Fact Check: does immigration have an impact on wages or employment?

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

When I was business secretary there were up to nine studies that we looked at that took in all the academic evidence. It showed that immigration had very little impact on wages or employment. But this was suppressed by the Home Office under Theresa May, because the results were inconvenient.

Vince Cable, leader of the Liberal Democrats, in a statement on September 6.

There is quite a lot of evidence that if we have too many low-skilled workers coming in, one of the effects is to depress the wages of those at the bottom end of the wage scale.

Damian Green, first secretary of state and minister for the Cabinet Office, speaking on BBC Radio 4’s Today programme on September 7.

The effect of immigration on wages and employment has been the subject of numerous studies, both in the UK and internationally. Research for the UK points to no convincingly large negative effects of immigration on average wages of British-born workers. This is largely in line with the predominant (though not uncontroversial) finding of studies done in other countries.

Some studies have pointed to the possibility of effects on the distribution of wages, holding wage growth back at the lower end and pushing wages up at the higher end. However, authors of studies which have suggested this have emphasised that the negative effects are small. While recent immigrants as a whole have typically been highly qualified relative to the skill level of the UK labour force, the location of such effects may have to do with the fact that they tend to work initially in lower paid jobs.

Evidence for harmful effects of immigration on employment is also slim. Most studies have failed to find clear evidence of a link.

One exception, sometimes cited by advocates of tighter immigration policy, is a 2012 Migration Advisory Committee report that found some association in particular of non-EU migration with employment of non-immigrants during one period of downturn, though the study itself emphasises that the evidence is not very robust.

Overall the Migration Advisory Committee itself concluded: “Evidence to date suggests little effect on employment and unemployment of UK-born workers, but that wages for the low paid may be lowered as a result of migration, although again this effect is modest.”

Impervious political debate

Despite the weak evidence, harmful labour market effects continue to be emphasised in political debate, for example by Theresa May both when she was home secretary and now as prime minister. (The same is true in the US).

Some may feel it is obvious that the expansion of labour supply that follows from immigration must harm competing workers. But this ignores the many ways in which immigration can also lead to expanded labour demand – through immigrants’ spending on goods produced locally, through the complementary skills they bring into the country, through encouraging changes in the pattern of production or encouraging inflow of capital, and so on. For all of these reasons, it is quite compatible with standard economic theory to find that immigration might have little or no effect on wages or employment.

Verdict

Vince Cable’s understanding of the preponderance of academic evidence on the labour market effects of immigration is accurate. There is little persuasive evidence that immigration has substantial harmful effects on average UK wages or employment. Damian Green is correct to identify effects on the least well paid as being of greatest concern but evidence suggests these effects are not large.

Review

Jonathan Wadsworth, professor of economics at Royal Holloway, University of London

According to standard economic textbooks, the purported effects of immigration on the existing workforce are undoubtedly negative – like the minimum wage. How so when the academic evidence – as accurately outlined in this fact check – does indeed suggest that, contrary to standard texts, immigration does not have any large significant effect on employment either in aggregate or among groups supposedly most at risk? Nor does immigration appear to depress wages of native-born Britons much. The recently resurrected study, cited by politicians and the media could not determine whether its findings of a small negative wage effect apply to UK-born people or immigrants or both.

Politicians and the media making disingenuous, selective or, at best, misinformed interpretations of academic studies do not help. There is also a lot of dross out there and sifting through it is not always easy, for anyone, politicians and the media included. Ultimately, continued dialogue and engagement between academia and the outside world can only help understanding and inform policy making.

Ian Preston is the Deputy Research Director of CReAM and Professor in the Department of Economics at UCL

Acknowledgement: This piece was first published at The Conversation

Why Britain’s public finances will suffer if Brexit reduces migration

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

Brexit will have high fiscal costs and a large part of that will be a consequence of what happens to migration numbers. That was the conclusion widely drawn from the Office for Budget Responsibility’s most recent Economic and Fiscal Outlook published in late November – the first since June’s referendum vote. It was illuminated further by supplementary analysis published on December 8.

To be precise, Brexit is forecast to lead to a cumulative £59 billion more in public sector borrowing over the next five years – £16 billion of which is attributed to the effect of reduced migration because of the unfavourable balance between its effects on tax revenue and government spending. Whereas the negative impact of other Brexit factors peaks in 2018-19, the effect of migration is forecast to still be rising by 2020-21.

What will happen to migration

The likely fall in migration is difficult to quantify, given the uncertainty about Brexit negotiations. As a result, the OBR’s approach to capturing it is necessarily rough and ready.

The changing political atmosphere since the vote may discourage immigration, as potential migrants expect a less welcoming reception. Eventually, the terms under which the UK withdraws may permit more restrictive migration policies for arrivals from the EU.

What the OBR does is to note that without Brexit it would have raised its estimate of future migration by about 80,000 a year. This is influenced by recent high migration levels, which have been confirmed again in the most recent migration figures. Given the referendum outcome, the OBR assumes that this increase will no longer happen and it treats this as the Brexit effect.

Past and projected net migration to the UK. Office for Budget Responsibility

This reduction falls some way short of meeting the government’s stated aspiration of cutting net migration to the tens of thousands, so it may be that the fiscal consequences of Brexit are being substantially understated. On the other hand, that target is politically contentious and widely viewed as impossibly ambitious.

Lowering net migration leads to a lower population and alters its composition. In particular, since migrants are typically young, well educated and arriving to work it leads to a population which is older and less likely to participate in the labour market. Effects of this on public finances could come through either side of the public sector balance sheet, through revenues or through spending.

Impact on tax revenues

The deleterious effect on the revenue side is easiest to understand. The lower population means less economic activity on which taxes are paid. Given that migrants tend to be younger than the average UK citizen, the OBR also predicts that fewer migrants coming in will lead to a decline in the employment rate, which reduces tax revenue further.

Because the inflow continues at the lower level year after year, the effect on the population builds up, which is why the annual effect on tax revenues continues to grow.

In its supplementary set of tables, published on December 8, the OBR explains that about half of the reduction comes through lower income tax and national insurance contributions and about a quarter through lower consumption tax receipts such as VAT. By 2020-21, the cumulative fall in tax receipts is forecast to have reached £17.3 billion. This is much the most important factor driving the increase of £16 billion in forecast borrowing by that year that the OBR attributes to lower migration as a result of Brexit.

Not much change to spending

On the expenditure side, things are more complicated. Welfare spending is treated as sensitive to migration because benefit claims are affected by the size and composition of the population, albeit that average welfare spending on migrants is lower than in the population as a whole. By 2020-21, cumulative welfare spending is forecast to be lower by £2.1 billion as a result of the lower migration. Offsetting this is an increase of £0.6 billion in debt interest spending as a consequence of the lower tax receipts.

But the largest part of spending – on public services such as education, health, police, defence and so on – is treated as fixed by prior plans. The OBR assumes that reduced migration will not lead to cutbacks in spending on these items over the horizon it considers.

Of course, migrants are entitled to use public services even if, contrary to popular perception, there is little evidence that they make excessive demands. So the OBR’s projected reduction in numbers of migrants without any change in planned spending means that pressure on those public services is implicitly being allowed to diminish somewhat. Falling population numbers are not being matched by commensurate spending cutbacks on these services and the projected increase in borrowing cannot therefore be straightforwardly interpreted as the cost of the migration changes. What the OBR is doing is making a forecast for borrowing, not evaluating the cost of lower migration after Brexit.

What the cost will be

It is perhaps helpful to compare the OBR figures to the best comprehensive costing available for the public finance impact of recent migration provided by economists Christian Dustmann and Tommaso Frattini.

Their calculations suggest that recent migration to the UK from the European Economic Area (EEA) over the period 2001-2011 benefited the exchequer by about £22 billion – with taxes paid exceeding spending costs imposed by about 34%. Over the ten-year period which they consider, EEA immigration expanded the economy by about 7m immigrant-years – calculated as about 1.4m immigrants each being in the country for an average of about five years. The net benefit to the exchequer was therefore of the order of £3,000 per additional immigrant, per year (in 2011 prices).

To compare, the OBR forecasts an increase in borrowing of £16bn over 2016-2021 for about 1.2m fewer immigrant-years. This suggests a forecast impact on borrowing of about £13,000 per missing immigrant per year. This is a significantly higher figure – but that is because it is an answer to a different question and evaluated over a different period coming after a decade of output growth and rising prices. Between 2011 and 2021, the OBR forecasts nominal GDP to rise by about 40%.

What is missing

The OBR projections ignore many possible economic effects of migration. If immigration affects UK workers’ wages or returns to capital, if it affects innovation and productivity, or affects the cost of providing public services then this is not accounted for. Although the OBR does allow for reduced migration to reduce housing demand and cut house prices, no effects on receipts from stamp duty, for example, are incorporated in the calculations of effects of migration.

Its projections also allow for no changes in the composition of migrants. If low-skilled migrants are more discouraged by Brexit than high-skilled migrants, say, then the fiscal consequences might be less pessimistic since the discouraged migrants would have paid less in taxes. However, the reductions needed to bring the government near to its target of net migration in the tens of thousands would need to cover more than the low-skilled.

International migrants are on the whole the sort of productive, economically motivated individuals that governments ought to be keen to attract. Making the country a less welcoming place and adding bureaucracy to economic relations with its nearest neighbours is not a promising route to attracting the most fiscally lucrative migrants.

Ian Preston is the Deputy Research Director of CReAM and Professor in the Department of Economics at UCL

Acknowledgement: This piece was first published at The Conversation

Comment on Migrationwatch's Analysis of the Fiscal effects of Immigration to the UK in 2014/15

By Christian Dustmann and Tommaso Frattini

Centre for Research and Analysis of Migration (CReAM)

MW has extended our analysis of the fiscal impact of immigration to the UK (Dustmann and Frattini 2014) to fiscal year 2014, a year for which the data were not available when we wrote our paper. However, while they claim to replicate our analysis in most points, they only consider that specific year, rather than computing the cumulative fiscal contributions of all immigrants who arrived since 2000, as we did.

It should be noted that the idea of our paper was to compute the contribution of EEA immigrants (A10 and “old Europe”) for those who entered the country after 2000, and up until the end of the data window (which was 2011 for our paper). We believe that this calculation answers the key policy question, which is “What is the net fiscal contribution of immigrants who arrived in the UK since year 2000 up until today”, or “What is the net fiscal contribution of immigrants who arrived in the UK since year 2000 up until today, relative to natives”. In that way, we capture entire entry cohorts of immigrants up until the present day.

What MW did was just choosing one year only – 2014. This tells us the rate at which the cumulated contribution of immigrants is growing in 2014 only.  This is certainly a less interesting question than the question we pose. For that particular year, they show that EEA immigrants who arrived since 2000 make a roughly neutral net contribution.  It would remain true that the cumulative contribution over the last 15 years must be positive.  It should also be noted that the net fiscal contribution of EEA immigrants even for that one year is still higher than that of natives. In fact, MW estimates that in 2014 natives contribute to the Exchequer about 85% of what they cost, thus making a substantial negative fiscal contribution.

A couple of additional points are worth noting.

1)      The central scenario analysed by MW is one where recent immigrants are assumed to make no contribution to corporate taxes. However, as we discuss in our study, the allocation of corporate taxes and business rates raises complicated questions of incidence.  The fact that businesses write the cheques does not mean that the burden do not fall ultimately on consumers or workers. In fact, there is a literature in economics that suggests that it is workers and consumers who ultimately pay the major share of such taxes, if not all. Our analysis was taking no stance on this debate, apportioning  capital and corporate tax payments, net of the percentage likely to be paid by foreign shareholders, on a per capita basis among the adult population. When MW adopts this assumption, which we believe is more realistic and grounded in economic evidence, they find that recent EEA immigrants have made an overall fiscal contribution of £1.5 million in 2014.

2)      MW emphasise in their study mostly their results for the entire resident immigrant population in the UK in 2014. As we have made repeatedly clear, in our paper and in other comments, this is a figure that is extremely difficult to interpret, and it is not clear what question it answers. It reports the contribution at one point in time of a very heterogeneous population of immigrants, many of whom have entered several years or even decades ago, and any contributions they may have made earlier is ignored. Moreover, a substantial fraction of immigrants who arrived at some time in the past have returned to their home countries by 2014, after possibly spending their most productive years in the UK and contributing to the fiscal coffers. We believe that this figure is therefore not very informative.

Latest migration figures make no economic case for Brexit

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

There is an increasing focus on migration in the build up to the EU referendum. It is arguably the key issue which Leave advocates feel confident of having majority support on. And headlines that proclaim migration to be nearing a “record high” fuel the Brexit campaign’s calls to quit the EU and end the commitment to free movement of labour.

As the last release of migration statistics before the referendum, the latest quarterly figuresfrom the UK’s Office for National Statistics assume heightened significance. While they largely confirm what we already know, it is worth looking at some of the detail.

Estimated net migration remains historically high. The latest figures show a slight rise, although not by a statistically significant amount. The figures released are not a comprehensive count of everyone who has come and gone, but an estimate based principally on a sample survey conducted at points of entry and exit.

They are therefore subject to sampling variation and the magnitude of the recorded change is within the range statistically compatible with no actual change from the previous quarter. There is nothing new therefore to get excited about in the headline figure.

The long-term annual net migration figure of 333,000 is the difference between a gross inflow of 630,000 people and an outflow of 297,000 people. So people are arriving at roughly twice the rate at which they are leaving. What change the figures do record is a consequence of a fall in emigration (though still statistically insignificant) rather than of a rise in immigration.

Long-term international migration, UK, 1970 to 2014. Office for National Statistics

This illustrates a point that rises in net migration can be as easily a result of fewer individuals leaving as of more coming. Is insufficient emigration what worries those upset by migration numbers? It seems unlikely.

A closer look at the numbers

The Brexit debate is focused more on migration from within the EU than immigration from outside and the ONS figures are also illuminating on this. Net inflows of EU citizens (other than the UK) and non-EU citizens are very similar: 184,000 and 188,000 respectively. So are the gross inflows, 270,000 and 277,000. Whether measured net or gross, EU immigration therefore accounts for about half of the total.

The statistics show that work is the most common reason for immigration, accounting for 308,000 arrivals, 58% of whom had a definite job to go to and the rest arriving with the intention of looking for work. Many more of these were EU citizens (61%) than were from outside the EU (24%). The number is currently rising.

Net long-term international migration by citizenship, UK, 1975 to 2015. Office for National Statistics

By contrast, the numbers arriving for study fell from 191,000 to 167,000 and these were mainly from outside the EU (72%) rather than from inside (23%). The number of those coming to accompany or join others, for example for marriage or family reunion, were smaller than either labour or student migration at 73,000.

The number of asylum applications, despite its prominence in much discussion, was lower than any of these, although rising – about 42,000 in the year to March 2016, with about 12,000 applications granted over the same period.

An ill-judged aim

The headline figure of more than 300,000 net migration is a continuing embarrassment to the government because of its aspiration to keep this below 100,000. Obviously, they are nowhere near to achieving that, but to many there is something seriously ill-judged in the aim itself.

A net immigration target is a target for the difference between two large numbers – immigration and emigration – only one of which the government has any ability to control. Furthermore, its influence even over immigration is diminished by the EU commitment to free movement of labour, particularly when half of the gross inflow is EU citizens, largely coming to the UK to work.

Efforts to reduce immigration are therefore drawn towards the relatively controllable categories such as student migration, family migration or high-skilled immigration from outside the EU – even though these are not the sorts of immigration that are most unpopular.

Bad economics

A case is therefore made for Brexit because it could liberate the UK from having to honour the free movement of European labour. At least two arguments suggest this might be a bad idea.

First, the economic advantages of participating in free movement of labour would be lost. There are good reasons to think that free movement is good for productivity, allowing firms to recruit widely for skills. It’s also good for public finances, bringing in young migrants keen to work whose contributions in taxes outweigh any costs imposed on the public exchequer. And it’s good for economic dynamism, allowing fresh ideas to spread and be adopted.

Long-Term International Migration estimates of immigration to the UK, by main reason for migration, 2006 to 2015. Office for National Statistics

Evidently there are costs in adjusting to high flows of people, but concerns that immigration is damaging either to labour market prospects of British-born workers or to public financesare not borne out by evidence.

But second, the only plausible way to restrict freedom of movement after Brexit would be to choose the most economically damaging of the options for post-Brexit trading agreements and access to the single market.

The weight of evidence has been gaining increasing acceptance among economists that the economic losses from Brexit would depend critically on trade arrangements negotiated in the aftermath.

While the most plausible estimates suggest that the range of options go from bad to very bad, the worst options in terms of long-term permanent losses in national income and harm to public finances are the only ones compatible with long-term restrictions on free movement. Alarmingly high costs would therefore be incurred for no compelling economic advantage.

The economic case is therefore clear – immigration has not been bad for the UK. But even voters who think it has should be wary of believing that Brexit would allow Britain to withdraw from freedom of movement without other high economic costs.

Ian Preston is the Deputy Director of CReAM and Professor in the Department of Economics at UCL.

Acknowledgement: This piece was published first at The Conversation

A confident UK has nothing to fear from free movement of labour

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

Migration brings net gains to the UK, and to hamper it would likely be as bad for British nationals as it would be for EU migrants.

Freedom of movement is at the core of arguments over Brexit. Not everyone in favour of Brexit is against free movement but polling evidence suggests that concern about immigration is strongly linked to support for EU withdrawal. Among the most common reasons given for voting Leave is the suggestion that it will restore British control over labour migration from European sources. By removing the country from the obligation to honour free movement of workers, it is suggested, it will make it possible to selectively and advantageously discourage immigration of less attractive sorts of workers.

Many have argued plausibly that the supposition on which this is based is questionable, that it will be impossible to negotiate continued access to European markets for British goods and services without also accepting continued free movement of labour into British markets. Indeed the delinking of different dimensions of free movement would not be straightforward, even if it were desirable. Free flow of services and free flow of individuals delivering those services are not easily separable, for example: you can’t engage a bricklayer’s services unless they are allowed to come and lay the bricks. If all of this is true, then British withdrawal would simply dilute British influence over the rules of free movement.

These sorts of points, convincing as they might be, are not what I want to concentrate on here. Instead I want to question the idea that separating Britain from the free movement of labour within Europe would be economically beneficial even if it were feasible.

From an economic point of view, mobility of labour is advantageous in many respects. Allowing workers to move where they are best rewarded is helpful to productive efficiency. It means that, when skill shortages arise, firms can recruit widely and workers can supply labour where their particular abilities are most in demand. British firms benefit, just as do firms in other countries, from being able to recruit from a broader pool for the particular skills needed in their operations. At the same time British workers gain, just as do workers in other countries, from access to a broader pool of possible employers.

Free movement also provides insurance against local labour market fluctuations. When there is a downturn in one region and a boom elsewhere, flows of workers between them can dampen the effects. Judging this by the economic circumstances of a single point in time gives a poor guide to the long run benefits this brings. British workers stand to gain from this when British labour markets are weak just as do workers in other countries when conditions suit movement for them.

The main benefits of free labour movement accrue, of course, to migrants themselves (including British-born migrants) who can enhance their incomes substantially by moving to where they are most valued. Some of those gains are captured in the receiving country through taxes paid on and out of migrants’ incomes. But the non-moving population may also see their own incomes change as a consequence of the movement of foreign labour and any movement of capital associated with it. If the possibility of employing immigrants keeps firms in the UK, for instance, then that may generate or prevent the loss of employment for British-born workers. Wages of non-movers may also be affected and some may gain and some may lose. Those whose skills are complemented by those who arrive and those who were competing with them in the areas they leave are most likely to gain, while those who compete most closely with them where they arrive and whose skills were most strongly complemented where they left are most likely to lose. Economies have many long-term and short-term ways to adjust which will damp these effects down, perhaps even to zero. And these effects do not just take from one person to give to another – the overall average wage effect on workers other than the migrants themselves may be positive. But if the harmful impact were to be concentrated on the less affluent then that would be a legitimate reason to worry.

Net gains

Ian Preston on Migration in the Brexit Debate from UCL European Institute on Vimeo.

So what does the evidence say? In the UK it suggests that migrants tend to work initially for pay well below that which might be expected given their qualifications if they had been locally born, presumably because it takes time to learn local skills such as command of the language and to embed themselves into local labour markets. To the extent that it is possible to identify negative effects on wages of locals – by comparing outcomes in parts of the country with different migrant inflows – these appear to be strongest exactly in the part of the wage distribution where migrants seem to be working, which is to say at lower wages. Nonetheless the effects are small, suggesting that the ability of the economy to absorb immigration without compromising the wages of the hardest hit is reassuringly strong. Moreover, any losses appear if anything to be more than balanced by gains to others, and those gains could be spread around if the political will were there to do so.

Why might the average individual in the receiving country gain? Maybe migration spreads ideas and encourages innovation. Letting innovators move to where their ideas can be developed may be important to economic dynamism and as entrepreneurs move they expose those with whom they work to new ideas. There is not much evidence on this for the UK but there is tentative evidence elsewhere that migration is associated with innovation and entrepreneurship.

Furthermore, freedom of movement allows certain industries to maximise their productivity by allowing for the build-up of a workforce in certain localities. Again this is something generally beneficial. One context in which this may be true, for example, is scientific research. Knowledge spillovers from concentrating the best minds in disciplinary specialities in the same place may be substantial, something reflected in the international composition of university departments and research laboratories.

Furthermore since benefits from research are largely public, enduring, and enjoyed in common, it makes sense for public funding to play a large role and much of that funding is at the European level. The wisdom of cutting the UK off from participation in such arrangements under the hope that the desirable outcomes could somehow be replicated through negotiation and newly formulated visa rules is questionable.

The question of benefits

Perhaps the strongest case for worrying about the possible implications of free movement regards its interaction with the public sector. There are well-established arguments within economics that suggest the redistributive functions of government should happen at the highest possible geographic tiers, not only because that allows addressing a wider range of inequalities but also because it means that migration between lower tier jurisdictions cannot unravel the effects. If one jurisdiction provides more redistributive services, especially if entitlement to use them has no past contributory basis, then the possibility that that will attract the neediest migrants from other jurisdictions could compromise sustainability. Since European social provision is principally a national responsibility, concern that free movement could compromise social programmes has to carry some weight in principle.

But evidence to support the seriousness of these concerns is again lacking. From what we know, migration is motivated principally by work and movers to the UK contribute positively to the exchequer at a time when there is an overall fiscal deficit. Migrants are no more unhealthy and no more criminally inclined than the British-born, and they tend to arrive already educated. Of course if they stay then they will age and eventually draw more heavily on public services, but this is just to say they will eventually come to be more like those already in the country.

Notwithstanding the evidence, the British government has negotiated an agreement allowing for circumstances in which an extended waiting period could be imposed on EU migrants before they could claim certain benefits. The agreement reached has been widely derided by advocates on the Leave side, who point out that even those wanting to remain accept that it is unlikely to affect migration levels. But this ignores the fact that those who believe this do so precisely because they never believed that welfare tourism was a problem in the first place.

The benefits of free movement

Free movement of labour has positive economic effects and if we restrict it we become worse off on average. But it also brings with it some disruption and there may be some who lose from it. The role of government should not be to prevent free movement and in doing so lose those gains, but to see that the long term benefits are enjoyed widely and the negative effects on those whose lives may be disrupted are recognised and addressed. 

A continent of walled-off labour markets with governments as gatekeepers arbitrating movement of workers between them would be less productive, less flexible, and less dynamic. In economic terms, a vote to begin erecting those walls would be a vote for a step backwards.

Ian Preston is the Deputy Director of CReAM and Professor in the Department of Economics at UCL.

Acknowledgement: This piece was published first at Open Democracy

Fact Check: is there zero economic benefit from high immigration?

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

The evidence – from the OECD, the House of Lords Economic Affairs Committee and many academics – shows that while there are benefits of selective and controlled immigration, at best the net economic and fiscal effect of high immigration is close to zero. So there is no case, in the national interest, for immigration of the scale we have experienced over the last decade.

Theresa May, home secretary, speaking at the Conservative Party Conference on October 6, 2015.

Evaluating the home secretary’s claim requires recognising that the economic effects of immigration have several dimensions. Although she says the overall impact is close to zero, she bases that on several specific claims.

The first point of concern is how immigration affects the labour market. It is easy to tell anecdotes about how immigration harms job prospects in receiving countries – but this can be misleading. Immigrants compete with similarly skilled workers but they also create demand for jobs by spending their income. Just like other forms of population growth, economies absorb immigration in many ways: importing capital, adjusting the composition of goods produced, adjusting training and technology.

The effect on wages has been heavily researched in many countries and evidence of large effects has indeed been difficult to find. There are exceptions, but the predominant conclusion is that immigration does not harm wages or employment.

Elsewhere in her speech, May contests this. She admits that migration can help “plug skills shortages” and bring talent in but makes specific negative claims about low wages and employment. She says that “we know that for people in low-paid jobs, wages are forced down even further while some people are forced out of work altogether”. More strongly, she argues that “there are thousands of people who have been forced out of the labour market, still unable to find a job.” Immigration control is needed: “For the sake of the people whose wages are cut, and whose job security is reduced, when immigration is too high.”

What happens to wages

What we do know about immigration to the UK is that immigrants are, on the whole, well-qualified but nevertheless tend to work initially in less well-paid jobs. There is some evidence from comparisons across regions that wage changes and immigration are most strongly associated in those jobs where immigrants work in the early years after arrival.

This could provide some justification for claims about wages – but it is subject to caveats. The effects are very small and immigrants move up to higher paying jobs the longer they stay so it is likely that such effects will disappear over time. Furthermore, there are counterbalancing wage gains in parts of the labour market where immigrants are not found and these more than compensate overall. On average, if wages gain from immigration then it ought to be possible to compensate those who lose and to benefit collectively.

As regards effects on employment, no convincing evidence exists to support the claim that immigration depresses it. Several studies have failed to find an effect. Work from within the government’s Migration Advisory Committee found evidence of association between one sort of migration in one period and changes in employment but the report in question is itself careful to point out that it is not very robust.

So overall, it’s possible to argue that the effect on the labour market of high immigration is small but not to support some of the other claims made about the labour market.

Positive effect on public finances

A second aspect of economic effect is the effect on the public sector. What we know here is that in the ten years since 2001 the best evidence, trying to account comprehensively for effects through all taxes and all components of public spending, is that migration impacted public finances positively, particularly migration from within the EU but also from outside. This was at a time of overall fiscal deficit when the average British-born person was contributing negatively, as the graph below shows.

Ratio of revenues to expenditures for natives and recent immigrants from inside and outside Europe, 2001-2011 Centre for Research and Analysis of Migration, UCL

Concerns about the prevalence of welfare tourism receive scant support from this source since immigrants are actually found to be less likely to claim than British residents.

Whether this effect is “close to zero” or not depends what it is being compared to. As a fraction of the overall deficit over the period it is small but on a per-immigrant basis it is more impressive. This is just the short term impact and a fuller assessment would need to look to the long-term when young, healthy, working immigrants will age, some possibly return to places of origin, and some bring up children whose taxes will contribute.

The home secretary also mentioned effects on specific services, claiming that:

when immigration is too high, when the pace of change is too fast, it’s impossible to build a cohesive society. It’s difficult for schools and hospitals and core infrastructure like housing and transport to cope.

Even if immigrants are paying enough to cover the costs, it is still sensible to worry about effects on service provision which will matter economically to people using those services. Evidence suggests that immigrants are not less healthy than the British-born, use the NHS no more intensively and immigration may actually be associated with shorter waiting lists.

Immigrants, of course, provide a disproportionate share of certain NHS staff. Immigrants able to work are not more likely to commit crime. The presence of non-English speaking children is not deleterious to English-speaking children’s education. There are certain respects in which immigrants have a clearly positive contribution to education, for example through overseas university fees. Effects on housing and transport are less well-researched.

The home secretary finished her speech by concluding that “there is no case, in the national interest” for large scale immigration. A full evaluation of this claim would need to take account of other aspects to the economic impact about which evidence is thinner. The economic case is not based so much on the scale of migration as perhaps on limiting migration restrictions which prevent firms from searching widely for skills and workers moving to where there are jobs. There is some suggestive and plausible evidence, largely from outside the UK, that immigration promotes innovation, entrepreneurialism and trade in ways that will boosts growth.

Verdict

It is true that the labour market impacts of immigration on British-born workers are plausibly close to zero – but that contradicts claims made elsewhere in the home secretary’s speech. Fiscal effects, on the other hand, at least in the short term, are not close to zero but positive. A full assessment of economic arguments for immigration would have to go beyond these effects.

Acknowledgement: This piece was first published at The Conversation

Free movement, welfare tourism and refugees

By Ian Preston

Centre for Research and Analysis of Migration (CReAM) at University College London

Ian Preston Deputy Director of CReAM and Professor of Economics at UCL, puts forward the case for freedom of movement within the European Union. He explains how freedom of movement and economic migration is important for a dynamic and innovative economy, but it also brings with it redistributive considerations that cannot be ignored. At a time when many politicians conflate economic migration and asylum-seeking refugees, he argues that the two are perhaps not entirely distinct from one another – and discusses reasons why they shouldn’t be treated as one group.

Some economic advantages of free movement of labour

Free movement of labour, in the sense of absence of restriction on European citizens’ rights of location for the purpose of work, has been a longstanding goal of the European Union. But this goal has come under increasing attack, from a variety of directions. Critics include not only those hostile to European Union membership but also some who are professedly sympathetic to membership but who appear sceptical about the benefits or long term viability of unrestricted cross-border mobility of people in modern Europe.

Judged in economic terms, the case for free movement of labour, within or between countries, is strong since mobility of workers has compellingly positive aspects.

From the point of view of efficiency in production, free movement allows workers to migrate to where their skills are most useful. If particular industries are geographically concentrated or face local skill shortages then they can recruit labour from a wider area. If workers have talents which are undervalued where they live then they can move to where they can be put to better use. High wages in locations of labour shortage will offer the necessary signals to draw the migration required, allowing migrants to capture part of the social gain from improved production.

From the point of view of social protection, free movement provides insurance against locally specific labour market shocks. If demand intensifies unexpectedly in an area then labour can move in. If demand falls within an area then labour can move out. The effects of temporary disturbances are dispersed and variations in labour income are smoothed. When monetary integration of different areas removes the possibility of macroeconomic adjustment through exchange rate movements the importance of labour mobility as an adjustment mechanism is even greater.

From the point of view of growth, free movement allows ideas to spread as people move so that innovators can work close to where their ideas are most valued and innovations are therefore adopted widely. As they do so, fresh encounters generate further new ideas.

From the point of view of efficiency in public provision, free movement allows better alignment of tastes and public service levels. If individuals differ in preferences for the type or level of locally publicly provided goods then free movement allows a better matching of wants and provision. Individuals who are prepared to pay higher taxes for better services can move to localities where this is offered and those less interested can move to areas with lower provision. Public sector economists recognise this as one way that a sort of invisible hand can work to a limited extent even where goods are collectively consumed and therefore best provided through the public rather than private sector. Of course, much public provision is of privately consumed services and considerations here are more complex, as discussed below, but the point is not eliminated.

For all of these reasons, “economic migrant” has never been a pejorative term among economists. On the contrary, economic migration is seen predominantly as a force for good.

Some economic drawbacks of free movement of labour

Even outside circles of economists, considerations of this sort are taken for granted as regards migration within a country. It would be considered absurd and economically unwise to propose limitations on movement of British workers from Birmingham to London. And yet, at the supranational level, limitations on free movement within Europe are argued for and thought to attract political support.

Why? In large part, this is because the politics of migration is not about economics. Economic migration drives social change which attracts strongly different reactions from the culturally conservative and the socially liberal. Population movements are swelled by humanitarian crises which draw sympathy differently in different parts of the population.

Nonetheless, even in economic terms, free movement is not popular. Partly this may be because, despite persuasive reasons to think the better geographic distribution of labour that results is a good thing on average, not everyone gains. The principal beneficiaries are migrants themselves who move because they can earn better wages where they go to than where they come from. The picture for nonmigrants is likely to be mixed — beneficial undoubtedly for some but potentially difficult for those competing most closely with incomers or whose productivity would have benefited from the presence of outgoers. The best evidence suggests that such effects are small and probably temporary but they are what matter to the immobile and the immobile both outnumber the mobile and are politically better represented.

This is not the biggest economic issue though. Perhaps most prominent among the economic fears of what migration involves in practice is the concern that what prompts movement between countries may be exploitation of differences in generosity of welfare systems and other redistributive parts of public spending. Migrants, it is argued, arrive in richer countries to claim benefits to which they have not contributed, and to draw on health and education systems for which they have not paid.

Such problems rarely arise from movement within countries because, sensibly, redistributive functions are typically centralised. There is no different welfare system in different parts of the UK and resource allocation formulae attempt to channel funds for provision in kind fairly to different parts of the country. This is as it should be. While there can be advantages to differing local provision of goods consumed in common, as argued above, privately consumed services with a redistributive aspect cannot be decentralised without threatening to generate potentially self-defeating movement of people.  Reasons would be created for those most in need to move to the most generous areas and for those most able to pay to move away, defeating the feasibility of effective redistribution.

No similar centralisation of redistributive activities is politically feasible at the European level because insufficient cross-border social solidarity exists relative to the inequalities that would need to be addressed. So redistribution remains largely a country-level function and fears that differing national levels of generosity will prompt migration flows generate calls for limits on migration. Benefit tourism is one side of this just as tax tourism by the affluent is another; though rarely discussed together and attracting the ire of different people, they are really similar economic phenomena, just different kinds of redistribution shopping. Associated hostility to migration can cross the political spectrum. Fears that the national social solidarity that sustains what redistribution can be afforded by national governments will be undermined by free movement creates a left-wing case for concern.

These observations have some force at an abstract level. But they are no reason to pretend that the benefits to free movement detailed earlier do not exist and are not substantial at a European level. Also, their practical importance is an empirical question. To what extent do we actually see welfare-seeking labour migration? Evidence is tenuous. Migrants are, on the whole, predominantly young, well educated workers. At least in the short term and over recent years, within EU migration has, for example, benefited the UK fiscally even at a time of deficit when the average British born worker has been a fiscal burden. EU migrants to Britain are less likely to claim benefits, no more likely to use public health, no more likely to commit crime, and do not compromise the education outcomes of native speakers. This is not the full picture since that has to take account of long term implications as young migrants age and impose future costs on welfare and health services. But some of them will return to their place of origin and those who stay will raise children who will pay towards their costs so there is no obvious reason not to expect gains even considered in the long term. This positive picture is not a necessary outcome and may not be true for all receiving countries; however, the strength with which these concerns are voiced in the UK, for example, bears little relation to any strength of evidence for them.

Because concerns about welfare tourism do seem so strong, a case can be made for putting time limits on benefit claims by migrants, enforcing a minimum period of residence before migrants can draw on certain parts of benefit systems in countries of destination. What would be positive about this would be that it might assuage concern that threatens to provoke policy responses which would undermine real economic benefits. If migration is indeed not largely benefit-driven then it should do little to reduce flows. The economic cost though is that it would mean social insurance would be denied to those moving for work.

Free movement and refugees

The political threat to the future of free movement predates the current refugee crisis but has been exacerbated by it. Open borders within the Schengen area have already been temporarily suspended by countries struggling to manage the sudden size of the flows of people and doubts about whether free labour mobility is sustainable are voiced even more loudly.

Decisions about the offer of asylum are governed, or should be, by international humanitarian obligations. It is not clear that accepting refugees need in any case be economically harmful. While past effects of immigration may be a poor guide to the labour market and public finance impact since refugees’ characteristics may differ from previous flows in ways difficult to predict, there seems little reason to expect entrepreneurialism, initiative and preparedness to work to be any lower than in past inflows. The notion that the economic calculus of benefit receipt might suddenly be drawing large numbers to undertake life-threatening boat crossings so as to exploit European welfare systems also seems far-fetched.

Nonetheless the handling of short term difficulties of sudden large flows raises questions about free movement of refugees. Confining refugees to the first safe country which they reach, whatever its legal basis, ties the short term costs of receiving large numbers to accidents of geography. If those countries receiving heaviest flows in the first instance are also those facing greatest current economic difficulties then the costs are made to  bear most heavily on those least well-prepared to cope. A system of country-specific quotas is a popular idea for spreading the burden of adjustment in the short term but can only work as intended if restrictions on refugees’ subsequent mobility prevents movements which unravel the quotas.

Yet all the economic arguments made above for allowing long term free movement apply. Allowing refugees to choose to go to where they can best find work, where their skills and competences are most valued and where they expect to feel most welcome harnesses refugees’ own wish to find the best lives for themselves and their families to best economic advantage rather than letting the most alarmist economic fears drive policy.

There is an unhelpful tendency of some rhetoric to contrast refugee migration and economic migration. The suggestion that rigorous discouragement of economic migration is the only way to accommodate a welcoming policy towards those fleeing persecution should, for instance, be resisted. One is not deserving and the other undeserving, as if seeking a better life is politically tolerable only when the alternative is persecution. The potential for economic migration to promote positive outcomes should be celebrated for itself.

Ian Preston is the Deputy Director of CReAM and Professor in the Department of Economics at UCL.

Acknowledgement: This piece was published first at European Institute blog poston Free Movement