By Harriet Johnson Postgraduate, First Prize

Transcription

1 In a July article published in The Telegraph, David Cameron stated, "We're building an immigration system that puts Britain first." Are cries for a 'clamping down' on immigration justified? By Harriet Johnson Postgraduate, First Prize The UK and Immigration: Invaluable & Inexpensive Type the word immigration into Google and 231 million hits appear in less than half a second: it is one of the most widely and fervently discussed topics in British politics and society today. Are immigrants taking our jobs and sponging off our benefits as is so oft declared, or do they pay their way and help secure and create jobs in the British economy? According to the Office of National Statistics (2015) 624,000 people immigrated to the UK from September , but at what cost, and what benefit? David Cameron, in the quoted speech, states that he intends to clamp down on abuses to the system, on making sure that the right people come for the right reasons and that the system puts British people first (Cameron, 2014). The author has interpreted these points as the issue of illegal immigration, the important of attracting skilled workers, and of ensuring that the immigration system does not bear a significant cost to the British people, respectively. This essay does not seek to assess the first issue of illegal immigration for reasons of brevity, assuming that clamping down on illegal immigration is largely justified, nor does this essay attempt to discuss the successes of the UK government in pursuing and policing its immigration policies. It shall, however, attempt to assess the economic reasoning behind having a tighter, or looser, immigration policy, i.e. is justified to clamp down on immigration? The essay proceeds as follows: section one assess the importance of immigration, as predicted by economic theory and how, in the UK, certain types of immigration are more crucial than others for ensuring long term economic growth and stability. For example, the recruiting of talented, geographically mobile workers is more important than that of low-skilled workers. Secondly, this essay shall explore the costs, or lack thereof, of immigration to the UK economy in recent years, both fiscal and to the labour market. Finally, the author concludes that while the tightening up of certain types of immigration is somewhat justified, largely immigration is invaluable and inexpensive for the UK. Is Immigration Invaluable for the UK? Economic theory suggests that immigration can be beneficial for an economy in a number of ways. In his speech, Cameron stresses the importance of the right kind of people, or workers, coming in for the right reasons, reflecting the fact that immigration can be extremely valuable to an economy if targeted correctly. This section does not attempt to discuss the reasons, right or wrong, that people have for coming to the UK,

2 but to analyse why it is important to have immigration, and which kind of immigrants are right. Firstly, theory suggests that given a supply of domestic labour, S, and demand for labour D, market equilibrium would fall at employment level N, with wages W2. The area under the demand curve, ABN0, is a measure of the national income of the economy. If a country s immigration policies are then relaxed, this increases the supply of workers to S and, assuming wages are not sticky and that all labour is homogenous, the wage then falls to W1, employment level to M, and national income increases to ACM0. CFMN represents wages paid to immigrants, but the triangle BCF is the immigration surplus that is paid to natives as a result of immigration. W2BFW1 is income lost to natives, which returns to employers since wages, and thus costs, are now lower (Borjas, 2013, p181) (See Figure 1). Figure 1: Immigration and the Labour market Wage!( )!! S! S! A! W 2! B! W1! F! C D! N! M!! Employment! Van den Berg expands on this simplified model, suggesting, the simple labour market model of immigration does not recognize that an increase in the quantity of labour employed can also increase income in the destination country, which increases aggregate demand, and hence demand for labour (Van den Berg, 2012, p507). In other words, the more people that are employed in an economy, the higher consumption will be, which will increase aggregate demand. This could, in turn, induce investment in businesses, driving them to hire more workers, which continues the cycle. Therefore, the long-run increase in aggregate demand and supply in the economy could be substantial, suggesting that immigration is important for growth and development of countries. Additionally, there could be benefits to the economy as a result of immigration if the additional workers and consumers cause industries to increase in size. This increase can lead to efficiency savings in industries in which immigrants are employed, due to economies of scale. Furthermore, immigration can increase the size of industries complementary to those directly affected by immigration, such as the use of public transport, housing markets, and education, because of the increase in population. This can be both positive, in terms of increasing employment and efficiency, but also

3 negative, increasing waiting times, congestion, or bidding up prices. There appears to be little quantifiable evidence in the literature discussing this, but it does seem clear that economic theory largely predicts immigration to be beneficial and important for an economy. This being said, it was assumed in the model that the supply of both native and nonnative workers was homogenous, in that they would both have the same level of skill and be competing for similar jobs, which drives the wage rate down. This is not representative as there are both skilled, and non-skilled natives and immigrants in a dynamic economy. Making a distinction between different kinds of immigrants is important for analysis because they can have very different impacts on the economy. Leading on from this idea, Oxford Economics (2012) estimated that in the next decade the UK would develop the 10 th most pronounced talent deficit in the developed and emerging world, where a talent deficit is the difference between the supply and demand of talented, skilled labour. In the same report, they highlighted that the projected Japanese talent deficit would become the 2 nd largest, after Taiwan, and attributed this to its economy being largely closed to immigration of large numbers of skilled managers and technicians (ibid, p202). This example underlines the importance of keeping the UK economy open and attractive to skilled and talented workers, or risk further worsening the talent deficit. Such a deficit is worrisome for the future as it limits the productive and growth capabilities of the economy. In this way, not only does economic theory suggest that immigration should induce growth in the economy, but there is evidence that the absence of it could actively obstruct growth. Moreover, it is not the influx of all immigrants that can alleviate the problem, but of skilled workers specifically. Alternatively, Rowthorn (2012), writing for Civitas, comments that immigration is important for rejuvenating the population of the UK. The benefit from this can manifest in different ways. Firstly, it can increase the productive work force of the country, filling any aforementioned talent deficits and helping the economy grow as theory suggests it will. Secondly, some have argued that immigration is valuable for the population demographic of the UK. For example, The Home Office (2007) comment that although little research has been done on the impact of immigration on the pension shortfall for the UK s rapidly ageing population, theoretical arguments suggest it could be beneficial. Thirdly, immigrants tend to be more mobile: willing to take jobs in, and relocate to, different cities (Rowthorn, 2012, p18). This would be helpful in order to shift industry, production and jobs elsewhere in the country. The Centre for Cities (2014) reported that London accounted for almost 80% of job growth in the private sector between 2010 and London sucks in talent nationwide, and thus arguably grows at the expense of other cities in the country. If mobile immigrants can help other cities grow, develop and prosper, this could be extremely beneficial to the future of the UK, helping to alleviate some of the north-south income inequality, and making the UK economy stronger, among other things. This being said, there is little qualitative data available to prove that this is the case, but common sense suggests that it is more than plausible. On the other hand, if immigrants are not geographically mobile and stay in London or

4 the South-East upon arrival, where booming industries are already established, this could place too much strain on the infrastructure and environment in those areas (Rowthorn, 2012, p67). This is troublesome because there is no way to distinguish between people who plan to stay in London, or those willing to move, so there is no way immigration policy can control for this. In this way, although economic theory suggests that immigration is valuable for an economy, it would seem that specific types are certainly more beneficial than others, namely that of highly-skilled, mobile workers. This section suggests that a clamping down of such workers seems hardly justifiable, as they play an important role in the growth, and future, of the UK economy. This section has not attempted to prove, beyond all reasonable doubt, that the clamping down of unskilled immigration is warranted, but it does highlight that it is arguably less important for the UK economy. 2. Is Immigration Inexpensive for the UK? There is much debate in the literature regarding the costs of immigration, both to the labour market, and the economy as a whole. David Cameron suggests that the UK s immigration policy should not cost the British public (Cameron, 2014). This is to say, that immigration should not occur at a cost to native employees, or taxpayers, regardless of its overall effect on the sum-total utility of the global economy. Firstly, the fiscal cost of immigration depends on the amount that people contribute to, and draw from, the government, which can be determined by several different things. The fiscal profile of an individual is largely determined by their age. Young people, in state education, are largely a draw on the state; working adults pay taxes into the state; and retirees take state pensions (Home Office, 2007). It is expected that, on average, people have a net fiscal impact of zero over their lifetime. Similarly, the OECD (2013) comments that immigrants age at arrival is an important factor in determining the net present value of their discounted future net direct fiscal contributions, as it determines how valuable, or costly, they are likely to be for the economy. Arguably, if an immigrant has not been educated in the UK, nor plans to retire here, their net fiscal contributions are likely to be higher than those of a native who resides in the country for all three stages of their fiscal lifecycle. Dustmann and Frattini (2014) also found that immigrants of comparable age, gender, education, and skill level were 21% less likely to claim any benefits that natives. Given this, is it highly questionable that immigrants are as the drain on the state that they are often vilified as being. This being said, there is much disagreement surrounding the total fiscal impact of immigration on the UK economy. For example, the OECD (2013) estimated that impact of immigrants is generally small, not exceeding plus or minus 0.5% of GDP; Dustmann and Frattini (2014) found that between , immigrants from the European Economic Area (EEA) made a positive fiscal contribution; the Home Office (2007) found that between , immigrants net fiscal benefit was 2.5bn; yet Migration Watch UK (2012) concluded that there have been no positive fiscal impacts from migrants in any year. Given the difficulty in assessing the outright fiscal cost of

5 immigration, it seems logical to attempt to break the problem down by assessing the costs attributing to different types of workers in the UK labour market. Unsurprisingly, the evidence here is similarly confusing and contradictory: Dustmann et al (2008) conclude that there is, at best, mixed evidence that immigration does not lead to negative employment effects for the destination county; the Migration Advisory Committee (2012) suggests that a one-off increase of 100 non-eu workers is associated with a reduction in native employment of 23 between 1995 and 2010; Ehrenberh and Smith suggest that some groups of workers will be clear winners, whereas some will be losers as a direct result of immigration (Ehrenberg and Smith, 2009, p344). Many authors suggest that the labour market costs of immigration depend on the skill set of migrants relative to those of natives, and the aggregate picture is not meaningful (Dustmann et al, 2008; MAC 2012). For the sake of simplicity, it is assumed that the wage rate is a suitable proxy for skill level, in that the higher the wage, the higher one s skills set is assumed to be, and vice-versa 1. The Migration Advisory Committee (2012) found that migrants increase wages at the top of the UK distribution, and lower them at the bottom. Similarly, the Home Office concluded relevant literature is reasonably consistent in suggesting that any displacement effect is likely to be greatest for the low skilled (Home Office, 2014, p7). It seems reasonably clear that while immigration may invigorate high skilled, well-paid industries, high levels of immigration of low-skilled workers can come at a cost to British society, precisely what Cameron wished to avoid. However, concluding this does not immediately suggest a clamping down on un-skilled worker immigration is necessary. Arguably, it is justifiable, but it is also certainly not the only option the government faces. One could argue that increasing education and training programmes in the UK would better equip native workers to compete for jobs. On the other hand, given the immigration of low-skilled workers does come at a cost to British society, and that it wasn t a crucial group for the economy, the clamping down of such immigration could be argued for. There is a plethora of contradictory, conflicting and confusing data available regarding the cost of immigration to the UK economy and labour market. On balance it would appear as though there are low, if any, fiscal costs to immigration, given that on average they claim fewer benefits and are generally here for productive, rather than dependent, periods of their life. Additionally, it seems that there are few employment costs to the labour market, except for affecting wages and job displacement for lower-skilled workers, which could be addressed with increased training and education programmes, or with a slightly tighter immigration policy. Conclusion This essay has made no attempts to show that immigration, on the whole, should be tightened. It has shown that immigration is important for the UK economy, in theory and in practise: it is vital that the UK can still attract talented, mobile workers from the 1 The Author acknowledges that there is an issue with often over-qualified immigrants working low paid jobs, but this essay is not the pace for such a discussion. See Altorjai (2013) for more.

6 global labour market in order to grow and prosper. Secondly, section two discussed the costs of high levels of immigration, both fiscally, and for the labour market, concluding that despite disagreements about overall costs, it would appear that immigration largely is not the drain on the state that people often are led to believe. This being said, there is evidence of some job displacement for low skilled workers. The costs of this, coupled with the fact that the immigration of lower skilled workers is less valuable to the economy, means that a clamping down on their immigration could be justified. In short, although there is room to tighten immigration policy to slow the influx of unskilled workers, there appears little evidence to justify a clamping down of immigration policy generally as it is invaluable and inexpensive for the UK.

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