Migration and the UK Economy

During the first eight years of the current decade, Britain experienced a significant level of net inward migration, where many more people were coming into the UK to live and work than were leaving. Many of these people have come to the UK from other EU countries especially the new member states of Eastern Europe. Factors affecting the direction and scale of migration Many economic and social factors affect the rate of migration. Some of them are summarised below. In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation. 1. Differences between countries in wages and salaries on offer for equivalent jobs 2. Access to the benefits system of host countries plus state education, housing and health care 3. Employment opportunities vary between nations, in particular for younger workers 4. A desire to travel, learn a new language, pick up new skills and qualifications 5. A desire to escape political repression and corruption in the country of origin 6. The impact of satellite television and the internet in changing peoples expectations 7. The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union 8. The unwillingness of people within the domestic economy to take certain drudge-filled jobs such as porters, cleaners and petrol attendants The effects of labour migration on the labour markets of richer nations inside the European Union including the UK depend on where the main source of competitive advantage lies, according to research from Marques and Metcalf in a paper delivered to the Royal Economic Society. They argued that industries that source their competitive advantage from a large, skilled workforce will have gained from an influx of younger, well-educated workers. Industries such as high-knowledge manufacturing, transportation and financial services may well gain from an increase supply of skilled workers from Eastern Europe. In contrast industries that rely on low-educated labour-intensive workers will lose out because production will gravitate to countries where unit labour costs are lower. Examples of include textiles and clothing and leisure sectors where there has been a shift of production towards emerging market countries in the Far East. The impact of migration on the UK economy Have migrant workers provided a boost to the competitiveness and supply-side capacity of the UK economy? The debate will rage on for many years and it is important to be aware that with this kind of controversial issue, many of those putting forward evidence will be using normative economics heavily laden with value judgements and will often use data selectively to push their own point of view. Supporters of unrestricted inward migration have argued that migration provides: 1. Fresh skills: Migrants can provide complementary skills to domestic workers, which can raise the productivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work.) 2. Driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs. Much innovation comes from the work of teams of people who have different perspectives and experiences. 3. Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe.

4. Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work and contribute to a nations GDP through a higher level of aggregate demand. 5. Reducing labour shortages: Migration can help to relieve labour shortages and help to control wage inflation. This can reduce the non-accelerating inflation rate of unemployment (NAIRU.) 6. Income flows: Remittances sent home by migrants can add substantially to the GNP of the home nations. And if these remittances boost spending in these countries, this creates a fresh demand for the exports of other nations. In April 2008 the World Bank reported that global remittances from migrants were three times as large as the flows of official government aid to developing countries. Total global remittances in 2007 were estimated by the World Bank to be $318bn of which $240bn went to people in developing countries. 7. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the governments finances. Supporters of allowing free movement of labour argue that labour mobility is a positive-sum game rather than a zero-sum game. On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. Some of the arguments include: Welfare costs: Increasing cost of providing public services as migrants come into a country. Worker displacement: Possible displacement effects of domestic workers Wage cuts: Migrant workers may lower the wages of people in other jobs. Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions. Pressure on property prices: Rising demand for housing which forces up prices and rents. Benefit claims: Many immigrants find it hard to get work Who really gains? The benefits of migration are focused mainly on employers, especially those who take on illegal workers at low wages. Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market.

Population churn in the UK labour market Population churn is a measure of the number of people entering and leaving a country in a given year. One feature of the UK economy is a high level of population churn, for example in 2007 1. 340,000 people emigrated from the UK 2. 577,000 people arrived to live in the UK It is estimated that more than 1 million people moved to the UK between 2004 and 2007. Many of the inward migration has come from the "A8" countries that joined the EU in May 2004 the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. But during 2009 there was growing evidence of a partial reversal of migrants flows because of the impact of recession on the number of job opportunities and also the weak UK exchange rate which has made UK wages for migrant workers less attractive.

Strong inflows of labour into the economy can have the effect of increasing the labour supply this puts downward pressure on real wages (for a given level of labour demand) e.g. through helping to relieve labour shortages in particular industries and occupations If migration provides a boost to the labour supply and to average labour productivity, there is the prospect of an outward shift in a countrys long run aggregate supply

Real Wage Rate

Labour Supply Labour Supply with migration

LRAS1 LRAS2

W1 W2 P1 P2

Labour Demand

AD

E1

E2

Employment

Real National Income (Y)

The benefits and costs of labour migration are hard to quantify and estimate. Much depends on 1. The types of people who choose to migrate from one country to another. 2. The ease with which they assimilate into a new country and whether they find regular jobs. 3. Whether a rise in labour migration stimulates capital spending by firms and by government. 4. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to their country of origin. UK Worker Registration Scheme and Immigration Points System The UK Worker Registration Scheme was introduced in 2004 covering migrants from former Eastern European countries who were coming to the UK to live and work. Once someone has been working in the United Kingdom legally for 12 months without a break in employment they can obtain a residence permit confirming a right to live and work in the United Kingdom and a right to welfare benefits. In February 2008 the UK government introduced a new points-based system for migrants from outside the EU modelled closely on a system that has been in place in Australia for many years. The aim of the system is to channel the most highly skilled workers through the immigration system but to control inward migration of lower skilled workers into industries where the government believes existing EU countries can supply enough migrants. Under the UK system, the most skilled professionals automatically have enough points to come to the UK without a job offer and seek work or set up a business. This tier includes entrepreneurs, top scientists and business people. A points

system is an alternative to unfettered migration on the one hand and a strict quota of workers on the other. Impact on the economies of source countries An important evaluation point is that inward migration into the UK from Eastern European countries has affected not just the UK labour market but also the labour markets in the countries from which these migrants have come. Many eastern European countries have suffered from a sustained reduction in the size of their populations migration is one factor behind this although not the only one. There are many potential negative consequences among them the following: A reduction in the size of the available labour supply A possible reduction in the quality of the labour supply if skilled migrants leave A fall in aggregate demand for goods and services A worsening problem of labour shortages which could drive up wages, costs and prices A decline in the size of the tax-paying population which will hit government tax revenue and spending plans Many eastern European cities will become less dynamic and existing infrastructure will be under-utilized

Migration and Remittances Remittances are transfers of money by foreign workers to their home countries and they are increasingly being viewed as an important source of finance for development, especially at a time when flows of foreign capital investment across countries has fallen sharply. The World Bank estimates that there are over 250 million people living overseas who send some of their earned income back - remittances to all countries topped $305bn in 2008. The biggest single recipients of remittances are India, Mexico and China but measured as a share of national income is probably a better way of considering their relative importance. The World Bank calculated that in 2007, remittances, as a share of GDP was particularly high in these countries: 1. Tajikistan (45%) 2. Moldova (38%) 3. Tonga (35%) 4. Honduras (25%) The world recession in 2009 will inevitably have a negative impact on the value of remittance flows. The World Bank expects payments from workers abroad to fall between 5 and 8 per cent this year.
Suggestions for further reading on the labour migration issue

Europes changing borders (BBC special guide) Healthy economy is impossible with closed borders (Observer, April 2008) Labour market effects of immigration (LSE Centrepiece magazine, February 2008) Skilled migrants are vital to economy, study says (Guardian, March 2008) Contrasting views on EU migration (BBC news, April 2008) Workforce fears as migrants leave (BBC news, July 2008) Migrant workers under pressure (BBC news, December 2008) East European worker curbs kept (BBC news, April 2009) Migrant workers hit by global downturn (BBC news, May 2009)