How Does Immigration Affect Labor Productivity? Time-Series Evidence from Germany with Innovation as a Mediating Channel

Abstract

Abstract
This paper investigates the impact of immigrants on labor productivity in Germany and their effect on innovation. The study relies on the World Bank's World Development Indicators (WDI) and combines four indicators of innovation output and input (R&D expenditure, researchers in R&D, resident patent applications, and scientific and technical journal articles) into a single composite Innovation Index using principal component analysis (PCA). The index captures 84.5% of the common variance among the indicators, with 2001-2021 serving as the core estimation window for annual national time-series data for Germany. Net migration is used to capture the level of immigration in the Baron and Kenny (1986) mediation model, supplemented by a Sobel test of the indirect effect. The model includes the following control variables: gross capital formation, trade openness, and foreign direct investment.
The results indicate that net migration is a significant positive predictor of the Innovation Index (a-path, p = 0.039). In turn, the Innovation Index is a significant positive predictor of labor productivity (b-path, p = 0.036), supporting the existence of an innovation-mediated channel. The indirect effect of migration on productivity is positive but weak (Sobel z = 1.60, p = 0.110), and the mediation effect, considered as an indirect relationship between the two variables, is not statistically significant. This finding is consistent with the mediation literature, where indirect effects may be weak or may only exist in one direction.
Compared with the limited evidence available from shorter time-series studies, these results provide more substantive, although still preliminary, support for the innovation-mediation hypothesis. However, several important limitations remain: the analysis is conducted at the national level; net migration is not disaggregated by skill level; and the sample size is relatively small for conventional econometric applications (n = 21 for the full model). The paper places these findings within the context of the international literature on skilled migration, innovation, and productivity. It also explores policy developments in Germany regarding skilled immigration and provides directions for future research using regionally disaggregated and skill-disaggregated migration data.