Flexible Labour Markets and Immigration

There is an interesting article in the Economist about immigration and the impact on the Irish economy.

Immigration tends to encourage a range of emotive responses, but, its impact on the flexibility of labour markets is worth considering.

In the boom years, Ireland was growing by up to 5% a year or more. Growth was particularly strong in the construction sector. This led to a shortage of workers in certain low skilled jobs. Usually, this rate of growth and shortage of labour would push up wage costs and create inflationary pressure. However, the growth and membership of the EU, encouraged many workers from eastern Europe to travel and work in Ireland. Thus, the supply of labour was relatively elastic, enabling Ireland to pursue fast growth with minimal inflation.

Now, the Irish economy has come to a sharp slowdown as the global credit crunch bites. Usually, this would lead to sharp rises in unemployment. But, as economic fortunes in Ireland deteriorate, many of the temporary workers are returning to Poland / Russia / Eastern Europe.

Therefore, the rise in unemployment will be mitigated by a decrease in the supply of labour.

A similar situation has been occurring in the UK. The exodus of immigrants has been accelerated by the fall in the value of Pound which means it is much less attractive to work and save in the UK. The benefit for the UK, is that as workers leave, the rise in unemployment is mitigated.

A key issues is the geographical mobility of eastern European workers. Immigrants from the Commonwealth (West Indies, India) would find it much more difficult to return home, just because work was drying up. But, for many young Poles, it’s just a question of driving home.

Of course, the net migration isn’t going to stop unemployment rising. Also as workers leave it will have an effect on reducing demand in the economy. But, it does give at least one benefit – more flexible labour markets.

The other question is when UK and Ireland recover, would Poles want to return?

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