A2 Economics Revision - Microeconomics of Labour Migration

1) Explain the circumstances in which an economy may see a rise in net inward migration of labour (15 marks) and 2) Evaluate the view that free movement of labour within the European Union improves the efficiency of British businesses (25 marks)

The economic impact of labour migration can be discussed in macroeconomic terms - i.e. the effects on growth, employment, inflation and competitiveness.But the movement of labour for example within the EU single market also has a microeconomic aspect - for example how individual businesses are affected.

1) Explain the circumstances in which an economy may see a rise in net inward migration of labour (15 marks)

Define the term: When the number of migrants coming into a country is greater than those leaving in a given time period

Then explain some of the factors that might cause a rise in inward migration: In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation although economic factors are rarely the sole driving force:

1. Differences between countries in wages and salaries on offer for equivalent jobs (e.g.lower average wages in eastern european countries)
2. Better access to the benefits system of host countries plus state education, housing and health care
3. More favourable employment opportunities in particular for younger workers
4. A desire to travel, learn a new language, pick up new skills and qualifications
5. Changes in the exchange rate affect the relative attractiveness of working in another country e.g. a stronger £ against the Euro - favourable for migrants when sending remittances home
6. Alterations to migrant policies e.g. a country may decide to raise an annual quota on inward migrants of skilled workers or may relax controls altogether

2) Evaluate the view that free movement of labour within the European Union improves the efficiency of British businesses (25 marks)

This is an open ended question and the examiners will always reward sophisticated answers that have a strong sense of context and have at their core some useful examples or supporting evidence - perhaps drawing on that available from data response stimulus material. Avoid descending into political commentary and basing your answer on tabloid journalese about the ubiquitous Polish plumber!

Focus on how British businesses might be affected and on different types of efficiency e.g. allocative, productive and dynamic

Ways in which rising inward migration may help British business efficiency:

Supporters of unrestricted inward migration have argued that migration provides:

1/ Fresh skills: Migrants can provide complementary skills to domestic workers, which can raise the productivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work.) - provides businesses with a more flexible workforce - and added flexibility to adapt to the requirements of the labour market

2/ Migration as a driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs. Much innovation comes from the work of teams of people who have different perspectives and experiences. This has long run benefits for British businesses harnessing inward migration to their advantage. Leads to an improvement in dynamic efficiency.

3/ Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work and contribute to a nation’s GDP through a higher level of aggregate demand. Higher demand and a growing economy provides an opportunity for businesses to exploit economies of scale

4/ Reducing labour shortages: Migration can help to relieve labour shortages and help to control wage inflation - keeping unit labour costs down for British businesses. A simple labour market diagram could suffice showing an outward shift in the labour supply curve and downward pressure on average wages.

Analysis diagram - lower unit labour costs can lead to increased efficiency and higher profits

Some counter-arguments:

1/ Many immigrants may find it hard to get work and will therefore have little impact on the employed labour force

2/ Inward migration may lead to a displacement effect for domestic workers, increasing welfare spending and hitting tax revenues - raising the prospect of higher taxes on businesses in future years

3/ The aggregate effect of inward migration on the size of and growth of the domestic economy has been challenged by organisations such as Migration Watch (watch out for possible bias in the extracts if organisations such as this are used in data questions)

4/ Much labour migration within the EU single market is short term in nature and thus has little bearing on business efficiency in the medium term

Evaluation might also raise some related questions:

a) Is it efficient / sustainable for British businesses to rely on permanent net inward migration as a way of relieving labour shortages - reducing economic inactivity among domestic workers might also be a priority for government policy?

b) We might also consider the impact on the efficiency and health of businesses in the countries from which the migrants left.

Background information

Migrants from EU Accession Countries 2004-08
• Average age 26.5
• 1/3rd have been in higher education
• 90% employment rate whilst in the UK
• Hourly wage of £6.80 compared to UK average of £11.90
• 12% claimed benefits or tax credits
• 6.5% lived in social housing
Source: Centre for Research and Analysis of Migration at UCL