Drawing on recently published research, Jonathan Portes analyses EU and non-EU migrant productivity in the UK using a new experimental data set from HM Revenue and Customs, finding some evidence of a positive association between non-EU origin migrants and productivity.
The UK’s relatively poor economic performance since the 2008 financial crisis – and the resulting slow growth in overall living standards – is largely the result of a sharp fall in productivity growth. Productivity growth had averaged close to 2% per year prior to the crisis, and fell to approximately 0.3% in the years after.
Meanwhile, immigration to the UK rose sharply, beginning in 1997. While the timing of the sharp fall in productivity does not match that of the increase in migration, the latter has been advanced by some as one possible cause of the productivity slowdown.
This issue was brought into sharp focus by the Brexit referendum. The Leave campaign argued that freedom of movement had led to a large increase in lower skilled migration, which had depressed both UK wages and productivity growth, and that Brexit would enable the UK to reorient its migration system towards higher skilled workers, with an accompanying rise in productivity.
In principle, migration could either reduce or increase productivity. There’s the simple ‘batting average’ effect: if individual immigrants are more or less productive on average than natives, they will directly raise or lower productivity. But immigration could reduce the incentive to invest in labour-saving machinery; or alternatively incentivise investments that complemented the skills of migrant workers. It could increase or decrease incentives for resident workers to train or upskill. And diversity – in the broadest sense – could have positive or negative impacts.
Five years ago, the Migration Advisory Committee commissioned research from me and others, and concluded: ‘Overall the existing literature and the studies we commissioned point towards immigration having a positive impact on productivity but the results are subject to significant uncertainty… the evidence perhaps unsurprisingly suggests that high-skilled migrants have a more positive impact.’
The new points-based migration system, introduced in 2021, ended freedom of movement. Migrants are now eligible for work visas on the basis of salary, skill level and (in some cases) specific occupations. However, even before it was introduced, there was a sharp fall in migration from the EU (and, during the pandemic, substantial return migration) while migration from outside the EU rose steadily. The new system has further accentuated the rise in non-EU migration for work. In the latest available data there was a sharp rise in the number of non-EU origin employees, up by 494,000 (or 26.6%) in 2022 compared to 2019, while EU-origin employee numbers were down by more than 150,000. The research described above predates the Brexit vote and this recent very large shifts in migration patterns.
In our new research, Hoseong Nam and I use new experimental data set from HM Revenue and Customs (HMRC). Unlike the more commonly used, but now unreliable (at least for these purposes) Labour Force Survey, it is based on a count of all payrolled employee jobs. The data is disaggregated between those who were either born in the UK or arrived here before the age of 16, and those who were registered as adults, and between those who are of EU origin and those from outside the EU. We therefore can identify three groups – EU origin employees, non-EU origin employees, and UK-origin employees, where the latter also includes those born abroad but who moved here before the age of (approximately) 16. We combine this with ONS published data on labour productivity by industry and region.
Our key findings, shown in the chart below, are that there is some evidence of a positive association between non-EU origin migrants and productivity, and the reverse for EU-origin migrants.
We proceed to investigate this more formally; our regression analysis, shows a reasonably clear association between non-EU origin migration and productivity, with coefficient estimates suggesting that an ‘extra’ 1% of the workforce from outside the EU is associated with an approximately 1.5% increase in productivity. The results for EU-origin migrants are less clear. The coefficient estimates are consistently negative, consistent with the descriptive statistics shown above. However, the estimates never approach statistical significance, and are quite small.
The differential impacts of EU and non-EU migration are most obviously explained by the different entry requirements. During the period covered by our data, EU-origin migrants could enter and work in the UK under free movement, while non-EU origin migrants moving to work generally needed a job offer paying significantly more than average earnings in a relatively highly skilled occupation.
So the most obvious explanation is simply that recent non-EU origin migrants are more highly skilled/highly paid, and hence more productive, than EU-origin migrants (or UK-origin workers). However, by no means all non-EU origin migrants in the workforce enter through the selective work visa system: there are also large migration flows through other routes, including students, refugees, ‘family’ migration, and dependents.
And while it is the case that median pay is somewhat higher for non-EU origin migrants than for UK-origin workers, which in turn is somewhat higher than for EU-origin workers, the differences are not large enough to explain our results. Instead, it seems that productivity growth is higher in sectors and regions where the non-EU origin workforce is growing faster; no such impact (and, possibly, the reverse) is the case for EU-origin employees.
There are a number of possible explanations: for example, high growth/high productivity firms may rely more on non-EU migrants, non-EU migrants may be more likely to set up or join high-growth firms, or the presence of a pool of available non-EU migrants may make it easier for firms to grow faster. We do not claim to have established causality in our analysis, and indeed these explanations are largely consistent with causality running in both directions.
What are the implications of our results for the impact of the post-Brexit migration system introduced in January 2021?
In principle, if our results continue to hold in the post-pandemic period, this should provide a modest boost to UK productivity over time. It would also appear to justify the broad rationale for the new system, which ends free movement while liberalising work migration more broadly for relatively highly paid/highly skilled workers.
This said, we note that much of the most recent growth in non-EU migration is in the health and social care sector and has been driven in large part by the introduction of a new Health and Care Visa, which is open to employees in even relatively low-paid roles.
By Professor Jonathan Portes, Senior Fellow, UK in a Changing Europe.