Immigration and Economics


Economics: MW 427

Economic growth

1. Most claims that immigration is good for the economy are made simply on the basis of economic growth. Obviously, the more people there are the bigger the economy is likely to be, but what matters more is changes to GDP per capita, the size of the economy divided by the number of people in the country.

2. In 2008 the House of Lords Economic Committee conducted the first major study of the overall impact of immigration on the UK economy and concluded that:

We have found no evidence for the argument, made by the government, business and many others, that net immigration – immigration minus emigration – generates significant economic benefits for the existing UK population.

And…

The overall conclusion from existing evidence is that immigration has very small impacts on GDP per capita, whether these impacts are positive or negative. This conclusion is in line with findings of studies of the economic impact of immigration in other countries, including the US.

(To read the House of Lords report click here)

3. In hard numbers, the Office for Budget Responsibility (OBR) calculated in 2014 that net migration of 225,000 a year would add an average of 0.4% to GDP annually yet it would also add to the population at the same rate meaning that GDP per capita would not improve. Moreover, net migration on this scale would add 21 million to the population by 2064, raising it to 85 million.

4. Similarly, in a paper published in May 2016 the National Institute for Economic and Social Research (NIESR) projected, on the basis of economic modelling that GDP per capita would barely be affected by a reduction of two-thirds in net migration, with a trivial difference of less than 1% by 2065 compared with migration continuing at high levels. (See here)

5. A previous study by the National Institute for Economic and Social Research, carried out for the European Union, found that the long-run impact of migration from Eastern Europe between 2004 and 2009 could actually depress UK GDP per capita by -0.17%.

6. Whereas the OBR assume for simplicity that all migrants have the same economic impact, this NIESR study supports our own research which observes very different economic characteristics of different migrant groups. See here for our work on this.

7.Increasing GDP per capita ultimately relies most on increasing productivity: each hour worked generating more value of output. While it is often claimed that immigration raises productivity, a recent IMF paper (Jaumotte et al., ‘Impact of migration on income levels in advanced economies’, December 2016) points out that if the demand is mainly for low-skilled migrants in rapidly growing low-skilled sectors it is unlikely that labour productivity will increase as a result. That appears to describe the UK’s experience certainly in relation to the large increase in migration from Eastern Europe since 2004, most of which has been into lower-skilled occupations despite the individuals in questions often being over-qualified for such positions.

8. The disconnect between skill levels and actual jobs was highlighted in the Migration Advisory Committee’s own report (‘Migrants in low-skilled work’, July 2014) and our own analysis of the Labour Force Survey has found that, of those EU migrants who have arrived in the last ten years, 80% are working in lower-skilled jobs.

9. Over the last decade, productivity has barely grown despite the number of immigrant workers growing by over two million, and the migrant share of the workforce nearly doubling.

10. The MAC report noted that the easy availability of foreign workers can result in employers preferring migrants than investing in training for less-qualified people in the UK population. Other sources suggest a similar impact from high levels of EU migration. For example, the UK Commission for Employment and Skills has noted, ‘the UK is currently ranked 25th, with the proportion of adults qualified at this level expected to decline slightly from 36 to 34 per cent. Stronger performance by other countries will result in the UK’s decline to 28th by 2020: four in five OECD countries will have better performance at intermediate level' (UK Commission for Employment and Skills, October 2015). And as Baroness Wolf made clear in her 2015 Social Market Foundation report (‘Fixing a broken training system: The case for an apprenticeship levy’, July 2015), this is also a result of a past lack of government investment in apprenticeships.

11. Overall, there is little to suggest any benefit in the long-term merely from growth driven by increasing population, certainly compared to the dis-benefit of over-crowding and pressure on public services that would result especially from large increases in population. The OBR (and NIESR) are clear that their economic modelling and forecasts take no account of the potential negative effects of a rapidly expanding population.

The impact on public finances

12. Like everyone else, migrants pay taxes when they earn more than a certain amount but also have money spent on them in welfare and when they use the National Health Service and other public services. The OBR makes the assumption for forecasting purposes that, because migrants are likely to be of working age when they arrive, they will make a more positive contribution to public finances than the overall population which obviously includes a large number of older retired people. This assumption means that they forecast that high levels of net migration would result in a slightly faster drop in the UK's debt to GDP ratio over the next twenty years than would otherwise be the case. However, the debt to GDP ratio would then start to rise again because migrants will themselves age and push up public spending by their increasing use of the health service and in pension costs.

As the OBR admits:

higher migration could be seen as delaying some of the fiscal challenges of an ageing population rather than a way of avoiding them.

13. Mass immigration is not the answer to an aging population because migrants get old too. Ever increasing net migration to try to constrain the dependency ratio of working age to non-working age people cannot be sustainable in the long term; the number of migrants would simply get larger and larger. A more sustainable solution is to raise the retirement age so that people work for longer, to reflect the fact that, thankfully, we are all living longer.

14. In addition, there are question marks over the OBR’s assumption that working age migrants are bound to be of benefit to public finances. There is wide variation in the economic performance of migrants. Those in high-skilled, high paid jobs will make a positive contribution but those in low-paid work who pay little or no tax will almost certainly not, especially if they go on to have families (For more on the differing economic characteristics of migrants see our paper here)

Evidence of a fiscal cost

15. Looking at the evidence of what has happened (as opposed to future scenarios) it now seems beyond doubt that migration has actually been a considerable cost to the exchequer. Even on assumptions favourable to migrants, the most recent and extensive academic research found that migration from 1995 to 2011 had cost the taxpayer over £110 billion - that is about £18 million per day. This resulted from a lower employment rate of migrants overall, lower wages for some particular groups, and the cost of providing public services and benefits. All of these factors remain in place to the present.

16. Estimating the migrant impact on the exchequer is a complex matter. There are no precise statistics available to the public so results very much depend on the assumptions made by researchers. The argument turns, of course, on what is paid in direct and indirect taxes by migrants compared to what is spent on them directly plus any increase in general costs caused by migration.

17. There is consensus that the correct broad approach was outlined in a seminal paper for the Home Office by Gott & Johnston in 2002. The authors made it clear that they had produced only tentative and uncertain results while providing clear pointers as to what would be necessary for more certainty. Their work was updated in a 2005 IPPR paper whose authors used the same methodology and made the same caveats. (See here) In 2008 Professor Rowthorn of Cambridge University showed the very wide variation in possible results that could result from varying assumptions. (See here)

18. Immigrants pay taxes, of course but, as a whole, they have still cost the Treasury substantial and increasing sums. The central estimate of economists at University College London was that, over the period from 1995/6 to 2011/12, the total cost was £114bn. In the final year it reached £15bn or £40m a day (See here; Migration Watch UK comments on the UCL research can be found here).

19. Migration Watch UK, using similar methodology to CReAM found that all migrants were a net fiscal cost of £17 billion in 2014/15 with a negative contribution of at least £1.5bn from recent arrivals from Eastern Europe. (For detailed analysis of the fiscal contribution of migrants in 2014/15 see here) This is in line with the general downward trend in net fiscal effect over time observed by CReAM.

Updated 7 August, 2018



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