Immigration can give substantial economic benefits – a more flexible labour market, greater skills base, increased demand and a greater diversity of innovation. However, immigration is also controversial. It is argued immigration can cause issues of overcrowding, congestion, and extra pressure on public services. There is also a debate about whether immigration of unskilled workers leads to downward pressure on wages and even unemployment of native workers. This is a look at mostly the economic costs and benefits of immigration.
Benefits of Immigration
1. Increased economic output and living standards. Net immigration will lead to a growth in the size of the labour force and an increase in the productive capacity of the economy. Immigration leads to higher economic growth with a corresponding rise in tax revenues and potential for government spending.
2. Potential entrepreneurs. It is argued that immigrants often arrive with little wealth so have a greater incentive to try and make something for themselves. Also, people who are willing to leave a country and try in a foreign company are the most ambitious and willing to take risks and a result tend to be the more dynamic part of the workforce. Immigrants who are young and mobile are also quite likely to be entrepreneurs – set up businesses which create innovative products. The American economy is an example of how immigrants have moved to America and set up classic American companies – leading to higher living standards and a greater choice of goods and services. For example, (Apple) Steve Job’s father – Abdul Fattah Jandali was from Syria. Alexander Graham Bell (telephone AT&T) from Scotland. Jeff Bezos (Amazon) son of a Cuban immigrant. Sergey Brin (Google) is a Russian immigrant.
3. Increased demand and growth. A fear of immigration is that ‘Immigrants take jobs from native-born population’ However, this is known as the lump of labour fallacy. The belief that the number of jobs remains fixed. However, this is not the case, if immigrants move to the US or UK and gain employment, then they will spend their wages in their new country, creating new demand in the service and goods sector. Far from ‘taking jobs’ immigrants contribute to a growth in GDP. Between 1900 and 1915, 15 million immigrants arrived in the US (1), but this was a period of low unemployment and high economic growth. Immigration was a major factor in the rapid rate of growth (In US between 1890 to 1910 – economic growth was over 4%.)
4. Better skilled workforce. In the UK, immigrants working in the economy are more likely to have more educational and skilled qualifications. For example, just 20% of UK citizens finished education at 21 or later. But 53% of new immigrants were educated until 21 or later. (LSE study 2012) Immigration allows an economy to attract high skilled professionals to fill in job vacancies and contribute to higher tax revenues.
5. Net benefit to government revenues. Because immigrants are more likely to be young and working than native-born citizens, they provide a net benefit to government revenues. Working people pay income tax, but don’t receive benefits, such as education, pensions. Young people are less likely to use health care services than old people. For example, the UK government HMRC show that in 2015/16, EEA nationals paid £15.5bn more in income tax and national insurance than they took out in tax credits and child benefit (HMRC, 2018). A study by Oxford Economics (2018) shows that recent migrants from EEA had the biggest fiscal benefit (+£4.7bn), non-EEA migrants a small cost (£ -9.0), and UK born citizens the biggest net tax burden (-£41.0bn).
- Evaluation – The impact of migration does depend on the type of immigrants. In the UK experience, non-EEA migrants have a bigger fiscal cost, because this includes more old-aged dependents who can migrate due to family reasons (therefore negative tax impact). There is a list of different studies on the fiscal impact of immigration here.
6. Deal with an ageing population. Many economies in the west are facing a demographic crunch with a low birth rate and ageing population causing a rise in the dependency ratio (ratio of old to young workers). This puts pressure on social care, tax revenues and government spending. Immigration is the most effective policy to deal with an ageing population, as it allows shortages in health care and social care to be filled with young workers who make a net contribution to government finances and boost the workforce.
7. More flexible labour market. Immigrants are highly mobile. They move to economies when wages are high and demand for labour strong. This helps to prevent a booming economy from overheating by providing labour to meet the growing demand. However, less obvious is the fact, that if the economy enters a downturn, migration flows often reverse, meaning they don’t stay to try and get unemployment benefits but return home. A good example is Ireland. In the boom years, pre-2007, the economy attracted many construction workers from the EU. When the property market collapsed many construction workers went home – limiting the rise in Irish unemployment. Immigration helped the labour market be more flexible.
8. Solves a skills shortage. If an economy has a shortage of skilled workers such as nurses and doctors, it would take several years to train new workers. But, the health service cannot afford this wait. Immigration enables the shortage to be filled immediately.
9. Filling undesirable job vacancies. Some types of jobs are often difficult to fill by native-born workers due to low wages and/or the prestige attached to that kind of work. For example, farmers often rely on immigrant workers to pick crops. A decline in immigration to the UK in 2019, led to farmers claiming they were unable to pick the harvest because they couldn’t get the seasonal labour. Immigration provides a benefit to businesses and employers who rely on flexible labour to fill job vacancies. Also, if low-skilled jobs are filled by migrants, it enables native-born workers to gain better-skilled work elsewhere.
10. Multi-cultural society. Away from economics, some feel that immigration leads to greater cultural diversity, which gives a country a more diverse and inclusive feel. All countries with immigration have absorbed some aspect of foreign culture into their country – be it cuisine, music, literature or political influences.
Costs of immigration
1. Potential negative impact on real wages. It is argued that low-skilled immigrants put downward pressure on wages. The argument is that an increase in the supply of unskilled labour enables firms to fill vacancies with lower wages than previously. Between 2010 and 2018, the UK had a high rate of net migration, but this was also a period of stagnant real wage growth. The impact on wages tends to be greater for the low-paid and those with few educational qualifications. A recent study by the Bank of England found a rise in immigration had a small impact on overall wages – with a 10% increase in immigration – wages fall by 0.31%. A study Dustmann et al (2013) find negative effects of immigration for the lower paid; they found that a 1% increase in the ratio of migrants to non-migrants leads to a 0.5% decrease for the poorest 10%.
- The impact on wages is uncertain. There are conflicting studies depending on the type of immigration. Most recent studies in the UK suggest if there is a negative effect on real wages it tends to be small. Also, many factors affect wages apart from migration levels.
2. Real GDP per capita could fall. Often supporters of immigration point to how it increases real GDP, and this is true. A rise in the population will ceteris paribus, increase national output. But a more useful measure is GDP per head. If immigration is of low-skilled and/or those not in labour markets, it will lead to a fall in real GDP per head.
3. Structural unemployment. Immigration could lead to some displacement of native-born workers who then experience structural unemployment. For example, if migrants gain unskilled labour because they are willing to work for lower wages. Those native-born low-skilled workers may find it harder to gain new employment in higher-skilled occupations.
4. Pressure on public services. Immigration and a rise in local populations put higher pressure on social services, such as schools, hospitals, roads and public transport. In theory, higher growth would lead to more tax revenue to enable higher spending. But, migration tends to be focused in particular areas (e.g near borders). Local people can feel a deterioration in the quality of public amenities because the population is growing faster than the number of schools. In the UK, the pro-Brexit vote was often highest in areas like Lincolnshire and Dover, which had recently experienced an influx of migrants without any corresponding increase in investment.
- If migration is more evenly spread out, these problems can be avoided. For example, parts of Scotland suffer from declining populations, but ironically migrants are often attracted to over-crowded areas like the south and London, where other migrants already live.
5. Housing costs If migrants move to areas with limited housing stock, migration can put upward pressure on rents and house prices, reducing living standards and increasing housing poverty for both migrants and native-born population who experience high living costs. In the UK, housing costs are a major problem – especially in areas like London and the south where it has been hard to find places to build new housing. Studies such as the Migration Advisory Committee (2018) found that a 1% increase in the UK’s population due to migration increased house prices by 1%. The Ministry of Housing, Communities and Local Government (MHCLG) found that between 1991 and 2015 immigration had contributed to a 20% rise in house prices (Study p.76)
6. Disharmony from rapid immigration. Whilst some like a more multi-cultural society which occurs from immigration, others are less welcoming of this change and feel like their culture and background is threatened by immigrants who don’t fit into their existing society. This is especially an issue with immigrants who don’t learn the native language, have different religions and belief systems and live in mostly isolated communities.
- Evaluation: Often dislike of immigration is strongest in communities where the rate of immigration is very low. Areas with high rates of immigrants are more likely to appreciate the benefits of immigration.