Select Committee on Economic Affairs Minutes of Evidence


Memorandum by the National Institute of Economic and Social Research[1]

THE NUMBERS AND CHARACTERISTICS OF RECENT IMMIGRANTS (QUESTIONS 1, 2, 13)

  Data on both the numbers and characteristics of recent immigrants are an important input to understanding the economic impacts of immigration, which we discuss below. In this context we discuss some of the statistics available. At present Total International Migration (TIM) statistics produced by the Office for National Statistics are compiled from the International Passenger Survey (IPS). According to these, immigration net of emigration rose sharply from less than 50,000 per annum on average during most of the 1990s to more than 150,000 per annum on average over the years 1998-2003. Following the enlargement of the EU in spring 2004, net immigration rose by a further 50,000 per annum on average in 2004 and 2005. In these years, net immigration from the Accession 8 (A8)[2] averaged more than 50,000 per annum.

  The Workers Registration Scheme (WRS) provides more detailed and frequently quoted statistics on migrants from the A8. The WRS records gross, rather than net, immigration flows and show that in the three years following Accession there have been 656.4 thousand A8 citizens registering to work in the UK, more than half of which registered before 2006.[3] These numbers exceed TIM estimates of gross migration from the A8 during 2004-05 by approximately 100,000 per annum, indicating the temporary nature of migration from the New Member States (NMS). The WRS counts individuals who intend to work in the UK for at least a month. The IPS figures, on which TIM estimates are based, count individuals who intend to stay in the UK for at least a year. We note that comparability between these figures is complicated by the fact that the WRS is likely to undercount the total number of migrants, since it only counts individuals who register to work as employees. Also, the reliability of the IPS data is often questioned due to the way in which this data is collected through voluntary survey participation at points of entry to and exit from the UK, and because it is based on intentions rather than realised outcomes.

  In terms of gauging the economic impact of recent immigration it is useful to know how many migrants are resident in the UK at a particular time, and hence contributing to UK economic performance, although the flows are relevant for these purposes too. Neither the WRS nor the IPS provides this sort of information. Of course `stock' numbers can be derived from these under certain assumptions. These are, however, not the only sources of information about migrants. The Labour Force Survey (LFS), which has a sample of about 60,000 respondents asks whether respondents were born in the United Kingdom or, if not, the year of their arrival. Although the LFS it is not without its problems, it does provide a head count of migrants resident in the UK.

  Quite separate from the benefit of having available data on migrant stocks as well as flows, given the concerns about the reliability of the IPS, it is important to compare the data which emerge from the IPS with those produced by the LFS. We note that one means of enhancing the information available would be to devise a means of producing combined estimates of the numbers of recent immigrants using both sources. Such figures will result in revised intra-censal population estimates and may shed additional light on the accuracy of the IPS. An advantage of the LFS is that, since it looks at people resident in the country, it automatically covers the people who arrive not intending to stay (and who are therefore not counted as migrants) but then change their minds; it equally excludes the people who do intend to stay but leave after less than a year (and should therefore not have been counted as migrants). The IPS figures are adjusted to allow for these but the benefit of an independent data source should not be overlooked.

  Using the LFS data we can illustrate the number of A8 migrants resident in the UK at different points in time since the enlargement of the EU in 2004 (Table A).[4] The figures do not provide information on most recent migrants since the sample frame covers only people who have been at addresses for at least six months. These data suggest there were 382,000 people, or 0.6% of the population, born in the A8 who had arrived in the UK since Accession to the EU. Reflecting the age distribution of A8 migrants, these individuals comprise a larger proportion, 0.9%, of the working age population. The steady increase in the recent A8 migrant stock is partly a result of the duration of residence criteria for participation in the LFS.

  Updating the data summary in an earlier study by the National Institute of Economic and Social Research (Riley and Weale, 2006) we get a picture of the number of recent migrants resident in the UK and their labour market characteristics. We limit ourselves to the data for the most recent available quarter (2007 quarter 1) to obtain an up-to-date picture, despite the relatively small sample size which results. These data (Table B) suggest that 4.6% of the population, and 6% of the working age population, arrived in the UK in the last decade. In comparison to the situation only one year ago NMS migrants account for an increasing share of the recent migrant population. At the beginning of 2006, migrants from the A8 accounted for a quarter of post-Accession migrants (Riley and Weale, 2006). At the beginning of 2007, this number has risen to a third.

  We also note two distinguishing features of migrants who arrived in the UK during the years 2004-06, the years following Accession, in comparison to those who arrived between 1998 and 2003, the previous period over which we saw an upward shift in net immigration to the UK. The more recent migrant group is significantly younger, much more likely to be employed in low skilled occupations and less likely to be employed in professional and managerial occupations (Table B). These differences are entirely attributable to differences in characteristics between recent NMS migrants and migrants from other areas. Recent NMS migrants of working age are more likely to be employed than both the indigenous population and migrants from elsewhere.

THE MACROECONOMIC IMPACTS OF RECENT IMMIGRATION (QUESTIONS 4, 6, 7, 8, 12)

  It is clear that the scale of recent immigration implied by the numbers discussed above should have been associated with an increase in GDP. Previous analysis undertaken by the National Institute of Economic and Social Research (Riley and Weale, 2006), using a simple accounting framework, suggests that immigration during 1998-2005 contributed to a rise in real GDP of around 3% Looking at the years 2004-05 alone, immigration contributed 1% of GDP. This does not take into account the further increases in GDP that would accrue if capital accumulated to match the rise in labour input. The National Institute of Economic and Social Research has further examined the potential macroeconomic impacts of recent immigration with the help of its macroeconomic models (Kirby and Riley, 2006; Riley and Weale, 2006; Barrell, Guillemineau and Liadze, 2006; Barrell, FitzGerald and Riley, 2007). These studies provide a useful illustration of the types and magnitudes of effects from immigration that we might observe at the national level. Much of the debate around the economic impacts of recent immigration relies on analyses undertaken at the individual or sub-national level (eg Gilpin et al, 2006; Blanchflower et al, 2007). These and similar studies provide valuable evidence on the economic impacts of immigration, but the results obtained do not necessarily extend to the national level, and the results discussed here can be viewed as complementary to these.

  Here we discuss some of the issues raised in previous work by the National Institute of Economic and Social research in the context of a simulation exercise using the Institute's global econometric model NiGEM.[5] This example serves to illustrate the macroeconomic impacts of recent A8 immigration to the UK. We model this immigration as an unanticipated shift in the population and the population of working age commensurate to the figures in Table A. This updates previous Institute work by taking into account further increases in the A8 migrant population that have occurred since the summer of 2006. The potential impacts on GDP, inflation, unemployment, productivity and GDP per capita are illustrated in Table C. Here we discuss key assumptions underlying these results and how alternative assumptions would affect these.

  The increase in the labour force from the immigration raises potential output, and in the longer term output rises to match this increase. In the short-term, productivity as measured by output per hour in the UK is likely to have grown more slowly than it otherwise would have, since the capital stock (including public sector infrastructure and the housing stock) takes longer to adjust to the increase in labour supply and in the short-term the level of capital employed per hour worked falls. If it is the case that migrants concentrate in sectors where the capital-to-labour ratio is low then productivity may return to base more quickly than this simulation suggests. Overall, GDP increases as the increase in labour supply results in increased employment. By 2015 the level of GDP is approximately 0.9% above baseline. Average output per capita is reduced in the short term, due to both the short term increase in the unemployment rate and the slow adjustment of the capital stock, but is higher in the longer term than it would have been in the absence of this increase in migration. The longer term effects reflect the age composition of migrants, which is skewed towards working age. Although not illustrated here this also results in small improvements in the public finances (Kirby and Riley, 2006). In this example we have assumed that A8 migrants and natives are equally productive. Taking into account the evidence that recent A8 migrants tend to be concentrated in low-skilled occupations the GDP effects would be smaller than shown here, as we illustrate in Barrell, FitzGerald and Riley (2007).

  With the labour supply curve shifting down the labour demand curve, there is a short-run increase in unemployment until the economy adjusts and labour demand is able to meet the extra capacity. The increase in unemployment can occur, either through migrant labour searching for employment or the displacement of existing workers. Indeed there is some evidence from the LFS that suggests that the employment rate of people of working age from the A8 countries was initially much lower than is now the case (64% in 2005Q1 in comparison to 81% in 2007Q1). Our simulations show the ILO unemployment rate returning to its baseline rate by around 2012 and, at its peak, the unemployment rate is only 0.4 percentage points higher than baseline. We have assumed that migrants and natives are perfect substitutes in production. We have not assumed that the inflows of migrants are composed of workers who reduce mismatch in the labour market by meeting currently unfulfilled labour demand, relieving bottlenecks. If there were such effects occurring in the economy then the impact on unemployment in the short run would be less than the numbers suggested here, while the immediate impact on output would be greater due to this larger increase in the labour input. Conversely, if immigration is concentrated amongst the low-skilled and low-paid workers, where wages are likely to be less downwardly flexible, we may expect to see smaller disinflationary effects and larger upward pressure on unemployment, as illustrated in (Riley and Weale, 2006) using the model in Riley and Young (2007). In these simulations we make no allowance for additional remittance payments from migrant workers to their home country. These are likely to be large for A8 migrants (Fihel et al, 2006), partly because of the temporary nature of migration from these countries. Taking these into account we might expect to see larger reductions in inflationary pressure than indicated in Table A, as the rise in demand would be less strong.

  This example highlights some of the differences between the macroeconomic impacts of unanticipated migration in the longer and the shorter term. In the shorter term the economy is affected by short run adjustment factors and the extent to which these matter is largely a consequence of the assumption that the change in migration is unanticipated, which seems a reasonable assumption to make in the case of recent A8 migration. This is also one of the key differences in determining the economic effects of migration versus general population change. In many ways we can think of the change in migration in the same way that we think about any other population change. However, there are likely to be important differences. In addition to whether or not these changes can be regarded as expected or unexpected, we have highlighted the importance of the age distribution of the change in the population, the role of remittances in macroeconomic adjustment, existing productivity differentials, and the degree of substitutability at the economy level between different types of labour, including migrants and natives.

  The example here is useful in illustrating the potential macroeconomic impacts of a sudden change in the population, similar to that which has been observed following the enlargement of the EU in 2004. A separate question is the effectiveness of macroeconomic policy in a small open economy, such as the UK, where labour is increasingly mobile across national borders. In this context migration may both affect the parameters of wage bargaining and make economies more flexible, changing the short term trade-off between output and price effects in response to policy innovations.

FUTURE TRENDS FOR IMMIGRATION (QUESTIONS 1, 13, 14)

  An understanding of the behavioural factors determining migration is necessary if the reliability of long-term forecasts of population growth and output growth are to be assessed and judgements made about the policy instruments available to affect the evolution of migrant flows. Such an understanding is also essential for the production of meaningful forecasts of the migration inflow. The National Institute of Economic and Social Research (Mitchell and Pain, 2003) has developed an econometric model of the economic and demographic determinants of annual migrant inflows into the UK. We found that the change in migration over the decade to 1998-2000 is primarily due to population growth in the source locations and the continuing pull effects from the rise in the migrant stock and per capita incomes in the UK relative to the source location. This finding is in contrast to the conclusions of Hatton (2005), which suggest that the upward shift in UK immigration towards the end of the 1990s is in large part attributable to changes in immigration policy. In this regard we note that rising immigration is not a feature peculiar to the UK. Several OECD countries have experienced rising immigration in the last decade.

  It is probably fair to say that the sharp increase in immigration following the enlargement of the EU in Spring 2004 was attributable to a sudden and one-off change in policy—ie the relaxation of border restrictions for people from the NMS—the impact of which will have been amplified by the temporary restrictions on labour mobility put in place in most other EU countries (the exceptions being Ireland, which has probably seen the largest change in the population due to immigration from the NMS if this is measured relative to the local population, and Sweden). Because this policy change can be regarded as a one-off event, and because most EU countries have now relaxed their initial restrictions on migration from the NMS, allowing migrants to move freely across their borders, it seems likely that the change in the level of immigration in 2004 will have been a temporary one. However, there are a number of factors that may help to sustain a relatively high level of NMS immigration to the UK, in historical comparison. Income differentials between the old EU countries and the NMS, particularly Poland, Latvia, Lithuania, and Slovakia, are likely to persist in the near future. Specific to the UK (and Ireland), the establishment of new NMS communities in the wake of Accession will act as a "pull" factor for further NMS migrants in the years to come. Our empirical work suggests that this "friends and family" effect is one of the most significant determinants of migration into the UK (Mitchell and Pain, 2003). Finally, the strength of the UK labour market vis-a"-vis many other old EU countries, if this persists, is likely to be a factor contributing to the popularity of the UK as a destination country for NMS migrants and migrants from outside the EU.

  While it is possible to point to factors influencing future migration trends to the UK, it is clear from our modelling work that forecasts of immigration are associated with substantial uncertainty. With this in mind it is not a question of one forecast proving to be right and another forecast proving to be wrong. Point forecasts are best seen as the central points of ranges of uncertainty. It is therefore important to provide a description of the uncertainty associated with migration forecasts. Just as the public have learnt to understand that the Bank of England's "fan" chart for inflation does not mean the Bank does not control inflation, similarly we should expect the public to understand "uncertainty bands" published around migration forecasts. Awareness of the uncertainty around the central estimate will enable better decisions to be made. The degree of uncertainty around central migration estimates should be estimated from a model of migration inflows.

Table A

NUMBER OF A8 MIGRANTS IN THE UK ARRIVING SINCE MAY 2004


All Thousands
% of population
Working age Thousands
% of population

2004q4
54.5
0.09
46.0
0.13
2005q1
57.5
0.10
50.5
0.14
2005q2
89.5
0.15
80.8
0.22
2005q3
122.1
0.21
112.5
0.31
2005q4
164.5
0.28
149.5
0.41
2006q1
199.5
0.34
175.1
0.48
2006q2
211.9
0.36
189.6
0.52
2006q3
263.0
0.45
241.7
0.66
2006q4
336.3
0.57
298.6
0.81
2007q1
382.3
0.63
338.6
0.90

Source: Quarterly Labour Force Surveys 2004Q1-2007Q1; numbers weighted with population weights.


Table B

THE STRUCTURE OF RECENT IMMIGRATION


Population
structure
Of which came to the UK
First quarter
2007
1998-2003
All
2004-06
All
2004-06
NMS

Numbers (thousands)
58,988
1,454
1,234
382
Age 18-24
5,297
161
279
115
(% of total)
(9.0)
(11.1)
(22.6)
(30.1)
Age 25-34
7,480
560
469
161
(% of total)
(12.7)
(38.5)
(38.0)
(42.1)
Age 35-49
13,166
376
192
43
(% of total)
(22.3)
(25.9)
(15.5)
(11.4)
Working age
36,679
1,188
1,004
339
(% of total)
(62.2)
(81.7)
(81.4)
(88.6)
Working age outside labour force and in full-time education
1,863
100
117
-
(% of working age population)
(5.1)
(8.4)
(11.6)
Working age employed
27,124
783
648
276
(% of working age population)
(74.0)
(66.0)
(64.6)
(81.4)
In professional, managerial, and associate professional occupations
11,620
355
209
31
(% of employed working age population)
(42.8)
(45.4)
(32.3)
(11.2)
In intermediate occupations
10,467
253
182
72
(% of employed working age population)
(38.6)
(32.4)
(28.0)
(26.2)
Process, plant and machine operatives and elementary occupations
5,037
175
257
173
(% of employed working age population)
(18.6)
(22.3)
(39.7)
(62.6)

Source: Quarterly Labour Force Survey 2007Q1; Numbers weighted with population weights.
Notes: (-) LFS sample size too small to report.


Table C

AN ILLUSTRATION OF THE POTENTIAL ECONOMIC IMPACTS OF RECENT A8 MIGRATION

(% difference from base)*


GDP
Inflation rate
Unemployment
rate
Productivity
(GDP per person
hour)
GDP per capita

2005
0.15
0.13
0.18
0.03
-0.03
2006
0.29
0.00
0.36
-0.05
-0.14
2007
0.42
-0.15
0.43
-0.16
-0.21
2008
0.50
-0.25
0.28
-0.23
-0.12
2009
0.59
-0.24
0.18
-0.25
-0.03
2010
0.67
-0.19
0.10
-0.25
0.05
2011
0.73
-0.15
0.04
-0.23
0.11
2012
0.78
-0.10
0.00
-0.22
0.17
2013
0.82
-0.07
-0.03
-0.20
0.21
2014
0.86
-0.04
-0.05
-0.18
0.24
2015
0.88
-0.02
-0.06
-0.16
0.27




*All numbers shown as per cent difference from baseline except for the inflation rate and the unemployment rate which are shown as percentage point difference from base.

30 September 2007



1   The authors are Research Fellows at the National Institute of Economic and Social Research (NIESR). The views expressed here reflect those of the authors and do not necessarily reflect those of the NIESR. Back

2   The eight Central and Eastern European countries that joined the EU on 1 May 2004 gaining new rights to live and work in the UK. These are the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. Back

3   Accession Monitoring Report: May 2004-June 2007, Border & Immigration Agency, Home Office (2007). Back

4   The population weights used in deriving these have not been adjusted to the latest mid-year population estimates. Estimates of the total population also differ from the mid-year estimates as the sample for the LFS does not include communal residences. Back

5   For a description of the National Institute Global Econometric Model (NiGEM) see Al-Eyd et al. (2006). Back


 
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