The economic impacts of immigration to the UK

Jonathan Portes

Much public and policy concern has focused on the distributional impacts of immigration – in particular, potential negative impacts on employment and wages for low-skilled workers. This column summarises evidence and draws conclusions from the now considerable literature on the impact of migration to the UK on the economy and labour market, including the potential economic impacts of Brexit-induced reductions in migration.

I have been working on the analysis of the economic and social impacts of migration to the UK since 1999, inside and outside government. Over that period the evidence base on those impacts has expanded hugely. In this column, I summarise the existing evidence from an economic perspective, under four headings:

Labour market impacts

Impacts on productivity and growth

Fiscal and public service impacts

The potential economic impacts of Brexit-induced reductions in migration

My conclusions here are inevitably in summary form, but where appropriate I provide references to original research, by myself and others.

Labour market impacts

Much public and policy concern has focused on the distributional impacts of immigration – in particular, potential negative impacts on employment and wages for low-skilled workers. Although the consensus in the economic literature is that negative impacts of migration for native workers are, if they exist at all, relatively small and short-lived (see, for example, Constant 2014), much of this literature is US based (Altonji and Card 1991, Card 1990, 2001, Card and Lewis 2007, Friedberg and Hunt 1995, Lewis 2005); there was almost no empirical literature on the economic impact of immigration to the UK before 2004. Unsurprisingly, given the size of migration flows since then, this deficiency has now been remedied. There is a now a considerable literature on the impact on the UK economy and labour market.

To the considerable surprise of many economists, including me, there is now a clear consensus that even in the short-term migration does not appear to have had a negative impact on the employment outcomes of UK natives. Studies have generally failed to find any significant association between migration flows and changes in employment or unemployment for natives (see, for example, BIS 2014 for a review). Since 2014, the continued buoyant performance of the UK labour market has further reinforced this consensus. Rapid falls in unemployment, now down to just over 4%, have been combined with sustained high levels of immigration.

Nor is there any evidence that immigration has impacted the employment prospects of specific groups such as the young or unskilled. Crudely, immigrants are not taking our jobs – the lump of labour fallacy, that the number of jobs or vacancies in the economy is fixed (which generally refers to the medium to long term) turns out to be a fallacy in the short term as well.

While the evidence on wage impacts is less conclusive, the emerging consensus is that recent migration has had little or no impact overall, but possibly some, small, negative impact on low-skilled workers. Dustmann et al. (2013), using UK LFS data for the period 1997-2005, find that immigration put a downward pressure on the wages at the bottom of the distribution (below the 20th percentile), while the effect on the rest of the distribution (in particular above 40th percentile) is positive. Their estimates show that a 1% increase in the foreign-born/native population ratio leads to an increase of between 0.1% and 0.3% in average wages.

More recently, Nickell and Salaheen (2015) find that a 10 percentage point ( not 10%, as misleadingly claimed by a number of politicians) rise in the immigrant share – that is, larger than that observed over the entirety of the last decade – leads to approximately a 1.5% reduction in wages for native workers in the semi/unskilled service sector. This would mean that immigration since 2004 would have reduced wages for native workers in that sector by about 1%, or put another way, would have depressed annual pay increases by about a penny an hour. Impacts in other sectors are even smaller. The conclusion is that while migration may have had some small negative impact on wages for the low paid, other factors, positive and negative (technological change, policies on tax credits, the National Minimum Wage) were far more important.

Beyond the aggregate impacts on employment and wages, there may also be other impacts on labour market institutions and structures, positive and negative, particularly if migration results in labour market segmentation (MAC 2014). There is indeed some evidence of dual or segmented labour markets in some low-paid sectors, for example food and drink manufacturing, where migrants are disproportionately represented in the seasonal, temporary, or flexible workforce. However, while EU migrants, particularly from the newer member states, are concentrated in some low-skilled sectors and low-paid occupations, this is of course by no means true of all EU migrants. Particularly in London, EU migrants make up a large proportion of employees in finance and business services, occupations which are generally highly skilled and highly paid.

Impacts on productivity and growth

The impact of immigration on productivity and hence (per capita) growth is methodologically harder to estimate. It has been argued that EU migration is likely to have depressed productivity growth, either through a simple ‘batting average’ effect (since new EU migrants are on average paid less than the average of the current workforce) or, more tenuously, because the availability of relatively low-paid but flexible workers reduces the incentive to invest in labour-saving and/or productivity-enhancing equipment. There is however little evidence to substantiate these claims: the UK’s recent abysmal productivity performance coincides with the financial crisis and its aftermath (which of course in turn led to a fall in migration) rather than the earlier sharp rise in migration (Pessoa and Van Reenen 2014).

Equally, there are a number of mechanisms by which migration could increase productivity. Immigrants’ skills may complement those of natives. A number of papers support this hypothesis: for example, Barone and Moretti (2011) found that low-skilled migration increased the labour force participation of highly skilled native women; Peri and Sparber (2009) and Foged and Peri (2016) found that low-skilled migration increased the wages of native low skilled workers. In particular, they argue that natives may have a comparative advantage in jobs with more communication-intensive tasks with respect to foreign workers, and that immigration ‘pushes’ low-skilled natives to occupations with a higher intensity of such skills, increasing the level of specialisation in the economy and hence productivity, as signalled by the corresponding increase in wages.

Immigration might also influence the level of human capital in the economy, either directly if immigrants have high educational attainment (Kerr and Lincoln 2010, Hunt and Gauthier-Loiselle 2010), or indirectly by increasing the incentive on natives to acquire human capital. Some evidence (Hunt 2017, McHenry 2015) suggests that increased low-skilled immigration increase school performance and outcomes for US natives.

The empirical evidence for the UK is currently relatively sparse compared to that on labour market impacts, but is broadly positive. Looking at the service sector, Ottaviano et al. (2015) show that a 1% increase in immigrants’ concentration in local labour markets is associated with a 2% to 3% rise in labour productivity, measured as gross value added per worker, mainly as a result of the cost-cutting dynamics implied by immigration-induced labour supply shocks. In addition, immigration represents a substitute for the import of intermediate inputs and is associated with an increase in exports to immigrants’ countries of origin. Rolfe et al. (2013) found that immigrants concentration within specific industries was associated with slight increases in productivity, but the impact was small.

At the aggregate level, recent literature uses cross-country evidence to estimate the impact of migration on growth and productivity in advanced economies. Boubtane et al. (2015) find that migration in general boosts productivity in advanced economies, but by varying amounts; for the UK, the estimated impact is that a 1 percentage point in the migrant share of the working age population leads to a 0.4-0.5% increase in productivity. This is higher than in most other advanced economies and reflects the relatively high skill levels of migrants to the UK.

Jaumotte et al. (2016) find that a 1% increase in the migrant share of the adult population results in an increase in GDP per capita and productivity of approximately 2%. This result is consistent across a variety of empirical specifications. Perhaps surprisingly, the estimated aggregate impacts of high and low skilled migration are not significantly different (although the distributional implications are very different). In a within-country perspective, Peri (2012), with a state-based analysis in US, finds that a 1% increase in immigration raises total factor productivity by 0.5%, mainly thanks to increased specialisation induced by immigrants’ inflows.

Overall, the evidence, while not comprehensive, does suggest that migration to the UK is likely to have boosted productivity and per capita GDP. See Forte and Portes (2016) for a more detailed discussion.

Fiscal and public service impacts

Given the labour market impacts, fiscal impacts too might be expected to be positive.

Dustmann and Frattini (2014) found that recent migrants, especially those from the EU, had a more positive fiscal impact on average than natives. Of course, it is hardly surprising that young migrants in employment make an initial positive fiscal contribution; proper assessment of fiscal impacts requires a life-cycle perspective (Preston 2014). In this context, there are various reasons to expect the impact to still be positive (in particular, migrants tend to arrive after they have left compulsory, publicly financed education).

However, a positive net impact on public finances at the national level does not preclude a significant impact on demand (and hence cost) at the local level, particularly if funding allocations do not adjust quickly (or at all) to reflect pressures resulting from migration (George et al. 2011). A notable recent example is the shortage of primary school places in some parts of the UK (especially London); this appears to be largely the result of poor planning on the part of central government, given the rise in the number of young children resulting from recent increases in migration (from both the EU and elsewhere).

But broader concerns about the potential negative impacts on public services appear to be largely unsubstantiated: higher immigration are not associated, at a local level, with longer NHS waiting times (Giuntella et al. 2015); and in schools, increased numbers of pupils with English as a second language doesn't have any negative impact on levels of achievement for native English speaking students (Geay et al. 2013). If anything, pupils in schools with lots of non-native speakers do slightly better.

This does not mean, of course, that citizens do not associate their experience of deterioration in public service quality and availability resulting from other factors – in particular, cuts in funding during the UK's ongoing fiscal consolidation – with the increased demand resulting from higher levels of immigration. The fact that migrants' fiscal contribution could, in principle, at least provide enough funding to cover their marginal impact on demand is not much comfort in practice if those revenues are in fact being allocated elsewhere, for tax cuts or deficit reduction, as in fact has been the case.

Immigration may also impact on the prices of goods and services. Frattini (2008) analyses the impact on tradable, non-tradable goods and services prices across UK regions over the period 1995-2006 and shows that immigration is associated with a fall in prices for non-tradeable goods and services, but a rise in the price of tradeables. Sá (2015) focuses on the impact on housing prices in UK local authorities from 2003 to 2010 and shows that immigration actually reduces house prices at a local level, since natives leave the area in response to high immigrant inflows; although this does not imply, of course, that immigration does not overall exert upward pressure on house prices at a national level.

Economic impacts of post-Brexit reductions in migration

During the campaign, there was extensive discussion of the economic impact of Brexit on the UK economy. Detailed projections, under different scenarios for the post-Brexit UK-EU relationship, were produced by HM Treasury, the IMF and OECD, among others. However, none of these projections incorporated the economic impact of changes in migration to the UK; they focused on trade (and to some extent investment) impacts. In recent work (Forte and Portes 2016), my co-author and I use a broadly analogous methodology and approach to that used in the trade-based analyse to analyse the impact of Brexit on migration flows to the UK from the EU, produce scenarios for future flows, and provide plausible, empirically based estimates of the likely impacts on growth, employment, and wages.

The conclusion is that the reductions in migration resulting from Brexit are likely to have a significant adverse impact on UK productivity and GDP per capita. The broad scenarios (not forecasts) we depict imply that the negative impacts on per capita GDP will be significant, potentially approaching those resulting from reduced trade. By contrast, the increase in low-skilled wages resulting from reduced migration is expected to be, if at all, relatively modest. The estimates are summarised in Table 1.

Table 1 Cumulative impact of immigration reduction in 2030 (% fall)

References

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