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The financial and economic Impact of Foreign labours on the economy Case of jordan

Qusi talafheh Jordan –amman 00962777313730


1. Introduction Over recent decades, international migration has occurred at substantial rates. The United Nations (2004) world survey reports a remarkable increase in international migration during the last quarter of the 20th century and the beginning of the 21st century. Despite the fact that most countries restrict immigration, the flow of international immigrants rose from 82 million in 1970 to approximately 175 million people by the year 2000. A very large number of individuals seek to migrate to developed countries in Europe and North America. Countries such as Italy, Spain, Greece and Ireland, which were source countries during the 1950s and 1960s, are now attracting a large number of immigrants. This mass migration is expected to have economic effects in both the source and destination countries. A large literature studies now the effects of immigration on the structure of wages, economic growth, and other receiving-country variables. An emerging literature also studies the effects of immigration on the sending country. Jordanian economy suffers from a lower refined activity rate in economic activity among Jordanians with only 39.5% of the total population working, whereas the total number of the Jordanian labor force amounts to 1,343,000 citizens. Jordan still suffers from a high unemployment rate that reached 12.7% in 2008, while it has recorded 14% in the third quarter of 2009, where the unemployment rate within the Jordanian workers is expected to increase due to the repercussions of the global financial and economic crisis. The number of immigrant workers increased in Jordan last few years, for example, in 2009, 335,000 foreign workers have obtained an official work permit from the Ministry of Labor, while in 2004 the number was 218,000 workers. The majority of those immigrants are Egyptians who constitute 68% of the total foreign workers registered in the Ministry of Labor. In contrast, the number of Jordanian unemployment’ has increased from 144,000 in 2004 up to 180,000 in 2009.


Consequently, this study will explore the aggregate economic effects and financial implications of foreign workers on Jordanian economy. Besides, investigate the feasibility of substituting Jordanian workers in the place of foreign workers. To conclude this study will investigate the impact of foreign workers on the labour market in developing countries using Jordan as a case study by estimating the production function of the economy. This function will be employed to estimate the productivity of the Jordanian and foreign workers and the feasibility of replacing foreign labor with Jordanian workers. 2. Importance of the study The annual report of the Authority of Statistic in Jordan for 2009 shows that number of non-Jordanian workers far exceed the number of Jordanians unemployed (almost double). This mass of foreign workers has had profound effects on the local economy. The importance of this study is based on an analysis of the macroeconomic and financial implications of foreign workers in the Jordanian economy. Besides, this study will look at the feasibility of substituting local workers in the place of foreign workers and how wages, and other economic variables would be affected. For the purpose of this study, Jordan will be used as a case study where Jordan belongs to the developing countries. There are other impacts of using foreign workers on local economy where the study will be extended and investigate these impacts. This study may help enhancing of understanding this problem and provide suitable recommendations and polices to enhance employment rate and increase substitution of the foreign workers by the local workers.


3. Research Objectives There are many objectives that derive the necessity of the research in order to find a cure for the phenomenon and present new strategies and polices that may help to solve the research problem: 1- Explore and identify the local and foreign labor in Jordan in terms of their distribution by nationality, occupation, and demographic characteristics (age, gender, and level of education). . 2- Analyze the economic impact of foreign labor on the Jordanian economy by estimating the production function of the economy and use the function to determine the marginal prductivity of the Jordanian and foreign workers. 3- Estimate the fiscal and financial implication on the Jordanian economy. 4- Propose suitable recommendations and polices that may enhance employment rate and increase substitution of the foreign workers by the local workers. 4. Literature Review Many researchers provided empirical studies about the impact of immigration on wages on the host countries, e.g. Friedberg and Hunt (1995), Simon (1996), Addison and Worswick (2002), Borjas (2003),and others. Empirical research by Simon (1996) argues that immigrants in the US tend to pay quantities of taxes that exceed the costs of the public services they receive and hence immigration confers positive fiscal benefits to the host country. A cross sectional studies conducted by Chapman and Cobb-Clark (1999) and Addison and Worswick (2002) show that the evidence does not indicate a negative association between immigration and adverse labour market outcomes for native Australians.


In the US, Borjas (2003) proposed a new method for estimating the labor market influence of immigration by using this variation in supply shifts across educationexperience workers. He assumed that workers similar educations with different levels of experience contribute in a local labor market and are not perfect substitutes. The results of his study pointed out that immigration lowers the wage of competing workers. He found that a 10% increase in supply reduces salaries by 3 to 4%. Michael (2003) studied the effect of international migration on benefit of host countries. He addressed this issue by developing a general equilibrium model of a two-class source or host country. Each country makes many traded and non-traded goods, applies income taxes and distributes the tax receipts equally to all people. The analysis investigated the impact of permanent migration on class, and national benefits. The study showed that, in the presence of international capital mobility, immigration can have a positive effect on national welfare by reducing the loss to workers while increasing the welfare of capitalist workers. Fairlie and Meyer (2003) studied the effect of immigration on native self-employment using general equilibrium model of self-employment and wage/salary work. The results show small negative effects of immigration on native self-employment rates and earnings and found that self-employed immigrants displace self-employed natives. Weng-Tat Hui (2004) examined the implications of the 5 per cent growth target on the labour requirements of the Singapore economy. The results show that the projected resident labour force will not be able to keep pace with the increased labour demand and the share of foreigners in the labour force will increase significantly even under the most favourable scenario. Sufian Eltayeb (2009) studied the effects of workers’ remittances on economic growth and growth in MENA1 Labor exporting countries. The results show the support for the


Middle East and North Africa


view that remittances have a positive impact on growth both directly and indirectly through their interactions with financial and institutional channels. Most of these studies where based on theoretical predictions. 5. Research Methodology This section covers the research methodology that will be employed for collecting the required data to achieve the research objectives. The study will use a descriptive method to study the labor market. Furthermore, it will use an econometric model to trace the effect of foreign workers on different sectors in the Jordanian economy. Since this study will use time series data from 1990 to 2009, a test for stability of data will be administered using the co-integration test, Error Correction Model s (ECM), and Ordinary Least Squire (OLS) to determine the relationship between the variables in short and long run. In addition, the VAR approach will be used in this research. Different resources of the data will be utilised, such as the annual and monthly reports published by the Central Bank of Jordan, the Jordan Department of Statistics, the Ministry of Labor, National Center for Human Development.


6. References

1- Addison, T. and Worswick C. (2002), “The Impact of Immigration on the Earnings of Natives: New Evidence from Australian Micro Data”, Economic Record, 78, 68-78

2- Addison, T. and Worswick C. (2002), “The Impact of Immigration on the Earnings of Natives: New Evidence from Australian Micro Data”, Economic Record, 78, 68-78

3- Borjas, G. (2003) ‘The labor demand curve is downward sloping: reexamining the impact of immigration on the labor market’, Quarterly Journal of Economics 118: 1335-1374.

4- Borjas, G.J. (1995), “The Economic Benefits of Immigration”, Journal of Economic Perspectives, 9, 3-22.

5- Borjas, G.J. (2003), “The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market”, Quarterly Journal of Economics, pp.1335-1374.

6- Borjas, G.J., Freeman, R.B. and Katz, L.F. (1997), “How Much Do Immigration and TradeAffect Labor Market Outcomes?” Brookings Papers on Economic Activity, 1, 1-67.

7- Chapman, B. and Cobb-Clark, D. (1999), “A Comparative Static Model of the Relationshipbetween Immigration and the Short-Run Job Prospects of Unemployed Residents”,Economic Record, 75, 358-68

8- De New, J.P. and Zimmerman, K. F. (1994) ‘Native wage impacts of foreign labor: A random effects panel analysis’, Journal of Population Economics 7: 17792.

9- Fairlie, R. and Meyer, B. (2003), “The Effect of Immigration on Native SelfEmployment”,Journal of Labor Economics, 21, 619-650.

10- Friedberg, R. and Hunt, J. (1995) ‘The impact of immigrants of host country wages, employment and growth’, Journal of Economic Perspectives 9: 23-45.

11- Hashmi, A.R. and Hui, W.T. (2002), “Population and Labour Force Projections for Singapore (1999-2049)”, a paper presented at IUSSP conference on South Asian Population in a Changing Asian Context (June), Bangkok, Thailand.

12- Michael, M.S. (2003), “International Migration, Income Taxes and Transfers: A WelfareAnalysis”, Journal of Development Economics, 72, 401-411.


13- Simon, J.L. (1996), “Reply to Review by George Borjas”, Journal of Economic Literature, 34, 1331-1332.

14- United Nations (2003), “Levels and Trends of International Migration to Selected Countries in Asia”, Department of Economic and Social Affairs, Population Division, NewYork.

15- Weng-Tat Hui and Aamir Rafique Hashmi,(2004) , Foreign Labour and Economic Growth Policy Options for Singapore, Paper presented to the CLMR Seminar Series, The University of Western Australia, Crawley.