21 February 2020

Concerns about the impact of immigration on jobs, wages, public services, and national identity played a huge role in the United Kingdom’s decision to leave the European Union. Unschackled by the EU’s freedom of labour movement requirement, Prime Minister Boris Johnson’s government unveiled its long-awaited immigration proposal. In practical terms, the new “points-based” system will maintain pretty much unfettered movement for highly-skilled foreign workers, but will impose tougher visa requirements for lower-paid (often less skilled) migrants.

What will be the likely impact of this new regime on migration, labour supply, wages, and the UK’s long-term economic prospects? As a starting point, such an assessment requires us to debunk many of the old myths regarding the UK’s immigration experience as a member of the European Union. Overall, I expect the level of immigration to decline in coming years: as a result both of the new plan, as well as the nation’s diminished economic prospects post-Brexit. Consequently, the UK’s long-term potential GDP growth rate is likely to slip towards a tepid 1.25 to 1.5% per annum.

The UK immigration plan aims to protect low-income UK workers. Ironically, the result may be precisely the opposite. Preventing slower long-term growth and raising living standards — especially amongst the less affluent portion of the population — will require that the United Kingdom remedy its woeful productivity track record. The answer lies in large-scale investment in education and training, particularly for the low-skilled (usually poorer) portion of the labour force, not protectionism or closing the borders.

Debunking the Myths

To be sure, UK immigration did surge in recent decades following the two phases of EU enlargement, and as a result of various political crises in the Middle East and elsewhere. However, the heated debate about migration has given rise to the misperception that the UK is swamped by immigrants. The Chart above illustrates that the percentage of foreign-born residents is roughly in line with other large European nations and the USA, and considerably lower than in several nations.

The second often heard myth is that immigrants are systematically displacing native-born labour. The Chart above, however, illustrates the employment rate for local workers stands at a cyclical high — having fully recovered from the trauma of the Great Recession. In particular, the employment rate for women is enjoying a secular rise, although still well below that for men.

On the other extreme, some commentators suggest that immigrants are less inclined to work. To the contrary, the Chart above shows the employment rates for most immigrant groups — especially migrants from the EU27 nations (and particularly the new member states EU8 and EU2) — are well above the UK national average. The employment rate for South Asian immigrants is depressed by the low level of participation by women. The rate for Africa and ROW is low, as the motivation for migration is often political rather than job-related.

Many pundits often suggest the United Kingdom is a “soft touch”, and migrants are simply attracted by generous UK social programs. The Chart above, however, illustrates that EEA immigrants make a more positive contribution to the government’s budget compared to native-born residents. The fiscal impact of non-European immigrants is less favourable, reflecting this cohort’s lower employment rate and often large family size.

What often gets lost in the negative tone of the debate is the hugely beneficial role immigration plays in the labour market. The Chart above illustrates the contribution UK migrants, especially those from the European Union, have made to the labour supply in recent decades. This is especially important given the slowing birth rate in the United Kindom — the trend is becoming even more pronounced and widespread throughout Europe in recent years (next Chart).

Another myth is that the UK attracts poorly educated migrants, adding a burden to the society and social services. The following Chart, however, illustrates that the share of UK immigrants with a university education is amongst the highest in Europe. At the other extreme, the proportion with less than primary training is amongst Europe’s lowest.

The Importance of a Good Education

So, immigration appears to have had a positive impact on the UK’s economy, labour supply, and fiscal position. However, for those unprepared for competition, migration can pose serious threats. The answer lies in good education and training. The next Chart, however illustrates that the educational attainment of the UK’s native-born population lags behind that of its immigrant cohort. In particular, the share of the poorly-educated local workers exceeds that of foreign-born labour. At the other end of the spectrum, the proportion of university-educated immigrants is higher than in the native population.

In the USA, Germany, and France, in contrast, the share of poorly-educated native-born workers is low, especially compared to migrants. And the share of local college-trained workers exceeds that in the immigrant community. It is worth noting, however, the share of university-educated workers in the United Kingdom is high compared to other European competitors. The UK educational system’s failure lies at the primary and secondary levels.

The Chart above illustrates the UK employment rate for native-born university graduates is on par with the immigrant population. Well-trained UK workers compete well. On the other end of the scale, the employment rate for poorly-educated UK workers is below that of the migrant population. Perhaps, this reflects an unwillingness of local workers to accept low-wage, unappealling jobs (the same pattern exists in other countries). More likely, however, poorly-educated UK workers find it hard to compete with better trained immigrants who are more willing to accept low-wage positions. Indeed, the following Chart illustrates that a large proportion of UK immigrants believe they are over-qualified for their jobs.

The deficiency of the UK educational system does expose poorly-trained local workers to the threat of competition. The following Chart illustrates that while the overall UK employment rate is high, the ratio for workers without qualifications has declined sharply since EU enlargement in 2004. The graph also underscores that the less educated were most vulnerable during the Great Recession — suggesting that inadequate education and the Financial Crisis are largely responsible for working-class difficulties.

As a result, a large proportion of the UK native-born population is engaged in low-skilled jobs, often competing with better-trained immigrants (especially from EU new member states — NMS).

Strategic Implications

• If UK firms are to expand trade in global markets and if British workers are to compete against foreign-born rivals, the UK must improve its woeful productivity track record (Chart above).
• The answer lies in in better education and training, as well as higher investment especially in infrastructure. We have demonstrated that well-trained native-born British workers compete effectively. Urgent improvements in primary and secondary education are vital.
• On a certain level, the UK government’s immigration proposal is patronising to low-income workers. While migration in high-paid professions remains largely open, low-skilled segments are shielded from competition. Such protectionism reduces the incentive to boost productivity, especially in the low-skilled segment of the labour force. Higher living standards, especially in the less affluent parts of the population, can only be achieved sustainably through higher productivity. Protectionism and closing the borders is not the answer, education is.
• I expect the government’s plan will reduce immigration, especially in low-income (often low-skilled, but not always) sectors such as hospitality, health and social care, and retail trade. Diminished economic prospects following Brexit will curb inward migration of high-skilled workers as well.
• Reduced labour supply availabilty will lower the UK’s long-term GDP potential, at least until productivity takes off!