THE IMPACT OF INTRODUCING INTERNATIONAL UNSKILLED LABOR ON THE LABOR MARKET OF DEVELOPED COUNTRIES: ILLUSTRATED BY THE RELATIONSHIPS OF IMPLEMENTATION OF OECD COUNTRIES’ LOW SKILLED WORKING PERMIT POLICIES AND THE COUNTRIES’ UNEMPLOYMENT RATE A Thesis submitted to the Faculty of the Graduate School of Arts and Sciences of Georgetown University in partial fulfillment of the requirements for the degree of Master of Public Policy By Xing Guan, B.A. Washington, DC April 6, 2020 Copyright 2020 by Xing Guan All Rights Reserved ii THE IMPACT OF INTRODUCING INTERNATIONAL UNSKILLED LABOR ON THE LABOR MARKET OF DEVELOPED COUNTRIES: ILLUSTRATED BY THE RELATIONSHIPS OF IMPLEMENTATION OF OECD COUNTRIES’ LOW SKILLED WORKING PERMIT POLICIES AND THE COUNTRIES’ UNEMPLOYMENT RATE Xing Guan, B.A. Thesis Advisor: Robert Bednarzik, Ph.D. Abstract This study focuses on the relationship between the OECD countries’ labor markets’ performance and the Working Holiday Visa policy, which provides young people with a temporary work permit. The program has been adopted by many developed countries, as it can address seasonal worker shortages at a low cost. However, only a few studies have examined its impact on the host countries’ labor market. Based on this paper’s regression results, the policy has negative robust significant correlations with the unemployment rate for OECD countries. It shows us the positive result of this policy for the developed world and the attraction of international unskilled labor may partially solve problems of population aging and declining fertility. Nevertheless, potential misspecification issues (e.g. omitted variable) remain in this paper’s models. Further study in this domain is also needed. iii Table of Contents I. INTRODUCTION ........................................................................................................................ 1 II. BACKGROUND ........................................................................................................................ 3 Working Holiday Programs (WHP) ............................................................................................ 3 III. LITERATURE REVIEW .......................................................................................................... 5 Immigration and Labor Market ................................................................................................... 5 Working Holiday Program and Labor Market ............................................................................ 7 Policy Implication ....................................................................................................................... 9 IV. HYPOTHESIS AND MODEL .................................................................................................. 9 Hypothesis ................................................................................................................................... 9 Methodology and the Models ...................................................................................................... 9 V. DATA AND ANALYSIS ......................................................................................................... 15 Data Description ........................................................................................................................ 15 Analysis and Diagnosis ............................................................................................................. 19 VI. POLICY RECOMMENDATION AND CONCLUSION ....................................................... 23 APPENDIX: MODELS DIAGNOSTICS ..................................................................................... 25 REFERENCES .............................................................................................................................. 32 iv List of Figures Figure 1. Older People as a Percentage of the Total Population ..................................................... 1 Figure 2. Fertility Rates in Major OECD Countries, Children per Woman, 1970-2017 ................ 2 Figure 3.Unemployment Rate and Numbers of Connections ....................................................... 16 Figure 4. Trend of Three Countries’ Unemployment Rate in the Year the Working Holiday Visa Program Started ............................................................................................................................. 17 Figure 5. Heteroscedasticity Informal Test for Model 1 ............................................................... 26 Figure 6. Heteroscedasticity Informal Test for Model 2 ............................................................... 26 Figure 7. Heteroscedasticity Informal Test for Model 3 ............................................................... 27 Figure 8. Heteroscedasticity Informal Test for Model 4 ............................................................... 27 Figure 9. Heteroscedasticity Informal Test for Model 5 ............................................................... 28 v List of Tables Table 1. Models and Definition of Variables ................................................................................ 13 Table 2. Variable Matrix and Discussion ...................................................................................... 14 Table 3. Average Unemployment Rate for Countries with Working Holiday Visa and Countries without Working Holiday Visa ..................................................................................................... 15 Table 4. Regression Results Using OLS for Working Holiday Visa Policy ................................. 18 Table 5. Variable Correlation ........................................................................................................ 25 Table 6. Heteroscedasticity: Formal Test ...................................................................................... 29 Table 7. Model Specification Errors: Link Test ............................................................................ 30 Table 8. Omitted Variable Test ..................................................................................................... 31 vi I. INTRODUCTION The Organization for Economic Cooperation and Development (OECD) countries are experiencing population aging and declining fertility. As OECD Policy Brief reported in 2015, “In OECD countries, the population share of those over 65 years old reached 17.8% in 2010, up from 7.7% in 1950, and is expected to climb to 25.1% in 2050.” Figure 1 shows that this upward trend is happening throughout the OECD world. Figure 2 shows that older workers are not being readily replaced by new workers, as fertility rates are declining. As a consequence, the aging society leads to a decrease in the nation’s labor supply. Besides increasing older people’s engagement in the labor market, introducing an international labor inflow could be a useful measure to deal with this problem. Figure 1. Older People as a Percentage of the Total Population Source: OECD calculations based on United Nations Department of Economic and Social Affairs, Population Division (2010), World Population Prospects: The 2010 Revision, United Nations, New York. 1 Figure 2. Fertility Rates in Major OECD Countries, Children per Woman, 1970-2017 Source: https://data.oecd.org/pop/fertility-rates.htm Meanwhile, it is true that talented and skilled individuals1 play an important role in countries’ prosperity. Many OECD countries have already implemented migration policies to attract highly educated workers, entrepreneurs, and university students. Moreover, Aydemir (2012) concluded that due to the importance of highly skilled individuals for both traditional immigrant countries and new countries, high skilled immigrants are able to choose between many alternative destinations. As OECD website reports2, in 2019 “the most attractive OECD countries for highly qualified potential immigrants were Australia, Sweden, Switzerland, New Zealand, and Canada, in part because of favorable admission and stay conditions.” However, many OECD countries 1 This paper defines that people who received at least a Bachelor’s degree or certain skill certificates as skilled labor. 2 Migration policy affects the attractiveness of OECD countries to international talent, 29/05/2019. 2 need unskilled labor as well. This realization has resulted in a plethora of programs to attract them. What’s the impact of introducing international unskilled labor program, such as the Working Holiday Program, on the OECD countries’ labor market? Will this kind of program help the OECD countries to deal with the problem related to population aging and declining fertility? Those questions should be addressed. The main purpose of this paper is to examine the relationship between implementing international unskilled labor supply immigration policies (Working Holiday Visa) and the receiving nations' labor market in OECD countries. The paper is organized as follows. The background section provides detailed information about the Working Holiday Programs, in OECD countries. The literature review section presents the relevant studies about the relationships between employment and immigration and the implementation of the Working Holiday Program in the major countries. The paper concludes with a description of the framework, data, and econometric model and a few preliminary policy implications. II. BACKGROUND Working Holiday Programs (WHP) A popular source of international unskilled labor supply is the Working Holiday Program (WHP). Each OECD country has