Evaluating the Relative Impact of Migration on the UK Labour Market

Evaluating the Relative Impact of Migration on the UK Labour Market

Migration is defined as the movement of persons from one country to another. The impact of migration on the UK labour market has become a contentious issue in public and political debate, with critics suggesting that immigration reduces wages for the the UK born population. This argument has become particularly prominent since the arrival of large numbers of migrants from central and eastern Europe since 2004. From 1996 to 2007 the annual inflow of migrants increased from 329,000 to 557,000 per year: this has transformed migration into one of the foremost important issues of today. On one side of the argument it can be debated that migrants undercut the wages of domestic workers, and force wages down through an increase of the aggregate supply of the workforce. On the other hand, critics argue that migrants assist the operation of the labour market by stemming labour shortages and acting as a compliment to native workers. However, these effects largely depend on: the skill mix of migrants and natives, the capital structure of the economy, the duration of stay and how quickly an economy can adjust to immigration.

Economic theory suggests that an inflow of new workers will lead to an increased supply of labour and therefore drive down the equilibrium wage for domestic employees. Many of these immigrants are highly skilled and young, therefore increasing the population of working age and also the flexibility of the labour market – this extends the pool of labour for domestic firms allowing them to hire at lower wages.

The diagram shows how an expansion of the labour supply, from LS to LS + Migration, can lead to both an increase in employment, from E1 to E2, and a depression of real wage rates, from W1 to W2. In the short run, it is typically assumed that capital and technology are fixed, the primary effect of immigration, therefore, is to increase the supply of workers in the economy. However, the effects of an increased supply of workers on the native population largely depends on the skills of the immigrants: immigration only creates a positive effect on incomes if they are, on average, different from existing residents.

If immigrants are close substitutes to existing workers, an increase in supply only acts to depress wages. This causes a displacement effect on the UK population: they lose out on both wages and employment as they are in competition for the same jobs. However, unemployment may only be induced if labour supply is elastic – native workers may not be willing to work for a lower wage therefore become voluntarily unemployed. This will obviously have a negative effect on the income distribution, given that the jobs that immigrants are close substitutes for are regularly for low skilled workers . This has a huge macro-economic cost, there will be a greater tax burden for the economically active as more welfare payments are made, effectively creating a negative government balance. The fact that immigrants appear to be most concentrated at precisely the same points where there are the most negative wage effects and the sharp rise in unemployment, as a result of the UK economy going into a recession, has only made the displacement effect take a stronger hold on the population's imagination. Interestingly, even if immigrants are not competing directly for the same jobs, in many cases, they may still have a strong indirect effect in depressing wages for resident workers – this can be attributed to a rise in the fear of unemployment caused by high immigration, which in turn leads to lower wage settlements as native workers attempt to clutch on to their jobs. However, if the immigrants are complements to native workers then wages may actually increase. Through raising the productivity of both, perhaps through offering each other perspectives on how to do a certain task, they become of greater value to the firm and can therefore demand higher wages. One might imagine a migrant surgeon standing next to a domestic surgeon and them learning from each other. As an aside, if economic rents exist migration will only push wages down to a level that they would have naturally reached. As higher wages occur, more people will provide labour for that particular job, pushing the real wage rate down; as such, it can be argued that immigration assists the operation of the labour market making it more efficient.

In the long run, it is assumed that capital and technology may partially or fully adjust to immigration. Given that immigration increases the returns to capital in the short run, investment is likely to occur in the long run. More investment in, for example, machines and equipment, increases the demand for labour to operate the equipment as it is a type of derived demand, the effect of this is to raise wages back towards their pre-immigration level.

We must also consider the undercutting argument. This argument is based on the assumption that immigrants are happy to deal with lower UK standards of living by working for a lower hourly wage than the going rate. However, the longer such workers stay, the less likely this is to occur as they assimilate more easily. It also assumes that they are prepared to work for lower pay because they send a high proportion back home in remittances where it is worth a lot. However, this depends on the state of the economies of their natives homes – if they are growing then remittance buys them less. Conventional economic theory can disprove the undercutting argument. Given that wages relate to productivity , there is no evidence to suggest that immigrants undercut the wages of domestic workers if their MRP is the same; this is particularly since 45% of migrants have a degree compared with only 17% of the indigenous workers and they work hard, averaging two hours a week more than UK-born workers. However, there are some situations where this argument is justifiable. In a non competitive labour market, one in which a firm has monopsony power, because the monopsonist's demand for labour is the market demand for labour it can set the going wage rate at a wage lower than domestic workers are willing to provide labour for, therefore it is possible for migrant workers to undercut indigenous workers. Another situation in which migrant workers are under-paid is when imperfect information occurs – immigrants may have poor information about the availability of other jobs therefore continue to work for a wage that undercuts domestic workers. However, when this argument holds true, the extent to which they are able to undercut domestic workers is limited by the level of national minimum wage (provided that it is enforced properly) as firms will not be able to offer different wages for the same job. It must also be noted that much of the time these migrants offer labour for low skilled, low paid jobs that can be arduous and which many indigenous people will not do.

Given that an increase in immigration shifts the supply of labour, an increase in employment is likely to occur – a positive effect for an economy. Indeed net immigration increases the level of competition for jobs leading to some of the existing workforce being displaced, however, this assumes that there are a fixed number of jobs within an economy, in reality this is not true. It is true, however, that labour markets may not adjust immediately, which would force a temporary labour market disequilibrium higher than long term predictions – giving the appearance of a major increase in unemployment. Such a phenomenon is exacerbated by the fact that migrants fill job vacancies in the UK where UK workers with the appropriate skill set are at a shortage at the prevailing wage level, this gives rise to a situation where unskilled UK workers are at a loss – in other words, after net immigration it is even harder for them to find employment, keeping them unemployed. An increase in the size of the UK population should lead to increased employment, given that there will be a higher amount of aggregate demand within the economy. However, if migrants demand preferences are for imports or capital intensive goods and services there could be a negative effect on employment, although the effect of this is likely to be negligible as immigrants represent only 8.3% of the UK population as of the last UK census in 2001. It is possible that if migrants preferences sway towards labour intensive goods then there may be a small positive effect on employment. There is also a risk of higher unemployment if the skills of migrants do not match the demands for growing industries in the economy – this will lead to an increased pressure on the welfare state.

There are many macro-economic effects of migration. Immigration in general will lower the natural rate of unemployment within an economy. It has also been suggested that immigration may reduce inflationary pressures by increasing potential supply more than demand: several reasons can explain this, locals may have cut consumption because of a greater fear of unemployment; because remittances by migrant workers mean that less of their earnings are spent in the UK; and because firms may substitute some labour for capital which would curb the rise of investment. Taken as a whole, a positive rate of migration can add to both short-term economic growth (via a rise in AD) and also a slightly faster trend rate of growth (which brings economic benefits in the long run). However, if the majority of immigrants do intend to return home in the near future, it is likely they will try to save a large fraction of their income. So recent inflows may have had only a muted impact on aggregate demand. This is particularly true of EU immigration because so much of it is temporary. It is less true of immigration from outside the EU.

There is simply no evidence to suggest that migration has any substantial negative impact on either wages or employment. Indeed, it is entirely possible that there is a small positive impact on either or both of these; or simply no impact at all. It is, however, worth noting that these effects are not uniformly distributed across the whole population and all sectors of the economy, as such, there may be more significant negative effects in some local areas and for some groups of workers, particularly in the short-term but these are likely to be wholly alleviated in the long run.