Unit 2 Macro: Migration and the UK Economy

A revision blog on the economic impact of migration on the UK economy

Net migration is the net total of migrants during the period, that is, the total number of immigrants less the annual number of emigrants, including both citizens and non citizens

Data from Timetric.

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Net migration, United Kingdom from Timetric

Factors affecting the direction and scale of migration

Many economic and social factors affect the rate of migration. In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation.

1. Differences between countries in wages and salaries on offer for equivalent jobs
2. Access to the benefits system of host countries plus state education, housing & health care
3. Employment opportunities vary between nations, in particular for younger workers
4. A desire to travel, learn a new language, pick up new skills and qualifications
5. A desire to escape political repression and corruption in the country of origin
6. The impact of satellite television and the internet in changing people’s expectations
7. The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union
8. The unwillingness of people within the domestic economy to take certain “drudge-filled” jobs such as porters, cleaners and petrol attendants

The effects of labour migration on the labour markets of richer nations inside the European Union including the UK depend on where the main source of competitive advantage lies, according to research from Marques and Metcalf in a paper delivered to the Royal Economic Society. They argued that industries that source their competitive advantage from a large, skilled workforce will have gained from an influx of younger, well-educated workers. Industries such as high-knowledge manufacturing, transportation and financial services may well gain from an increase supply of skilled workers from Eastern Europe.

In contrast industries that rely on low-educated labour-intensive workers will lose out because production will gravitate to countries where unit labour costs are lower. Examples of include textiles and clothing and leisure sectors where there has been a shift of production towards emerging market countries in the Far East.

United Kingdom from Timetric

The impact of migration on the UK economy

Have migrant workers provided a boost to the competitiveness and supply-side capacity of the UK economy?

The debate will rage on for years and it is important to be aware that with this kind of controversial issue, many of those putting forward evidence will be using normative economics laden with value judgments and will often use data selectively to push their own point of view.

Supporters of unrestricted inward labour migration have argued that migration provides numerous advantages:

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.)

2. 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.

3. Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe.

4. 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.

5. Reducing skilled-labour shortages and expanding the labour supply: Migration can help to relieve labour shortages and help to control wage inflation. Recruitment of skilled workers from outside the European Union is important to many businesses in the UK, and evidence indicates they currently make a positive contribution to UK’s GDP.

6. Making a country attractive to FDI: Availability and quality of labour is known to be a key investment location factor for many businesses. In a global battle for talent, if a country is not successful in attracting and keeping skilled workers then FDI in high-knowledge industries will eventually flow to other parts of the world.

7. Income flows (remittances): Remittances sent home by migrants add to the GNP of the home nations. And if these remittances boost spending in these countries, this creates a fresh demand for the exports of other nations. Remittances sent home by migrants exceeded $440bn in 2010, with more than two-thirds of these flows going to developing countries.
According to the economist Professor Ian Goldin from Oxford University, in Latin America and the Caribbean, more than 50-million people are supported by remittances, and the numbers are even higher in Africa and Asia.

8. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the government’s finances.

Supporters of allowing free movement of labour argue that labour mobility is a positive-sum game rather than a zero-sum game.

United Kingdom from Timetric

On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. Some of the arguments include:

• Welfare costs: Increasing cost of providing public services as migrants come into a country.
• Worker displacement: Possible displacement effects of domestic workers
• Wage cuts: Migrant workers may lower the wages of people in other jobs.
• Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions.
• Pressure on property prices: Rising demand for housing which forces up prices and rents.
• Benefit claims: Many immigrants find it hard to get work
• Who really gains? The benefits of migration are focused mainly on employers, especially those who take on illegal workers at low wages.
• Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market.

United Kingdom from Timetric

Brain Drains

A brain drain is a term that describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. It has been used to describe net outward migration of people from several European Union countries in recent times (notably Ireland, Greece and Spain) - another phrase for this is human capital flight.

A sizeable brain drain can bring economic costs and benefits for the sending nation. One disadvantage is that countries lose out on the benefits that might have accrued from the resources used in educating people who leave. Add to this the loss of tax revenue from those who choose to live and work overseas. A sizeable loss of skilled workers (many of whom may be younger and therefore more geographically mobile) could lead to labour shortages in the sender country, putting upward pressure on wages and labour costs.

Some of this income earned overseas returns to the sender country in the form of remittances (adding to GNP) and many skilled migrants often leave only for a year or two - the percentage of permanent migration inside the EU is relatively small.

The benefits and costs of labour migration are hard to quantify and estimate. Much depends on

1. The types of people who choose to migrate from one country to another.

2. The ease with which they assimilate into a new country and whether they find regular jobs.

3. Whether a rise in labour migration stimulates capital spending by firms and by government.

4. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to their country of origin.

Impact on the economies of source countries

An important evaluation point is that inward migration into the UK from Eastern European countries has affected not just the UK labour market but also the labour markets in the countries from which these migrants have come. Many eastern European countries have suffered from a sustained reduction in the size of their populations – migration is one factor behind this although not the only one. There are many potential negative consequences among them the following:

• A reduction in the size of the available labour supply

• A possible reduction in the quality of the labour supply if skilled migrants leave

• A fall in aggregate demand for goods and services

• A worsening problem of labour shortages which could drive up wages, costs and prices

• A decline in the tax-paying population which will hit government tax revenues