitivity analysis. Finally, Section 5 presents the conclusions and suggests areas for future research. 2.2 Literature review and hypotheses 2.2.1 The theoretical relationship between immigration and the welfare state In 1981, Meltzer and Richard developed a political economy model to express how demand for redistribution by voters is dependent on levels of economic inequality. Assuming voters act rationally and with economic self-interest, the model predicts that when mean income rises relative to median income, those with an income lower than the median will choose candidates who favour higher taxes and greater redistribution – thus taxes will rise and redistribution will increase, and vice versa (Meltzer & Richard, 1981). Magni-Berton (2014) builds on this model to illustrate how immigration reduces demand for redistribution through closing the gap between the mean and median income. The model demonstrates that while low-skilled immigrants lower the mean income of the entire population, an absence of voting rights means the income level of the median voter stays the same. This suggests that in light of increasing immigration, in particular lowskilled immigration, voters would prefer lower taxes and less redistribution. In practice, however, voters do not always act rationally and when casting votes individuals must choose between policy bundles and therefore may vote on a preference for reduced immigration rather than a preference for reduced spending.
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