Seminar in International Economics 16 July 2015 The Long Term Economic Impacts of Reducing Migration in the UK Katerina Lisenkova (with Marcel Merette and Miguel Sanchez-Martinez) NIESR, UK This seminar series is an activity in the framework of FIW ('Forschungsschwerpunkt Internationale Wirtschaft'), which is a project designed to build a center of excellence in research on International Economics, funded by the Austrian Ministry of Science, Research and Economy (BMWFW).
The Long Term Economic Impacts of Reducing Migration in the UK Katerina Lisenkova (NIESR) Marcel Merette (University of Ottawa) Miguel Sanchez-Martinez (NIESR) WIIW Vienna, July 16, 2015 Financial support from the Economic and Social Research Council under the grant: A dynamic multiregional OLG-CGE model for the study of population ageing in the UK is gratefully acknowledged.
Overview Introduction Model Results Conclusions
Two views on immigration Solution for ageing countries immigrants are younger than natives replacement for falling native working age population Competition with natives higher unemployment for native workers lower pay for native workers demand public services (net contribution to welfare system?) Our aim: provide a formal analysis in favour/against each of these opinions
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 Old age dependency ratio* 60% 50% Projection 49% 40% 30% 28% 20% 24% 10% 0% * Population aged 65+ divided by population aged 20-64
UK net migration 350,000 318,000 300,000 250,000 200,000 150,000 100,000 50,000 0-50,000-100,000 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
UK migration policy Conservative government s target is to reduce net migration from hundreds of thousands to tens of thousands Difficult if not impossible to achieve Despite toughening of migration rules, during 12 months to December 2014 record net migration of 318,000 2010-based principal ONS population projections assume long-term net migration of 200 thousands per year To achieve target, net migration has to decline by a factor of 2
Overview Introduction Model Results Conclusions
Structure of a CGE model External Goods market sector Goods Firms Taxes Public sector Taxes Households Migration Factors market Capital market
Time Household. Overlapping generations Age A1 A2 A3 A4 A5 T1 G1 T2 G2 G1 T3 G3 G2 G1 T4 G4 G3 G2 G1 T5 G5 G4 G3 G2 G1 T6 G6 G5 T7 G7 G5 T8 G8 G5 T9 G9 G5 T10 G10 G9 G8 G7 G6 T11 G11 G10 T12 G12 G10 T13 G13 G10 T14 G14 G10 Several generations Finitely-lived individuals with complete life cycle (birth, work, retirement, death) Age specific characteristics productivity (age-earnings profiles) employment rates demand for public services
Main features of the model Closed economy Interest rate reacts to population ageing One final good Cobb-Douglas production function Demography: 21 generations (0-4, 100+) time-variable fertility rate time/age-variable mortality and migration rates Unintentional bequests distributed via a perfect annuity market In every generation six types of households Three qualification levels Two origins Native-born Foreign-born Age-specific public consumption Health and education
Household problem. Forward-looking Household Utility Function Household Budget Constraint Euler Equation Household problem is qualification- and origin-specific sr a,t -- conditional probability of survival from age a to age a+1 20 4 1,, 0 ) ( 1 1 1 1 k k g k t m g m t k m k C sr U 0< θ < 1 1/ 1, 1 1, 1 1 t g t g t r C C g t c g t t g t l g t g t C HA r Y sr HA,,,. 1, 1 ) (1 1 ) (1 1
Government Revenues Labour income tax (endogenous) Consumption tax Pension contributions Expenditures Age-independent (fixed level per capita) Health expenditures (mostly in old age) Education expenditures (mostly in young age) Transfers (origin-specific) Pensions (for 65+ year old)
Age distribution of health and education spending per capita 35% 30% Health Education 25% 20% 15% 10% 5% 0% 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+
Demography Fertility Mortality Two types of migration Realistic population structure Pop t, gk Pop Pop t1, gk5 t1, gk1 fr t1 for k 0 sr mr for k 1,20 t1, gk1 t1, gk1 mr t, gk nmrt, gk fmrt, gk
Modelling migration We introduce differences between natives and immigrants in two main dimensions: 1) Labour market characteristics Qualification distribution Employment rates Productivity 2) Use of public funds Origin-specific government transfers
Modelling migration: employment rates/qualification distribution Immigrant workers display a higher qualification compared to that of natives but lower employment rate: Workers Native-born 84% Foreign-born 16% Employment rate 75% 70% High qualification 22% 44% Medium qualification 31% 35% Low qualification 47% 21% Source: LFS, Q2:2008-Q1:2013
20-24 25-30 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 20-24 25-30 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 Modelling migration: age-earnings profiles Immigrants earnings (a proxy for productivity) are lower 20 Native-born 20 Foreign born 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 highqual mediumqual lowqual highqual mediumqual lowqual Source: LFS, Q2:2003-Q1:2013
Modelling Migration: differences in demand for government services Immigrants are estimated to be 4.6% less likely to claim social benefits than natives This difference feeds into origin-specific government transfers in the model Source: LFS, Q2:2008-Q1:2013
Overview Introduction Model Results Conclusions
Principal ONS population projections: baseline scenario 120% 100% 0-19 20-64 65+ Total 80% 60% 40% 20% 0% 2010 2015 2020 2025 2030 2035 2041 2046 2051 2056 2060
Low migration scenario Experiment: net migration level 2 times lower than in baseline scenario We assume that native net migration level is not affected by the government migration policy And impose a reduction in the foreign net migration rate only
Population age structure in 2060 7% 6% Baseline Low migration 5% 4% 3% 2% 1% 0% 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
Output and factors of production 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060-2% -2.7% -4% output -6% output per capita labour demand capital demand -8% -10% -11.0% -12%
Government spending % of GDP, pp difference 1.6% 1.4% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% age-unrelated expenditure health education pensions transfers total 0.6% 0.5% 0.2% 0.2% 0.1% 0.0% 0.0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060-0.2%
Labour income tax rate, pp difference 2.5% 2.2% 2.0% 1.5% 1.0% 0.5% 0.0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060-0.5%
Wage and net wage 1% 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060-1% wage net wage -2% -3% -3.3% -4%
Sensitivity analysis. Effects for different labour market characteristics Output per person difference in 2060 Labour income tax rate pp difference in 2060 Foreigners are like natives -2.8% 2.4% Different productivity -2.2% 2.1% Different employment rates -1.8% 1.9% Different qualification distribution -4.1% 2.9% All characteristics are different -2.7% 2.2%
Sensitivity analysis. Quality of migrants The results shown before show the effect of the number of immigrants on the economy We want to check how sensitive the results are to the quality of immigrants For this, we chose A8 immigrants (8 Eastern European countries that joined the EU in 2004)
Why A8 immigrants? This subgroup differs significantly with respect to the average migrant: All immigrants A8 Employment rate 70% 85% High qualification 44% 37% Medium qualification 35% 53% Low qualification 21% 10% Probability of claiming state benefits (pp less than that of natives) 4.5% 13.0%
Sensitivity analysis. If all future migrants are like A8 migrants Output per person difference in 2060 Labour income tax rate pp difference in 2060 A8 migrants -3.2% 2.5% All migrants -2.7% 2.2%
Overview Introduction The model Results Conclusions
Conclusions Lower net migration policy has significant negative effect on output and a smaller but nonnegligible negative effect on output per person negative impact on the public finances, owing to the shift in the demographic structure small and temporary positive effect on gross wage. However, if growing fiscal imbalances are covered by income tax, the effect on net wage is large and negative Qualification distribution of migrants has the strongest effect among labour market characteristics Quality of migrants has expected effect, although it is much smaller than the effect of the number of migrants
Caveats Downward bias of our estimates the least strict interpretation of the migration target the model does not take into account potential positive productivity effects from higher levels of immigration (TFP growth, imperfect substitution between natives and migrants) closed economy model => higher equilibrium capital-labour ratio and lower returns on capital. In an open economy model with perfect capital mobility, downward pressure on interest rates would lead to capital outflow and thus even stronger negative effects of reduced migration Upward bias of our estimates we do not capture the negative externalities resulting from, for instance, congestion do not take into account the potential social impacts of higher immigration