New Research by Michael Peters on the Economic Consequences of Refugee Settlements

How do local economies respond to large increases to the size of their population? New research by Yale Economist Michael Peters suggests that a large refugee settlement after World War II had three important consequences:

• Large and persistent increase in the size of the local population;
• It spurred local industrialization by increasing labor in the manufacturing sector and decreasing labor in the agriculture sector; and
• Increases in per-capita income, particularly in the long run.

The positive relationship between population size and productivity is at the heart of virtually all theories of economic growth. Professors Peters’ new paper, published in Econometrica last month, explores a particular historical setting to provide direct evidence for the empirical relevance of these effects.

At the end of the Second World War, the governments of the United States, the United Kingdom, and Russia expelled millions of ethnic Germans from Eastern Europe and transferred them to West Germany and the Soviet Occupied Zone. The ensuing expulsion was implemented between 1945 and 1948 and represents one of the largest forced population movements in world history. By 1950, about 8 million people had been transferred to West Germany, increasing its population by more than 20 percent.

To estimate the relationship between refugee inflow and local economic development, Professor Peters constructed a data set from original historical sources for more than 500 West German counties since the 1930s. At the heart of this analysis are West Germany population censuses for the years 1933, 1939, 1950, and 1961. This work allowed him to quantify the effect of the refugee settlement on aggregate income and study how the government policy of sending refugees to the countryside might ignite and maintain rural industrialization.

What were the results? Refugee settlement led to persistent increases in the local population, the share of people working in manufacturing, and income per capita.

The large inflows led to persistent changes in the sectoral composition of the local economy. For example, after refugee settlement, the manufacturing sector expanded and stayed higher many years after refugees arrived. These mass migrations also led to a long-term increase in income-per-capita for the aggregate economy: a 10 percent increase in the share of refugees increased income per capita by roughly 5–6 percent after 15 years, and roughly 12 percent after 25 years. These results provide direct evidence on the link between population growth, industrialization, and subsequent income growth.

The persistent long-term effects of the refugee settlement imply that the government policy of settling refugees in rural labor markets might have changed the long-term path of local industrialization in West Germany. In particular, refugee settlement seemed to have ignited the process of industrialization in agricultural communities.

Interview with Michael Peters

What motivated you to take on this research question? I started working on growth theory during my PhD at MIT. The link between market size and productivity has always been a central aspect in the field but there was relatively little empirical work. There have been few attempts to provide direct evidence on the causal effect of larger scale on productivity growth and to connect such estimates to structural models.

This particular setting is, of course, close to my heart. Being from Germany myself, one hears lots of stories about the WW2 expulsion. My aunt, for example, grew up in the Eastern Territories and had to flee on a horse. My parents grew up in the West, but remember that they had to share their apartment with refugees from the East in the immediate war periods because housing was so scarce. So, at some point around 2010 I started to explore whether one could compile empirical evidence on this episode. The first months where very discouraging because so little data seemed to have survived. At the same time, the historical sources were full of anecdotes, which seemed to point at exactly the mechanism I wanted to explore. For example, the US Military Government in Bavaria, published an internal report which explicitly discussed how the arrival of the refugees in rural Bavaria presented opportunities for firms to move to locations near idle workers. This is, of course, exactly the link between productivity and population that, decades later, features so prominently in Paul Romer’s work on economic growth or Paul Krugman’s work on economic geography.

The breakthrough came at visit to Stanford, when I realized that the Hoover Institute had hundreds of old microfilms of the data the US military government collected in the late 1940s and 1950s. And they, luckily, had taken pictures of the old census publications, which I could digitize.

What are the policy implications, if any, of this research? To what extent these findings have a direct relevance for immigration policy today, is a great question. At a very general level, I am pretty confident that population density leads to higher productivity and there is a large empirical literature in urban economics that provides evidence for this to be the case. My results are consistent with this literature, even though my analysis takes a long-run view, which is – I think – more novel. At least three aspects of this study seem particularly context specific. First, the German economy had just emerged from the Second World War and firm creation might have been particularly mobile across space. Second, the refugees were allocated to rural areas and not to urban centers. This is in stark contrast to most episodes of voluntary migration, both in the modern era and in the past. For example, the recent influx of immigrants from Syria to Germany was pre-dominantly directed towards cities. Finally, the 1950s and 1960s were characterized by a secular increase in the manufacturing sector. If the link between productivity and population size is different in the service sector, these findings might have little to tell us about the likely effects of immigration today.

What are some exciting areas for further research in this area? I think there are so many related interesting and important questions to work on. As far as immigration is concerned, there is still lots to understand in terms of the importance of the type of skills immigrants bring. Some immigration is low-skilled, some immigration is high-skilled. The US is clearly the prime example of a country that was able to attract high-skilled migrants for a good part of the last 150 years. But even within the US there are vast regional differences in the type of migrants that settle in different areas. I would love to see more quantitative work on the consequences of migration that takes such differences into account. Together with my colleague Costas Arkolakis and Sun Kyoung Lee at Michigan, we work on a project on the link between migration and economic development in the US between 1880 and 1920 where we try to carefully measure differences in innovation potential between migrants from different countries.

Finally, most of the literature focusing on the link between density and productivity focuses on the effects of positive population shocks. I think we need more work to understand what happens when the population shrinks. Fertility rates in most of the developed world have already declined below 2 and we see the same trends in developing countries. Most demographers expect the global population to decline starting by around 2065. Understanding better what the likely economic effects of this unprecedented change are going to be seems very important to me.