Reduction in net migration: a blessing or a curse?

During the 2010 election campaign, David Cameron set the Conservative party’s migration policy target: to reduce the level of net migration from “hundreds of thousands to tens of thousands”. Since then, net migration increased to an all-time high of 332,000 in 2015. Net migration from EU countries constituted just over 55% of the total (Figure 1).

But uncertainty associated with Brexit has brought an end to this rise – in 2016 net migration figures registered the sharpest one year decline (25%) in recent history and settled for now at 248,000. It is still well above the “tens of thousands” target; but should we celebrate or worry about the change in trend? My research shows that significant reduction in EU immigration would lead, in the long run, to lower GDP per person; which in turn would necessitate higher taxes.

Economists are particularly interested in the effects of migration on the UK labour market and public finances. The consensus among researchers studying the impact of migration on the labour market is that immigrants do not have a strong effect on the wages of native workers, or the unemployment rate. A Bank of England study found that the immigrant-native ratio has a statistically significant but very small negative impact on average wages in the semi/unskilled services sector. This blog gave a detailed discussion of the question “How small is small?”, and the short answer is: 1p an hour.

The most comprehensive study of the fiscal impact of immigration in the UK computed the net fiscal contribution of different population groups for each year between 1995 and 2011. The authors found that the contribution of recent immigrants (i.e. those who arrived after 1999) has been consistently positive. Recent EU immigrants contributed 34% more to the fiscal system than they took out, and recent immigrants from non-EU countries contributed about 2% more than they took out. More details in this blog.

Just before the referendum on the EU membership, my colleague and I built a model capable of bringing together labour market, fiscal and other macroeconomic effects in one framework. It also added a dynamic perspective, differentiated between natives and three different categories of immigrants, and captured age and qualification compositional effects. These features made this study the most comprehensive analysis of the effects of migration on the UK economy to date.

We compared Brexit and no-Brexit scenarios for migration to the UK, and assessed their macroeconomic impacts. The Brexit scenario assumes that net migration from EU countries declines by two thirds compared to no-Brexit – the difference in net migration between the two scenarios is about 90,000. We conducted simulations of the effect of varying only one factor – the level of EU net migration. By 2065, in the Brexit scenario, aggregate GDP and GDP per person are 9% and 1% lower respectively compared to the no-Brexit scenario.

Reduced migration after leaving the EU has a significant negative impact on the public finances, primarily because of a higher old-age dependency ratio, which is the ratio of the number of older people to the number of people of working age. Working age people contribute the most to the public purse by paying most of the taxes, while older people require high public spending on pensions and healthcare. Thus, the higher an old-age dependency ratio is the harder it is to keep public finance sustainable. Accordingly government spending rises as a share of GDP by 1 percentage point by 2065, requiring an increase in taxation of about £400 per person (in 2014 pounds).

As a result, post-tax wages are 2% lower in the Brexit scenario. This means that in the Brexit scenario the economy is smaller in both absolute and relative (to population) terms, and people are poorer. However, although the impact is significant it is not quantitatively large and would take a considerable time to materialise.

EU immigrants benefit the UK economy for two main reasons – they are on average much younger, contributing to lower dependency ratio, and are more highly qualified than the general population. The UK is successful in attracting highly educated migrants who are attracted by employment opportunities rather than by the welfare state.

Table 1 summarises labour market characteristics of workers from different origins. Immigrants have higher educational attainment than the UK-born population on average – which is partly explained by the fact that they are younger, and younger cohorts tend to be more educated. They also have high employment rates – especially immigrants from the new EU countries.

My research shows that immigrants have benefited and continue to benefit the UK economy. The effects are not large but significant and persistent. Overall, researchers fail to detect strong negative effects of immigration to justify the “tens of thousands” target, but the current UK government seems to be willing to sacrifice access to the single market for the ability to control EU migration. This is a high price to pay in order to correct a non-existent problem.

By Dr Katerina Lisenkova, research fellow at Stratchclyde University.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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  • Thus, the higher an old-age dependency ratio is the harder it is to keep public finance sustainable

    Agreed. However, you may have to take into account the likely effects of the infamous social care proposals in the Conservative manifesto:

    1. Local authorities will save around £20k per year per (self-funding) person.
    2. The new regime will be far less attractive for informal live-in carers (typically a close relative) and so far fewer elderly people will be cared for at home. This will save HMG £5,600 per year per carer (state benefits such as Carer’s Allowance + Income Support).
    3. Care workers’ hourly rates will rise to £20ph (private client rate) from £15ph (rate negotiated with domicilliary care agencies by local authorities using their bargaining power).
    4. Now factor in the increase in rates should EU27 workers start to leave; currently, 60,000 work in the health sectore and 90,000 in social care [source: NIESR].
    5. Residential care home places are already difficult to find, so as more elderly people seek accommodation demand will rise leading to increased weekly rates. Then there is the Brexit aspect to consider (see point #4).
    6. Anecdotal evidence suggests elderly people (particularly those with dementia) tend not to live as long in a care home environment as they do in their own home, where understandably they are generally happier – not least because it is quieter and less stressful (e.g. not being attacked by a fellow resident).
    7. If most of the elderly that need care can be ‘warehoused’ then there are other savings for the public purse. For instance, doctors, district nurses etc will only have to visit that location to see multiple pts rather than visit each individual in their home with the added travelling time and trying to find a car parking space.

    Therefore, the goal of the Tories’ proposals seems to be to save the public finances at the expense of the equity the person has built up over the years in their home.

  • UKipper1978

    What would be the effect of net migration if almost all
    Immigration was subject to the minimum standards required by the old tier 1 or current tier 2 migrant visas? This would essentially make every immigrant a high rate taxpayer. The entire discussion around immigration control is about reducing the number of low skilled low wage low tax individuals and keeping the flow of highly skilled coming on, whilst opening the doors to more highly skilled from non EU countries. This would very clearly has a far more positive effect on the fiscal impact of immigration. The question is not therefore, “why fix a non existent problem?”, but “how do we make immigration an even bigger benefit?”

  • UKipper1978

    Also, the point about an ageing population, whilst valid, is not solved by simply importing young working peoole. What happens when they themselves retire? We are simply kicking the can down the road and making the problem even greater in the future.

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