Jessica Zeng RES Young Economist of the Year 2014 Page
Does immigrant labour benefit or impoverish the United Kingdom?
Imagine a newlywed young couple from China, or perhaps Romania, Poland or Pakistan. Though they have only just started their married life, they want something bigger, something better than their country can offer them. The UK seems as good a place as any: better employment prospects, high job creation rates, an impressive average standard of living, free healthcare and secondary school education. So, they decide to emigrate. With the appropriate skills, their job options are many, ranging from professorship to construction work to managerial positions. Together, they can support themselves and their family back home. But they are constantly accused of taking “our” jobs, jobs that should go to British workers. This forms one of the main arguments used to support legislation that limits and reduces immigration. Therefore, how does immigrant labour benefit the United Kingdom if there are fewer jobs for the British?
Let’s think about our happy couple. With 50.2% of the working age population of the UK having finished education at age 16 or under, and 53.6% of new immigrants obtaining university level education (equating to 41.1% of all immigrants), it is evident that a larger proportion of immigrants have obtained a level of education higher than that of UK born citizens. Thus, it is likely that our happy couple are well-educated and skilled - a significant factor in the consideration of the benefits of immigrant labour, as it takes years to educate and train people. With 532,000 citizens migrating to the UK during the year ending September 2013, an increase from the previous year, the UK is able to benefit from the labour of these educated and skilled workers instantly, without waiting for current UK citizens to be trained and educated. Therefore, through filling any gaps in the labour supply market, the market can expand and shortages can be prevented in professions such as lectureship (which requires an obviously extensive knowledge of the subject) in the UK. Consequently, the presence of immigrants in the workforce means that there are more workers with the appropriate expertise and experience, leading to a greater human capital stock. The UK economy can benefit from this as it is less likely to be restricted by bottlenecks and thus, the economy can become more competitive and efficient. This effect is mostly seen for skilled jobs as 23% of immigrants have a professional occupation but as 16.2% fill elementary occupations, labours shortages for lower-skilled jobs can also be filled through immigrant labour (though shortages here are less likely to occur).
In addition to increasing the supply of educated and skilled workers, the presence of immigrants in the workforce increases productivity, most commonly measured as output per person. A report from the National Institute of Economic and Social Research (NIESR) shows that between 1997 and 2007 a 1% increase in the number of immigrants employed correlated with a rise in labour productivity of 0.06-0.07%. This increase in productivity occurs for many reasons: skilled immigrants are more willing to take on lower-skilled jobs, employing their expertise; the diversity of teams with immigrant workers is conducive to productivity; immigrants’ knowledge of their home countries; the more prevalent promotion of specialisation with immigrant workers present, but mainly, because of the hard-working nature of immigrants. For example, our skilled young couple immigrate to the UK in search of a better life; therefore, they are willing to work hard to make one for themselves, even if this requires taking on more undesirable jobs, such as those with unsociable hours. An increase in productivity enhances the UK economy through the increased international competitiveness, which derives from an increased output decreasing the prices of goods and services. Furthermore, the NIESR have found evidence of the skill of immigrants acting as a complement to that of native workers. Because of this, immigrant labour can be said to benefit the UK by incentivising UK born workers to try and obtain the same level of education/ same skills as immigrants. The resultant competition could help the economy to expand through increasing the productive capacity of the UK. As productivity of labour is intrinsically linked with a country’s standard of living, one of the most important ways of increasing economic growth in a country is through encouraging productivity in order to boost the potential capacity of the economy. As wages earned by migrants in the UK are often seen as more than could have been earned in their country of origin, national consumption would increase, as more of the population would be purchasing native goods. Further contributing to the economy would be the lower prices resulting from increased productivity, improving exports. This provides a means of economic growth as aggregate demand increases, which the economy can greatly benefit from. Therefore, when our happy couple immigrates to the UK, not only can they aid the economy through contributing their skills and education but also through consuming the UK’s products and adding demand to the economy.
Despite contributing to the economy in the aforementioned ways, the 31st NatCen Social Research British Social Attitudes survey shows that almost 25% of Britons believe the main reason workers immigrate to the UK is to claim benefits and over 75% of the population have the view that immigration should be reduced. It is surprising therefore, that a study at UCL discovered recent immigrants were 45% less likely to receive money from the government through benefits between 2001 and 2011 than UK born workers. Immigrants from the European Economic Area have, in total, added £22.1 billion to the economy through taxes and the like equating to 34% more than has been taken out through benefits or such. Contrarily, UK born citizens have contributed only 89% of the money they have taken out - this is a loss of £624.1 billion to the UK financial system. Therefore, the labour of immigrants benefits the UK as they support the economy by making a positive financial contribution. As shown in figure 1, UK born citizens, compared to recent immigrants from both the EEA and non-EEA, have had lower revenue to expenditure ratio over recent years. Therefore, immigrant labour (during the 10-year period discussed) has contributed significantly more to the economy than received from the government - this is especially important, as this has helped lessen the UK’s considerable budget deficit since the end of 2001.
Whilst contributing a financial surplus to the UK, remittances - the money that is sent home by migrants - are significant cash flows out of the country. In 2012, around £236 billion worth of remittances were recorded (likely to be a vast underestimate, considering how much is not recorded). It is understandable for our happy couple to want to support their family back home and though remittances do significantly help the country they are being sent to, they could be seen to impoverish the UK through creating an outflow of money that should have been spent in the UK. It is difficult, however, to say whether this really impoverishes the country as, even with money being sent back to the immigrants’ native countries, the migrants are still able to positively contribute to the economy (in contrast to native workers).
Despite the positive effect that immigrant labour has had through adding to the economy, immigrant labour could be said to impoverish the UK through affecting wage distribution. Though a 1% increase in the number of immigrants in the workplace in 1997-2005 led to a 0.1-0.3% increase in wage, and during 2000-2007, a 1% increase of immigrants in the workplace caused a 0.3% fall in wage, the average wage varies only slightly with the percentage of immigrant labour employed and it is difficult to predict how- whether this change will be positive or negative. In contrast, during 1992-2006, with a 1% increase in the number of immigrants in the workplace of unskilled or semi-skilled workers, the average wage was reduced by 0.5%, thus impoverishing the UK through lower wages for the least wealthy. Similarly, the same is true for the 5% lowest paid workers who faced a slightly larger fall of 0.6% in average wage whilst skilled workers had higher wages with the presence of immigrant labour. Thus increasing income inequality, which is significant: an IMF study has shown that as inequality increases, growth decreases and will continue to do so in the future – the correlation of which can be seen in figure 2 below. Therefore, immigrant labour could be said to impoverish the UK through making the rich richer and the poor poorer, contributing to higher levels of income inequality.
The effect of immigrant labour on the wages of workers depends heavily on the nature of the labour - if immigrant labour is complementary to the labour and skills of native workers, it is likely to have a positive effect on wages; in this case, it is probable that immigrant labour was in fact a substitute for the skill of workers. The extent to which immigrant labour is complementary or substitutable can also influence the long-run and short-run effects of immigrant labour. Substitutive immigrant labour provides competition for the native citizens, thus decreasing the average wage, whilst conversely, complementary immigrant labour is likely to increase the average wage. However, in the long term, because a larger proportion of working immigrants can lead to an increase in productivity and consumption, investment will also rise as firms will have more profit. Therefore, the presence of immigrants in the workplace helps the productive potential of the economy. Likewise, labour for both immigrants and natives could increase in demand as wages decrease, therefore, increasing employment. Both of these factors could benefit the UK such that it outweighs the loss made initially when immigrant labour is substitutive and lowers the average wage through increasing employment/ job creation.
One of the determining factors to whether immigrant labour benefits or impoverishes the UK lies in the country of origin of the immigrants. For example, the effect of EEA immigrant labour and non-EEA immigrant labour is vastly different. During 1995 and 2011, immigrants from the EEA contributed 4% more to the UK economy than they received, whereas non-EEA immigrants caused a negative fiscal impact as, in general, they had more children than natives thus received more in benefits - obviously impoverishing the UK. As discussed before, EEA immigrants during the years 2001 to 2011 contributed 34% to the economy but non-EEA immigrants contributed only 2% comparatively (adding £2.9 billion to the economy) and are around 7% more likely than EEA immigrants to claim benefits - showing a noticeable difference. The origin of immigrants has also correlated with changes in employment rates. In 1995-2010, EU immigrants did not seem to affect employment rates but non-EU immigrants seemed to increase unemployment of natives. Therefore, if this were to continue, the labour of non-EU immigrants could be seen to impoverish the UK through increasing unemployment levels for those born in the UK.
Arguably the most significant determinant of the benefit of immigrant labour is the current skills and characteristics of the immigrants. Currently, when comparing the likelihood of recent immigrants claiming benefits to native workers, recent immigrants are 45% less likely but when compared to UK born workers of the same age/ education level/ gender, this statistic falls to 21%. Therefore, this is indicative of the effect that characteristics of immigrants have on the extent to which immigrant labour benefits/ impoverishes the UK. However, the age of the immigrants can be of an advantage to the UK. For example, though our happy couple may enjoy the life they make in the UK, there is a high chance that they decide to migrate back to where they grew up and were born originally, whether to be with family or for familiarity. This means that during the least productive and probably least economically active portion of their life, they are not draining the UKs resources through pensions and increased healthcare costs. Rather, they are returning home after having contributed positively to the economy, especially when considering that many immigrants reach their productivity peak/ the peak of their economic activity during their time as an immigrant in their host country. On the other hand, this could be seen as a negative factor - after working in the UK, they are taking the money they earned and spending it elsewhere. Like remittances, this may be a negative withdrawal from the economy - not something that they originally would have had without the immigrant labour, but something the UK should have received afterwards. Therefore, this lack of consumption caused could be said to impoverish the UK but, most likely, the return home of the immigrants would be beneficial to the UK when balanced alongside the cost of healthcare and pensions that would no longer be incurred on the government.
Ultimately, immigrant labour has benefitted the UK over the years, especially more recently. The reason for this is quite clear: the UK attracts educated and skilled immigrants, thus the benefits received from these immigrants are most often positive. This perhaps, is one of the strongest characteristics of the UK economy and lasts even through economics downturns, such as the 2008 recession. It is difficult however, to predict how long this trend will continue for and it is this trend which will have the biggest effect on whether the UK benefits from or is impoverished by immigrant labour. After the laws restricting Romanians and Bulgarians from working in the UK were lessened, there was a decrease of 4000 Romanians and Bulgarians working in the UK in the first quarter of 2014 as seen in figure 3, invalidating predictions that forecasted a dramatic increase in the number of Romanians and Bulgarians immigrating/ working in the UK. Therefore, predictions of immigration are sometimes inaccurate and difficult to make. Thus, predictions about the types of immigrants (as in skilled or unskilled, educated or uneducated) the UK attracts may also be difficult to make. Moreover, with anti-immigration parties such as UKIP increasing in power and popularity, the economy could be harmed if laws limiting immigration were passed - the effect could be positive and encourage only the most educated and skilled workers to immigrate (and so continuing the trend), or it could persuade immigrants of all levels of skill to decide to live elsewhere.
So, our happy and well-educated couple chose to immigrate to the UK. Whether in the future, similar people will decide to immigrate is difficult to predict. But overall, the labour of immigrants has benefitted the UK thus far and, hopefully, will continue to do so in the coming years.
Word count (excluding bibliography): 2430
References and Bibliography
Cribb, J. (2013). Income inequality in the UK. Available: http://www.ifs.org.uk/docs/ER_JC_2013.pdf
Dustmann, C and Frattini, T. (November 2013). The Fiscal Effects of Immigration to the UK. CReAM Discussion Paper. No. 22/13. Available: http://www.cream-migration.org/publ_uploads/CDP_22_13.pdf
Easton, M. (May 2014). Romanian and Bulgarian migration: Dip in workers coming to UK. Available: http://www.bbc.co.uk/news/uk-27407126
Ford. R and Heath, A. (2014). Attitudes to Imigration. British Social Atttitudes. No. 31.
Kay, J. (2004). The Economics of Immigration. Everlasting Light Bulbs: How economics illuminates the world. The Erasmus Press. P64-67.
Ostry, J., Berg, A. and Tsangarides, C. (February 2014). Redistribution, Inequality, and Growth. IMF Staff Discussion Note. No. 14/2. Available: http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
Rolfe, H., Rienzo, C., Lalani, M. and Portes, J. (November 2013). Migration and productivity: employers’ practices, public attitudes and statistical evidence. NIESR. Available: http://niesr.ac.uk/sites/default/files/publications/Migration%20productivity%20final.pdf
Ruhs, M. and Vargas-Silva, C. (March 2014). The Labour Market Effects of Immigration. Migration Observatory briefing, COMPAS. No. 2.
Wadsworth, J. (June 2012). Immigration and the UK Labour market: The latest evidence from economic research. CEP Policy Analysis.