The economic impact of Brexit-induced reductions in migration to the UK

Jonathan Portes, Giuseppe Forte

The various projections of the impact of Brexit on the UK economy that were produced during the referendum campaign omitted the economic impact of changes in migration to the UK. This column presents plausible scenarios for future migration flows and estimates of the likely impacts. The potential negative impact of Brexit-induced reductions in openness to migration on the UK economy could well equal that resulting from Brexit-induced reductions in trade.

Two issues dominated the UK’s Brexit referendum debate: immigration and the economy. 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 (2016), the IMF (2016) and OECD (2016), among others.

However, none of these projections incorporated the economic impact of changes in migration to the UK; they focused on trade and investment. There was little or no analytical justification for this omission (Portes 2016a). In a new paper (Forte and Portes, forthcoming) we try to fill that gap, using a broadly analogous methodology and approach to that used in the trade-based analyses. We 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.

We estimate the economic determinants of migration to the UK from a number of the largest source countries for economic migration, as proxied by quarterly National Insurance number (NINo) registrations. Both high-level macroeconomic developments (the evolution of GDP in both the UK and source countries, changes in unemployment rates, and the bilateral exchange rate) and the existence of free movement of workers are significant determinants. In particular, our estimates imply that free movement results in an increase over time of almost 500% – that is, by a factor of six.

Coupled with NIESR’s November 2016 economic forecasts [Hacche et al. 2016], our results allow us to produce scenarios for future flows between now and 2020. In a central scenario, we assume that, over the period between now and 2020, the combination of policy changes and the psychological impact of the Brexit vote is equivalent to reversing half of the impact of introducing free movement in the first place. In a more extreme – ‘hard Brexit’ – scenario, we assume the impact is completely reversed.

The resulting falls are quite large; in the central scenario, NINo registrations average about 443,000 over the 2016-20 period, falling to 327,000 by 2020 while in the extreme scenario they average about 350,000 falling to 140,000 by the end of the period. While this may seem implausibly steep, recall that as recently as 2003 NINo registrations for EU nationals totalled about 100,000, even with free movement in place for the EU15.

Figure 1 NINo registrations with free movement coefficient falling to 50% of its original value

Assuming that falls in NINo registrations translate into a fall into net migration on a proportional basis, our scenarios imply that net EU migration to the UK could fall by up to 91,000 on the central scenario, and up to 150,000 on a more extreme scenario. This is comparable to other estimates that employ different methodologies (Vargas-Silva 2016, Migration Watch 2016).

In order to translate these scenarios of the impact of Brexit on migration flows into impacts on economic variables, we use the existing empirical evidence. A 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. 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%. Perhaps surprisingly, the estimated aggregate impact of high- and low-skilled migration are not significantly different (although the distributional implications are). One possible, partial explanation is that low-skilled migration appears to increase labour force participation among native women (a result also found in individual country studies, see Barone and Mocetti 2011). This is one example of the type of complementarity or spillover effect by which migrants working in low-skilled occupations might indirectly increase productivity and output and is likely to be relevant to the UK.

We use these coefficients to estimate the possible impact of falls in EU migration on GDP and GDP per capita growth between now and 2020, compared to a counterfactual where EU migration remains constant. In our central scenario, the impact would be to reduce GDP by between about 0.63% to 1.19%, while GDP per capita would be reduced by between about 0.22% and 0.78%. In the more extreme scenario, the hit to GDP per capita would be up to 1.16%.

Figure 2 Possible impact of falls in EU migration on GDP between now and 2020

In order to facilitate comparison with the estimates produced by the Treasury and others of the long-term impacts of Brexit, we also calculate the impact on GDP per capita out to 2030, assuming that migration remains flat at these reduced levels after 2020. Here the impact on GDP per capita ranges from a fall of 0.92% to 3.38% under the central scenario, and from 1.53% to 5.36% under the extreme scenario. This compares to the Treasury’s central estimate of a reduction in GDP from Brexit of 6%.

Of course, our scenarios for future migration flows are dependent on a number of assumptions relating both to our methodology and to the inherent uncertainties over future policy. Nevertheless, we believe they are useful for illustrative purposes. And while the theoretical basis for the view that reductions in migration will translate into reductions in productivity is (as with trade) clear, and supported by the empirical evidence, using quantitative estimates based on historical cross-country data to construct scenarios for the impact on the UK economy going forward is inevitably speculative.

As with other analyses of the long-term impact of Brexit, these estimates should be viewed as an indication of the sign of the likely impact and of the plausible rough order of magnitude of the possible impacts, rather than a point estimate. Nevertheless, it is striking that the potential negative impact of Brexit-induced reductions in openness to migration on the UK economy is, according to our analysis, of a similar order of magnitude to that resulting from Brexit-induced reductions in trade.

References

Barone, G, and S Mocetti (2011). "With a little help from abroad: The effect of low-skilled immigration on the female labour supply". Labour Economics 18(5), 664-675.

Boubtane, E, J C Dumont and C Rault (2015). “Immigration and Economic Growth in the OECD Countries 1986-2006”. CESifo Working Paper Series No. 5392. Available at SSRN: https://ssrn.com/abstract=2622005 (accessed on 29/11/2016)

Forte, G and J Portes (2017). “The economic impact of Brexit-induced reductions in migration”. Oxford Review of Economic Policy, forthcoming.

Hacche, G, O Carreras, S Kirby, I Liadze, J Meaning, R Piggot and J Warren (2016). “World Overview”. National Institute Economic Review, November, 238: F9-F16.

HM Treasury (2016), “Analysis of the long term economic impact of EU membership and its alternatives”. CM 9250. ISBN 978-1-4741-3090-5. Available at https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives (accessed on 29/11/2016)

International Monetary Fund (2016). “United Kingdom: Selected Issues”. Available at http://www.imf.org/external/pubs/cat/longres.aspx?sk=43980 (accessed on 29/11/2016)

Jaumotte, F, K Koloskova and S C Saxena (2016). “Impact of migration on income levels in advanced economies”. Spillover Task Force, IMF. Available at: http://www.imf.org/~/media/files/publications/spillovernotes/spillovernote8 (accessed on 29/11/2016)

Kierzenkowski, R et al. (2016). "The Economic Consequences of Brexit: A Taxing Decision". OECD Economic Policy Papers, No. 16, OECD Publishing, Paris.

Migration Watch (2016). “UK immigration policy outside the EU”. Available at http://www.migrationwatchuk.org/briefing-paper/371 (accessed on 29/11/2016)

Office for Budget Responsibility (2015). “Fiscal Sustainability Report”. Available at http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-june-2015/ (accessed on 29/11/2016).

Portes, J (2016a). “The Treasury's Brexit analysis and immigration”. National Institute of Economic and Social Research Blog. Available at http://www.niesr.ac.uk/blog/treasurys-brexit-analysis-and-immigration (accessed on 29/11/2016)

Portes, J (2016b), ‘Immigration after Brexit’, National Institute Economic Review, November, 238: R13-R21.

Vargas-Silva, C (2016). “Potential Implications of Admission Criteria for EU Nationals Coming to the UK”. Migration Observatory report, COMPAS, University of Oxford, UK.