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Post-facts, post-gains: the economics of labour migration after Brexit

Curbing labour migration involves macroeconomic risks the government needs to address. However, Theresa May’s impasse between electorate and market promises prevents pragmatic dialogue on this.

The UK Border at Heathrow Airport. dannyman/Flickr. (CC 2.0 by)

Theresa May’s announcement that the UK will be leaving the single market marks the first indication of the ‘hard’ Brexit to come. While some aspects of what to expect are finally clearer, the future of the Brexit bogeyman – labour migration – remains elusive. On the one hand, the government is promising to categorically restrict immigration, and on the other to become a deregulated economic powerhouse and a "magnet for international talent". Pledging both so strongly is unwise and more than a little contradictory, and ultimately Theresa May’s anti-immigration agenda could hamper productivity, fiscal health, trade and long-term growth.

Recent research from the National Institute of Social and Economic Research (NIESR) predicted that halving or ending EU free movement – in very stylised terms choosing a ‘soft’ or ‘hard’ Brexit – could cut GDP by 5.2% and 8.2% by 2030 respectively. Despite such calls for caution, the immigration debate continues to rage largely without informed economic argument. Instead, it has swung from the unrealistic – spreading the fiction that single market access and freedom of movement are divisible freedoms, officially settled this week – to the irrelevant, such as pretending that a benefits freeze for EU migrants would be economically significant.

Ending months of misleading debate, the government has decided to exit the single market, recognising finally that the UK cannot enjoy continued access without accepting EU freedom of movement. EU migration, and likely all migration, will be curbed, likely necessitating the introduction of work visas for EU migrants. Further, the government has repeatedly pledged to reduce net migration to the “tens of thousands”, and its attracting the “brightest and the best” line shows preference towards high skilled migration. As a large part of migration to the UK is high skilled, however, meeting any such target will involve cutting both low and high skilled migrants.

The country’s trade make-up is also set to change drastically, with or without the single market. May’s trade partner wish list includes the US, China, Canada, Australia, India and the Gulf Cooperation Council – so far she has made headway with the latter two. More broadly, May has shown her post-Brexit vision for the economy is strongly liberalised, free to grow unharnessed without EU red tape.

So what could all these factors and scenarios mean for migration and the economy?

Public finance

The most direct way reduced immigration will damage the economy is via lower tax receipts. Last month the Office for Budget Responsibility forecast that lower immigration as a result of Brexit will increase public sector debt by £16 billion by 2020-21. This figure was based on possible moderate migration controls; if the “tens of thousands” target is met it will be much higher.

Migrants have been consistent net fiscal contributors to the UK – meaning they pay in more than they take out. Furthermore, recent migrants are 45% less likely to receive benefits or tax credits than British citizens, and EEA migrants specifically are 50% less likely to do so. Tax contributions are correlated positively with skill; better educated migrants earn and pay more.

EEA migrants are the most fiscally profitable individuals in the UK.

More crucial – and stunningly overlooked – is the fact that EEA migrants are the most fiscally profitable individuals for the UK. A study showed that from 1995-2011 EEA citizens contributed more per capita than British citizens and non-EU migrants did. Therefore, a hard Brexit that curbs EU migration is especially bad news. Facilitating more non-EU migration could partly but not fully offset this, given the “tens of thousands” target. This is significant, as an ageing British population continues to push up the dependency ratio.

The Chancellor of the Exchequer’s Autumn Statement revealed Brexit will lead to an estimated £59 billion of extra borrowing over the next five years. Whichever way you look at it, reducing immigration – EU, non-EU, high or low skilled – will squeeze the budget further.

Growth

Labour migration and economic growth have a positive relationship. The IMF estimates a 1% increase in adult migration to the UK correlates with a 2% increase in productivity and GDP per capita. Most directly, this is due to a larger workforce increasing productive capacity. It is also thanks to higher labour productivity, as immigration brings efficiency gains to different industries.

With low skilled migrants, these gains usually come through a more efficient division of labour. In other words, when low skilled migrants enter a labour force, over the long run workers tend to move to more skilled occupations. In the UK, this has proven more than just theory. Various industries are operating at a productivity level that has efficiently adjusted to migrant labour supply over time. This has most clearly happened in sectors such as fruit picking.

30% of workers in British food manufacturing are EU citizens.

The UK will lose even more by limiting high skilled migration, because the higher the skill level of an individual, the higher their productivity contribution. British skilled services industries, for example, benefit from big migration-related gains – a 1% increase in migrant labour leads to a 2-3% increase in labour productivity.

Thus reducing immigration would hit the output of several key industries. Curbing EU migration specifically will affect food manufacturing, where 30% of workers are EU citizens, and the NHS where 52,000 EU citizens work. Some ministers are waking up to potential labour shortages in migrant-heavy industries and are now calling against controls.

Limiting arrivals would also stunt long term growth in other ways. Immigration stimulates trade, as migrants have an export-boosting effect. Given its current trade deficit, the UK should care about this regardless of whether we are speaking of fully leaving the customs union or of pursuing non-EU trade. Skilled migrants boost innovation and skill diversity, both key to economic growth.

As a final addition to this laundry list, it is worth noting that without positive net migration Scotland’s population would decline over coming decades. Even for those unversed in economic theory this is a clear non-starter for growth.

Labour markets

So, what of the argument with the most political traction – that immigration makes low skilled British workers suffer?

The Home Office recently analysed available evidence and concluded UK employment is largely not affected by immigration. Where there were negative effects, they were mainly due to the recession and smoothed over with time. This is also the case for the lowest skilled: the number of people not in education, employment or training and who left school at the minimum leaving age or younger has no significant relationship with immigration.

What about wages? For median and high skilled British workers, migrants are a proven boon – migrants increase wages for median and high skilled British workers. For low skilled British workers, studies show little to no wage impact; the Bank of England estimated a 1% immigrant increase brought a 0.2% dip to low skilled wages. Similarly, NIESR found reducing EU immigration could increase low skilled wages by 0.12% by 2020; minimal gains that would be dwarfed by projected 2017 inflation of 2.7%.

The effect of migrants on jobs and pay depends on their ‘substitutability’ with native workers. If migrants and native workers are substitutes, immigration increases competition for employment. If they complement each other, and bring new skills and fill gaps which native workers cannot fill, migrant labour leads to positive knock on effects that improve employment and wages for natives.

In the UK, migrants and British workers are, on the whole, not substitutes. This is because their skill profiles are different; migrants are over-represented in very low and very high skilled labour categories. This means migrants generally complement British workers, and over the long run increase opportunities and wages in part due to the productivity gains described above. The main group negatively affected by low skilled migrants are actually earlier migrants; they tend to be closest substitutes to new arrivals and are their main competition for work.

Finally, in the long term both low and high skilled migrants create employment opportunities through increased goods and services demand.

Costly paradox

There are many ways to formulate a labour migration policy framework. Countries can use skill or labour shortages as a starting point, introduce temporary migration schemes, set quotas, prioritise migrants via bilateral agreements, or take a rights-based perspective, amongst a number of options. However, as the UK muddles through divorce planning it seems to have no approach at all, apart from ‘getting immigration under control’. So far, so Brexit.

What it has shown is a conflict between two pledges: to carry out drastic net migration cuts while becoming a haven of free-market efficiency and growth. As far as labour migration goes, this is paradoxical. The former implies the government managing migration supply based on skill level and citizenship; the latter suggests immigration driven by industry and market demand. These approaches are not necessarily mutually exclusive, but May’s versions are hardly moderate. May seems to believe both scenarios are possible. They are not.

Trade and migration are deeply intertwined – May cannot realise her free trade champion dream without recognising this.

This conflict is already evident in trade negotiations. India has indicated that a more liberal visa system is a precondition to any trade deals with the UK. Trade and migration are deeply intertwined – May cannot realise her free trade champion dream without recognising this.

It is also evident in industry. May is struggling to calm global companies’ Brexit worries on tariffs (see the Nissan deal) and passporting rights (see woes in financial services), and continued access to talent is part of this. A deregulated British economy will need an agile labour migration framework to respond to labour markets’ continually shifting demands, for example through temporary migration programmes. The government has indicated it will pursue some sector-specific migration schemes, however this will not be enough for all employers for whom access to foreign labour is central to a continued UK presence. If the government sets fixed immigration thresholds and introduces EU work visas, employers may not be able to plan easily around labour supply and could find it more expensive to hire foreign workers.

The government is stuck between a rock and a hard place of its own rhetorical making. Lo and behold, a fresh example of the failure of the having-and-eating-cake Brexit mantra.

What now?

Will it really be all that bad? Despite an overall slowdown, recent 0.5% GDP growth proved gloomy forecasts wrong. However, this figure – led by services sector growth and buoyed by short-lived consumer confidence (which has already peaked) – masks construction, agriculture and manufacturing output falls. Further, it says nothing about longer term resilience, simply because Brexit hasn’t happened yet.

Migration cuts will not crash the economy. But they will hurt, because migration is strongly linked to long-term growth. Foreign labour is deeply embedded in the British economy, causing structural dependencies and gains – much like those from trade – that will sting if they disappear without being replaced. These losses will be particularly painful if accompanied by single market exit as we now know they will be. Further, curbing EU migration and ‘looking beyond Europe’ will come at a price, as EU nationals deliver the largest gains to the British economy. The government should drop its zero-sum mentality that sees labour migration as a concession and carefully consider the economic consequences of blocking hundreds of thousands from working in the UK.

Meanwhile, it must address social factors that have made migration discourse so toxic. Decades of policy neglect have kept British social equality and mobility subpar, fuelling anti-immigration sentiment. Those who argue migration cuts would alleviate pressures on public services – as May did in her speech this week – forget migrants are less likely to use welfare and miss the point of the long-term macroeconomic gains of migration. The government has a responsibility to minimise the forces that make immigration loom large as a perceived threat in society. This means investing in affordable housing, health, and vocational education.

Post-Brexit labour migration policy needs to be based on facts, not fears. Reviewing the economic evidence, it is remarkable how off-course the popular immigration debate has veered. May has claimed the new hard Brexit agreement she outlined is the most ‘economically rational’ move; this is simply not the case for her migration plans. It is time to shift discourse away from migrant scapegoating and start a real conversation on what immigration means for the economy.

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It is clear that Brexit is going to have significant impacts on immigration and asylum law, policy, and the lives of immigrants in the UK. And yet if the likelihood of significant ‘implications’ is clear, the specific policy, legal and other changes remain unknown. OpenDemocracy’s new series Brexit Asylum Watch provides a space for expert analysis and reflection on the theme.

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