November 27, 2016    9 minute read

The Economics Of Migration

The Power of Migration    November 27, 2016    9 minute read

The Economics Of Migration

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2016 will forever be known as the year of the populist movement. The year that Nigel Farage and Donald Trump were taken seriously as global political leaders. The year bearing the brunt of the IS stronghold in Syria and its civil war, which resulted in one of the most significant humanitarian crises that Europe has seen since the Second World War.

Populism stems from a collective discontent at the decisions taken by the political elite. But one common trait to the propaganda cries from Trump and Farage were the controls on immigration, and these appealed. European, Middle Eastern and Mexican migrants were accused of “taking jobs” from the native populace, despite the fact that the largest number of migrants in the UK are actually from India, China and Pakistan. The economic study of migration has, therefore, often been driven by ill-informed perceptions.

The UK has indeed experienced a positive net flow of migrants into the country in the past two decades. Between 2011 and 2016 an estimated 1 million migrants arrived on UK soil, to live and work permanently. But does it aid the economy, or hinder it?

The Impact Of Net Migration To The UK Economy

Migration_Inflow_Into_The_United_Kingdom_data_TMMChart.png

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United_Kingdom_Emigration_data_TMMChart

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Migration is a prominent part of the social and economic lives of most countries, yet the migration profiles of each nation are distinctive due to the variety of sources. The two major types of migration are economic and humanitarian – the latter has come to the UK via the EU from Syria and parts of Northern Africa while the former occurs due to the Schengen free movement of people and goods.

UK_Asylum_Applications_Number_Of_Applications_TMMChart (1)

1. The Labour Force

Whether they are humanitarian or economic, migrants are often between the ages of 20 and 30 when it is most convenient for them to move and travel. Therefore net immigration tends to lead to growth in the labour force. As the UK faces an ageing population, migrants boost the working age and help to support the retiring demographic reducing dependency ratios. A rise in the labour force increases the productive capacity of the economy and its potential output. As migrants spend their wages, they contribute to an increase in aggregate demand. In turn, the demand for labour will increase.

Economic migrants, especially those that come to London from the European Union are often better educated than those nearing retirement. Over one-third of young migrants entering the UK in 2014 were tertiary educated. They are entrepreneurial and innovative. Even the humanitarian migrants are often coming to the UK for the abundance of opportunities for low-skilled employment that the locals feel too superior to take.

Number_Of_Immigrants_From_The_EU_In_The_UK_Number_Of_Immigrants_(In_1,000)_TMMChart

This can have adverse effects, as the migrants who are willing to work for less often drive down the wages. This was one of the critical arguments of Donald Trump’s campaign when referring to the Mexican migrants encroaching on American workers. Migrants are often willing to bypass traditional trade union bargaining. If wages in a particular sector are high and migration from a low income occurs, wages may fall. This was the case in the agricultural industry in the UK.

21% Of The British Population have University Degrees

Ceteris Paribus net migration will lead to an increase in real GDP, although the impact on GDP per capita is less known. Between 2005 and 2015, real GDP in the UK grew much faster than GDP per capita.

2. Labour Market Flexibility

Migrants in Europe have accounted for 70% of the growth in the workforce over the past ten years and, according to the OECD, have filled niches in both fast growing and declining industries. Migrants often take jobs that are regarded by domestic workers as unattractive, including trade workers and machine operators. From the mid-2000’s there was a massive influx of migrants from Poland and other Eastern European countries. The government also sought migrants to fill shortages in nursing.

Migrants arrive with specific skillsets that can develop the human capital of the recipient nation. Therefore they can contribute towards technological progress and innovation. In fact, a recent study conducted by UCL for 2011 revealed that 32% of EEA immigrants had university degrees compared with 21% of the British population.

32% Of EEA Immigrants Have University Degrees

Employment is the single largest determinant of a migrants net contribution to an economy, especially in the UK which is famous for its generous welfare state.

 

3. Economies of Scale

The UK has a comparatively high population density compared to its European neighbours. More migrants increase the budget, which can, in turn, be spent on developing public infrastructure. But higher population densities are more efficient and have a lower environmental impact.

4. Taxation

Economic migrants contribute a net positive effect to the public purse. They give more to the government than what they take in benefits. Recent studies from the OECD countries reveal that immigrants fiscal cost across the region rarely exceeds 0.5% of GDP.

0.5% Of GDP, The Fiscal Cost Of Immigrants

In the UK, contrary to what many believe, less educated migrants often will have a better fiscal position than their domestic counterparts who comparatively receive more benefits. The only instance where they may have a worse economic situations are those on a lower wage, i.e. victims of a humanitarian crisis.

5. Welfare Benefits

There is a widespread belief that migrants come to the UK to benefit from the welfare state and social housing. Immigrants who have arrived since 1999 are 45% less likely to receive state benefits or tax credits than their native peers according to Professor Christian Dustmann from the Research and Analysis of Migration Centre at UCL.

However, what their studies did indicate was that immigrants who are not from the European Economic Area (EEA) countries, typically have more children, and therefore require more benefits than the native Britons. These tend to be immigrants from Pakistan and India. The migration of these people to the UK has much firmer roots due to the British Empire trading links.

45% How Much Less Likely Immigrants Are To Receive Benefits Than Natives

The Claimant Count has in fact decreased in recent years because the means testing is becoming far more rigorous, one has to prove beyond doubt that they are looking for employment every day. The criteria for an immigration visa from non-EU countries is extremely strict, and, as such, the claimant count is far less than the unemployment statistic.

6. Social Issues

There have been some adverse effects of immigration – overcrowding has been cited as a principal cause for a fall in the standard of living. Immigration of wealthy or successful migrants has been known to drive up the rent prices in cities, while the countryside has seen development on landscapes that were once greenbelt. Infrastructure is struggling to keep up, and therefore traffic and pollution has increased significantly. Furthermore, if immigration occurs at a fast pace, the building of new schools, hospitals and other amenities are unable to keep up. The increase in real GDP should be measured against these issues.

In the period running up to the Brexit referendum, campaigners often blamed migrants from the EU for “taking our jobs”, but migration is often compatible with low unemployment. The US had high unemployment during the 1990s and was able to decrease these figures drastically with net migration which enabled an increase in the supply and demand for labour. The same occurred in the UK. The underlying cause of unemployment is a recession and not migration. The only likely form of unemployment an immigrant may experience is structural due to lack of skills.

7. Remittances

Migrants can be seen to drain the economy because they often send remittances back to their families in their country of origin. This prevents spending in the host country, and some currencies can go further than others. Earnings in pounds, for instance, at least before Brexit, could be valued much higher when exchanged into an Indian rupee, for example.

Conclusion

Migration has been a major source of contention in the last few years as a consequence of a failure to integrate. This has partly been because of poor English language skills and partly due to racial discrimination. Often pocketed communities have developed as a result which has worsened native opinions of the migrant populations. Indian migrants have been very successful, the emergence of curry houses across England demonstrates the success of their entrepreneurial skills and their ability to capitalise on their culture. According to the report of the Economic Affairs Committee of the House of Lords:

“The focus of analysis should rather be on the effects of immigration on income per head of the resident population. Both theory and the available empirical evidence indicate that these effects are small, especially in the long run when the economy fully adjusts to the increased supply of labour. In the long run, the main economic effect of immigration is to enlarge the economy, with relatively small costs and benefits for the incomes of the resident population.”

When analysing Great Britain, there is no doubt that immigration, especially from the EU, benefits the economy. But whether the UK is capable of absorbing a greater population is a different matter. London is overcrowded, and Great Britain has a population of 64.1 million for 243,610 sq. km while France has a population of 66.03 for 643,801km. The population density in Britain is far higher than in France. The free movement of people that the EU project requires is therefore much less of a problem for France.

While migration from the EU has a positive effect, migration from non-EU countries has a negative effect. Therefore leaving the EU will decrease the quantity of skilled workers entering the UK if the free movement of people is left out of the negotiations. Migration from non-EU countries will not necessarily decrease, and many voted for Brexit to protect the interests of their families from these non-EEA areas.

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