Impact of Immigration on UK Economy

In the past two decades, the UK has experienced a steady flow of net migrants into the economy. Net migration is a significant factor in the growth of the UK population. But, does this net migration help or hinder the UK economy?

net migration into UK

In 2011, long-term net migration was +215,000 – slightly down from over +250,000 in 2010. It means that in the past five years, the UK population has been boosted by net migration of around 1,000,000.

Inflows and Outflows

net-migration-outflows-inflows

  • In 2011, the top 3 countries for source of migrants was India, China and Pakistan.
  • The top 3 destinations for people emigrating from  the UK was Australia, India and US.

Impact of Net Immigration on UK Economy.

1. Increase in Labour Force.

Migrants are more likely to be of working age – such as, students, and those looking for jobs. They may  bring dependants, but generally net immigration leads to an increase in the labour force and increases the potential output capacity of the economy.

2. Increase in aggregate demand and Real GDP

Net inflows of people also lead to an increase in aggregate demand. Migrants will increase the total spending within the economy. As well as increasing the supply of labour, there will be an increase in the demand for labour – relating to the increased spending within the economy. Ceteris paribus, net migration should lead to an increase in real GDP. The impact on real GDP per capita is uncertain.

3. Labour Market Flexibility

Net migration could create a more flexible labour market. Migrants will be particularly attracted to move to the UK, if they feel that there are job vacancies in particular areas. For example, during the mid 2000s, there was a large inflow of workers from Poland and other Eastern European economies – helping to meet the demand for semi-skilled jobs, such as builders and plumbers. The government has also sought to attract migrants from various countries to meet shortfalls in job vacancies in key public sector jobs, such as nursing.

  • In theory, a period of higher unemployment might discourage migrants (this has occurred in the case of Ireland). However, the UK has seen continued net migration despite higher unemployment 2008-12.

4. Positive impact on the dependency ratio.

With an ageing population, the UK has a forecast to see an increase in the dependency ratio. However, net migration helps to reduce the dependency ratio. Migrants are a source of working age people, and this helps to reduce the ratio of retired to working people. This has benefits for the government’s budget. If migrants are of working age, they will pay income tax, VAT – but will not be claiming benefits.

5. Impact on particular sectors

An important target of net migration is higher education. In 2010/11 there were 428,225 international students (link), studying in the UK. These students may not show up in long-term migration trends. But, the short term effects are quite important. The Russell Group of leading universities suggest foreign students contribute £2.5bn a year in fees (link) – helping to finance higher education for domestic students.

6. Social issues.

Another issue felt keenly in the UK, is the concept that we are already ‘overcrowded’ In this case a rapid increase in the population due to migration could lead to falling living standards. For example, the UK faces an acute housing shortage, but also an unwillingness to build on increasingly scarce green belt land. In many cities, it is difficult to build more roads because of limited space. Increased population could increase congestion and urban pollution. Therefore, the increase in real GDP has to be measured against these issues which affect quality of life.

7. Economies of Scale

Others may argue that concepts of ‘overcrowding’ are misplaced. In the nineteenth century, people were already worrying about overcrowding. But higher population densities are in one sense more efficient and have a lower environmental impact.  Other countries like Belgium have an even greater population density than the UK. Also, if migrants help to grow the economy, there will be more tax revenue to finance public infrastructure.

8. Welfare benefits

A popular idea is that immigrants are more likely to receive welfare benefits and social housing. The suggestion is that Britain’s generous welfare state provides an incentive for people to come from Eastern Europe and receive housing and welfare benefits. Whilst, immigrants can end up receiving benefits and social housing. A report by the University College of London, suggests that :

EEA immigrants have made a positive fiscal contribution, even during periods when the UK was running budget deficits.
This positive contribution is particularly noticeable for more recent immigrants that arrived since 2000 in particular from EEA countries.” (pdf)
net_immigration_benefits

net_immigration_benefits

Immigrants who arrived after 1999 were 45% less likely to receive state benefits or tax credits than UK natives in the period 2000-2011, according to the report by Prof Christian Dustmann and Dr Tommaso Frattini from UCL’s Centre for Research and Analysis of Migration.
  • However, despite the positive figures in the decade since the millennium, the study found that between 1995 and 2011, immigrants from non-EEA countries claimed more in benefits than they paid in taxes, mainly because they tended to have more children than native Britons.

In recent years, claiming unemployment benefits in the UK is quite strict – the claimant count measure of unemployment is much less than the labour force survey (see: Unemployment stats). People have to prove they are looking for work. Also, the criteria to be given an immigration visa from non-EU countries is increasingly strict. The migrant often have to show they have a degree of savings, and or offer of a good job. (One anecdotal evidence, a friend from New Zealand, couldn’t get a visa to the UK, despite having a job as a computer technician. He certainly wasn’t poor or low skilled.)

The UCL report on immigration, suggested that immigrants tend to be more highly skilled than native workers.
  • In 2011, 32% of recent EEA immigrants and 43% of non-EEA immigrants had university degrees, compared with 21% of the British adult population.

Does Immigration Cause Unemployment?

migration-unemployment

No clear link between migration and unemployment. Net migration occurred with falling unemployment 1991-2005. But, rising unemployment from  2008 onwards.

 

A common question people often ask – is whether immigration causes unemployment? Migrants have often been blamed for ‘taking our jobs’ – especially in periods of high unemployment, and in local areas of above average unemployment.

Firstly, net migration is compatible with low unemployment. Net migration helped the US population to increase drastically around the turn of the century, but this didn’t cause unemployment. Migrants bring both increased supply of labour and higher demand for labour. In the 1990s, net migration was consistent with falling unemployment in the UK.

However, in periods of high unemployment, it may be much more difficult for migrants to find work. This may be exacerbated if the migrants have poor English, low skills and or suffer racial discrimination. In this case, net migration could add to the unemployment problem. However, the underlying cause of unemployment is not the net migration, but the recession.

Another factor that determines the impact on unemployment is the skills and qualifications of immigrants. If migrants have low skills, they are more likely to experience structural unemployment. In the 1950s, immigration into the UK from the Carribean, was encouraged for manual labour (driving buses e.t.c.) to fill job vacancies. However, when the period of full employment ends, migrants may be more liable to be unemployed, if they lack the skills to find new work.

The impact on unemployment in the current crisis depends on the type and skills of workers who are migrating into the UK.

Does Immigration Push Down Wages?

supply-labour-right

From one perspective an increase in the labour supply may push down wages. This is especially true, if migrants are keen to accept lower wages (e.g. willing to bypass traditional union bargaining). However, again, net migration doesn’t have to push down wages. The massive immigration into the US, during the twentieth century was consistent with rising real wages. Increased migration, will also have an effect on increasing demand for labour due to higher spending in the economy.

However, particular labour markets, may notice lower wages if there is a concentration of immigrants willing to work. For example, if wages are high in a particular agricultural market, migration from a low income country may lead to falling wages in these particular markets.

Also, some migrants may be more vulnerable and more willing to work in the black market (e.g. accept wage below the equilibrium).

Evaluation

The impact of net immigration depends on:

  • The skills and qualifications of migrants. The UK is increasingly strict on allowing only skilled workers.
  • How easy do migrant find it to assimilate in the destined country? E.g. in 1950s and 1960s, migrants from the Indian sub-continent / Carribean may have found it more difficult to find employment due to poor English  / racial discrimination.
  • It depends on the age profile of migrants. If a high % are young workers, then this can help reduce the dependency ratio – a crucial issue for government budget.
  • It depends on the current economic climate. In a recession, migrants will find it harder to gain employment.
  • It depends on the type and skills of migrants. Migrants from Eastern Europe may be more flexible and return home, if the economic situation deteriorates. Low skilled migrants are more likely to be structurally unemployed.
  • Migrants can be a source of foreign income, e.g. tuition fees from foreign students. However, migrants may also send a substantial portion of their earnings to relatives abroad – reducing wealth of UK.
  • Can the Economy absorb a greater population? For example, what is the impact on public services, levels of congestion, and housing?

Related

NOTE: EEA – European economic Area – EU, plus EFTA countries Norway, Iceland and  Liechtenstein.

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9 Responses to Impact of Immigration on UK Economy

  1. robert January 15, 2013 at 3:43 pm #

    Very clear and easy to understand

  2. Colin March 12, 2013 at 12:45 am #

    In your evaluation on immigration you have said “The UK is increasingly strict on allowing only skilled workers”. Non EU migration are a proportionally small part of total migration, and even within this group family member migration and those coming here to study are not assessed in terms of skills. Migration from within the EU is not regulated by any assessment criteria at all. The proportion of migrants coming under scrutiny in terms of their skills are quite small and thus have little bearing on the impact of migration as a whole.

  3. Ryan May 7, 2013 at 4:22 pm #

    The argument concerning the dependency ration is unpersuasive and ridiculous. In the short term yes it helps the dependency ratio, but you fail to highlight that in the long run immigrants themselves become old, and more immigrants are required to fill up the ratio- a never ending, uncontrollable cycle. For example to keep the UK 4 plus to 1 ratio (that is 4 working to support one pensioner) WOULD REQUIRE 199 MILLION BY 2051 AND TO 303 MILLION BY THE END OF THE CENTURY – (source migrationwatch- immigration and pensions study (1.24- 25/1/2010).

  4. Jon June 12, 2013 at 12:39 pm #

    Your lines on the net migration vs unemployment chart are the wrong way round i think

  5. Guillaume February 10, 2014 at 4:27 pm #

    Economically the debate about immigration is too heated and emotional.

    I would like to have more data-supported answers about whom it helps and whom it doesn’t.

    Immigration in the UK allows to import lower expectations labour from porter EU countries.

    This obviously puts pressure on the law of offer and demand and the mid to lower income part of the UK population, which is the vast majority.

    In answer, this allows UK business to develop growth and wealth and reinvest and expand geographically. But does it create jobs and if yes in which proportions? Or does it create Wealth for only few.

    Can we have some data from reliable independent source on this so we can close the debate? Can we have some special project looking at this and the answers shared?

    A notional output or an averaged GDP per capita is simply not good enough.

    A few years back a headline form a notional news paper (i think the data comes from the ONS) claimed that 95% of the jobs created over a few years went to immigrants (whether EU or not I can’t recall)

    Surely the data is here to be crunched. Where could we find the answer?

    Your views are appreciated.

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