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-migratinon-91-14-UK

Net long-term migration to the UK was estimated to be 260,000 in the year ending June 2014. This compares to net migration of 182,000 in the previous 12 months.

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.

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Reasons for migration UK – Nov 2014 ONS Migration Report, Table 2

The latest ONS report suggests formal study is the biggest reason for net migration into the UK. See also: reasons for net migration into the UK

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?

net-migration-unemployment-01-14

No clear link between migration and unemployment. Net migration occurred with falling unemployment 1991-2005. But, rising unemployment from  2008-12. The fall in unemployment since 2012 may have attracted more migrants coming to work.

 

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.

26 thoughts on “Impact of Immigration on UK Economy

  1. This site is appears to be less about objective economics and more about pushing pro-EU propaganda. For example, it quotes studies produced by UCL’s immigration research department (CReAM).

    However, the author of this article appears to be unaware of the fact that CReAM’s studies have been discredited by a number of eminent statisticians (including UCL‘s own Emeritus Professor of Statistics). The criticisms are extremely serious.

    Professor Mervyn Stone and others refer to the use of underlying crude assumptions, an all-embracing approach, the absence of sensitivity tests and the study being driven by a desire to prove a pre-determined conclusion.

    He goes on to accuse Dustmann and Frattini of using questionable methods and having an inadequate understanding of the data, thereby significantly overstating their case. ‘’Small changes to large assumptions about the claimed benefits could make the supposed positive contribution of EU migrants disappear, and in fact turn negative.’’

    The CReAM studies also totally ignore a number of costs arising from large-scale immigration. For example, they takes NO account of costs such as welfare benefits or social housing provided to displaced British workers. These costs run into billions and would almost certainly wipe out the modest gains asserted by Dustmann and Frattini.

    There are other problems with this article. For example, using US migration flows in the early and middle 20th century as a comparator to 21st century Britain! But as this comment probably won’t even appear, I won’t waste time going over all the other issues.

  2. Louis Walker is rather harsh about this website, which I think is distinguished for its clarity, but is factually correct in noting the statistical criticisms by their professorial colleagues of the Dustmann/Frattini report (Immigrant Fiscal Contributions 2001-2011), particularly Mervyn Stone to which I would add the work of Robert Rowthorn (Emeritus Economics Professor at Cambridge) in his 2014 report. However the continued general acceptance of the fiscal contribution of immigration, notwithstanding that even Dustmann quantifies the cost of earlier non-EU immigration at £90 billion from 1995-2011, fails to address the the issue of the public expenditure shortfalls right across those areas where immigration should have required such expenditure to increase. The perverse effect of this shortfall is to increase the apparent fiscal contribution of immigrants, and indeed all inhabitants, by the simple expedient of not actually spending the contribution on those areas which need it.

    Nowhere is this economic illiteracy more obvious than housing. The much quoted requirement to build 240,000 houses per annum is largely based on the forecast of household formation from the Department of Communities and Local Government with a 2012 base year and a principal population projection based on net immigration of 165,000 annually to 2031. At that level the DoCLG concludes that about 40% of household formation is due to immigration but, adjusted for their larger households, means that about 83,000 new houses annually are required solely to keep up with immigration. At £250,000 per unit that is over £20 billion annually that has to found to stand still. (Dustmann’s EU immigrant challenged contribution ran at just £2 billion annually) Last year net immigration was 300,000, 80% greater than the DoCLG projections. The cost of properly housing all in our nation is rising exponentially and is becoming impossible to resolve by any remotely conventional policies.

    Half of my family is black. I am acutely aware of anti-immigration rhetoric but, as a member of a well known economics institution, even more aware of the economic dynamics transferring housing capital from many in my family to the wealthy. In his evidence to the Treasury Select Committee Steven Nickell of behalf of the OBR (minutes published 13.02.2015) said that the general consensus was that we could not say whether immigration was overall beneficial to the UK or not, a position which has remained academically unchanged for some time. (see CReAM 2012 Ian Preston and Migration Advisory Report July 2014 which concluded that the main beneficiaries were the migrants themselves and the owners of capital)

    We must all draw our own conclusions as to why uncritical support of immigration by the owners of capital, exemplified by the CBI, continues to be the default position of broadcasters and most of the press who seemed to have suppressed the old journalistic maxim of ‘follow the money’. To find who is making money out of immigration is where to start questioning current received opinions as to who actually benefits.

    One half of my family is black. I am acutely aware of anti-immigration rhetoric but I am even more aware of the long term transfer of housing capital
    from working families to those who already own capital with immigration being a very significant agent, together with the ‘dampening of wages’ acknowledged by Steven Nickell in his evidence for the OBR to the Treasury Select Committee. He took the view that the “general consensus was that immigration may be a little bit good or a little bit bad but that the evidence is not fantastically strong either way”. This position is entirely consistent with all academic studies, including CReAM in 2012 (Ian Preston’s report on economic effects of immigration on UK) and David Metcalf’s
    Migration Advisory Committee July 2014 report on unskilled migration which drew the conclusion that the principal gainers were the migrants and the owners of capital.

    We must all draw our own conclusions as to why the uncritical support of immigration by the owners of capital in the UK, exemplified by the CBI, continues to be the default position of broadcasting and most newspapers.

  3. Louis Walker is rather harsh about this website, which I think is distinguished for its clarity, but is factually correct in noting the statistical criticisms by their professorial colleagues of the Dustmann/Frattini report (Immigrant Fiscal Contributions 2001-2011), particularly Mervyn Stone to which I would add the work of Robert Rowthorn (Emeritus Economics Professor at Cambridge) in his 2014 report. However the continued general acceptance of the fiscal contribution of immigration, notwithstanding that even Dustmann quantifies the cost of earlier non-EU immigration at £90 billion from 1995-2011, fails to address the the issue of the public expenditure shortfalls right across those areas where immigration should have required such expenditure to increase. The perverse effect of this shortfall is to increase the apparent fiscal contribution of immigrants, and indeed all inhabitants, by the simple expedient of not actually spending the contribution on those areas which need it.

    Nowhere is this economic illiteracy more obvious than housing. The much quoted requirement to build 240,000 houses per annum is largely based on the forecast of household formation from the Department of Communities and Local Government with a 2012 base year and a principal population projection based on net immigration of 165,000 annually to 2031. At that level the DoCLG concludes that about 40% of household formation is due to immigration but, adjusted for their larger households, means that about 83,000 new houses annually are required solely to keep up with immigration. At £250,000 per unit that is over £20 billion annually that has to found to stand still. (Dustmann’s EU immigrant challenged contribution ran at just £2 billion annually) Last year net immigration was 300,000, 80% greater than the DoCLG projections. The cost of properly housing all in our nation is rising exponentially and is becoming impossible to resolve by any remotely conventional policies.

    Half of my family is black. I am acutely aware of anti-immigration rhetoric but, as a member of a well known economics institution, even more aware of the economic dynamics transferring housing capital from many in my family to the wealthy. In his evidence to the Treasury Select Committee Steven Nickell of behalf of the OBR (minutes published 13.02.2015) said that the general consensus was that we could not say whether immigration was overall beneficial to the UK or not, a position which has remained academically unchanged for some time. (see CReAM 2012 Ian Preston and Migration Advisory Report July 2014 which concluded that the main beneficiaries were the migrants themselves and the owners of capital)

    We must all draw our own conclusions as to why uncritical support of immigration by the owners of capital, exemplified by the CBI, continues to be the default position of broadcasters and most of the press who seemed to have suppressed the old journalistic maxim of ‘follow the money’. To find who is making money out of immigration is where to start questioning current received opinions as to who actually benefits.

  4. Informative and fairly unbiased. Louis most of the data was from ONS it seemed? It could be argued your comment is purely from an anti-EU standpoint.

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