Examination of Witnesses (Questions 320
- 332)
TUESDAY 27 NOVEMBER 2007
Professor David Blanchflower
Q320 Lord Turner of Ecchinswell:
May I ask you a particular question about this fear of unemployment
and its relation to the natural rate of unemployment? Am I right
that there are actually two things going on here, one of which
is that you have an extra supply of workers and if there is at
all a downward sloping demand curve for labour, as Borjas puts
it, then there will be a fall in people with the same skill sets
within this country? You seem to be saying there is an extra effect
which is that fear of unemployment actually makes the labour market
more efficient. How does that work? Is this because it erodes
trade union power, that trade unions have less ability to defend
the interests of insiders against outsiders? Is this a secondary
effect or is it simply the fear of unemployment is driving wages
down?
Professor Blanchflower: In some sense it is
built on work Lord Layard did with Steve Nickell many moons ago.
In some sense it seems to me that we have now a very flexible
labour market, able to absorb shocks and basically what we have
done, to put it in Layard/Nickell—type language, is that
we have improved the matching function. We have brought a group
of people in who are disproportionately in work, first. Second,
they are prepared to live in places that particular groups of
workers here are not prepared to do. They are mobile, they are
prepared to live in housing conditions that domestic workers are
not prepared to live in. If you like, it has made the labour market
more flexible and more adaptable and, to go back to the matching
function, we better match workers to jobs. In the data it does
not appear that they are actually displacing workers; they are
actually doing jobs that indigenous workers cannot or will not
do, because they perhaps cannot afford the housing or something.
I think of it as improving the functioning of a labour market
and the work from the OECD suggests that our economy is flexible
enough to absorb that. I have sort of answered your question.
Q321 Lord Turner of Ecchinswell:
My second question is: is it changing the performance of the labour
market of the pre-existing native population? The answer you just
gave could be the equivalent within employment statistics of the
compositional effect in wage statistics; the wage rates on average
come down, not because the wages of existing workers have come
down, but just because you have brought in some low wage people.
One could end up with a lower rate of unemployment just because
you have brought in some people and that segment compositionally
has a higher rate of unemployment. Do you think it has changed
the behaviour of existing workers in a way which therefore changes
the natural rate of unemployment?
Professor Blanchflower: I do, and my observations
in a variety of companies suggest that. A number of times what
I see in these factories and the companies that I go to is that
there is the incumbent workforce and then a workforce from Poland
or Lithuania or Latvia, who have been brought in, who are efficient,
the company likes them. I have asked them on many occasions to
tell me about what is going to happen to the next pay round? The
manager says to me that these guys make £10 an hour and those
make £7 and we know that these people would be very happy
to do that job. I do take the point.
Q322 Lord Turner of Ecchinswell:
So it reduces the potential for cost-push inflation by institutional
mechanisms?
Professor Blanchflower: That is right. There
certainly appears to be some recognition of that fact; they are
filling skills shortages. It is not just fear of these folks:
this is in some sense globalisation. I listen to union leaders
and so on saying to me that they are aware that the companies
can themselves move. It is not just that the workers can come
from Hungary but the factory can go to Hungary as well and it
can go to Hong Kong and so on. This is in some sense the front
end of globalisation; it is one example of it. We should not just
focus on this flow of workers from eastern Europe, we should think
of it as a bigger part of the global phenomenon.
Q323 Lord MacGregor of Pulham Market:
I suspect, in terms of manufacturing plants, that factor of going
to Hungary or elsewhere is a bigger factor because it is happening
on quite a scale. May I also ask you about those who are not in
that sort of manufacturing area, the self-employed, a huge number
in London in the tourist industry and so on? Is that a displacement
factor or not?
Professor Blanchflower: I do not know that it
is a displacement factor. We certainly have a couple of puzzles.
The first puzzle we have is why the vast proportion of jobs in
the last couple of years has been self-employed at a time when
apparently there is a flow of workers from eastern Europe into
self-employment whom we do not even count, so you might think
that the estimates are relatively low. We know relatively little
about the earnings of the self-employed. For example, most of
the so-called wedge between the AWE and the AEI actually excludes
them entirely. We know relatively little about what is going on.
It does not appear, if you look at the data, that there has been
a displacement because there has been a huge growth in self-employment.
That would be a good cover; it may or may not continue. However,
if you look over the last two years something like two thirds
of all job growth has been in self-employment. That is an understatement
of how many self-employed there are.
Q324 Lord MacGregor of Pulham Market:
Or keeping wage rates stable or low in a lot of those sectors
where self-employed are used?
Professor Blanchflower: We might well think
so but, again, we have some problems and it seems to me that the
fact that, for example, the self-employed do not have to register
on the Worker Registration Scheme does not help us and it is hard
to get them on it. It seems to me that that is something which
probably should be fixed and I see no good reason why they should
not be registered on it. We would like to know how many are here.
We can only really pick it up badly from the Labour Force Survey.
I take your point entirely and it is something I have written
two or three papers on recently; it is a puzzle but thank you
for the question.
Q325 Lord Griffiths of Fforestfach:
Two questions on the impact of immigration. Firstly on labour
market participation and secondly on training, especially training
of young people.
Professor Blanchflower: I am afraid I do not
know a lot about quite what the impacts have been. We have seen
a couple of puzzles at the moment; the participation rates of
older workers have been quite substantial and risen. We have tried
again at the Bank to think about what has gone on with the young.
Perhaps I am not quite answering your question in terms of training
because we do not really know much about it but it does seem a
puzzle that we have a growing proportion of the unemployed who
are young. If you take 18- to 24-year-olds since 1997, each year
the proportion of the total unemployed ticks up by one per cent
a year. We do not know a great deal whether it has to do with
lack of training of those folks or not being trained for the particular
jobs in place. This is an area we do not know very much about.
It does not appear that these guest workers coming in are actually
having a big effect on the older workers' participation rates
or on this unemployment number. We tried hard to see whether we
could see an effect. There may be one, but it does not appear
to be in the data. So, again, this is an area where we need more
work. No-one seems to be doing any work on it. We are trying but
there are only a few of us.
Q326 Lord MacGregor of Pulham Market:
I have a horribly general question which to some extent you have
answered already, so it is a general mop-up question. What is
the impact of immigration on the income per head of existing residents,
that is the non-migrants, in the short and long run? How would
you assess the overall economic aspects of immigration on that
existing population in the UK?
Professor Blanchflower: I take a view that there
has been a significant positive. What you have seen actually,
when I am talking particularly about the flow of workers post-2004,
particularly from the A8, which is the area that I have worked
the most on, if you look at the Government's submission to this
inquiry, they talk about the benefit to the country in terms of
the contribution of a migrant in that they contribute more than
they take away. However, you might think of it in a sense that
this group of workers is really quite different in that their
probability of working is so very high. As a group they are not
unemployed, they are not drawing benefits, they are clearly working
and they are not drawing from the total population. I take the
view, as a member of the Monetary Policy Committee, that this
is, if you like, raising the trend growth of the economy and in
a sense it is to some degree holding back wage inflationary pressures
that we have seen in the past. There is a benefit in the short
run but we might think going forward there will be macro benefits
and in some sense people are more realistic about wage pressures
but we will see going forward.
Q327 Lord Griffiths of Fforestfach:
May I just clarify that? In earlier evidence, people argued very
strongly that there was no evidence that there was an increase
in income per capita from immigration. In your evidence to us
what you suggested at one stage was that the productivity of migrant
workers was possibly higher than the productivity of existing
workers. Would they not take the benefit of that themselves? Why
would that raise the income per capita of the existing workforce
in the UK or indeed of the population of the UK?
Professor Blanchflower: That is a good question.
These are issues that we are trying to understand and explore.
A good way of thinking of this is that employers do not have to
hire these folks, they do not have to hire them; they are choosing
to, they find them productive, they are finding them beneficial
to their business and they are keeping the prices of their products
down. That is having positive effects elsewhere through the distribution.
It is helping employment of others, it is keeping this firm going
and it is helping shareholders. This is early days but it appears
to me that if these Eastern European workers were not beneficial
to the firm, they did not have to hire them. There is no legislation
from you saying these folks have to be hired; this is a free market.
This is a choice and they are productive. In the future, whether
that will continue we shall see, but it is hard to think that
this has not been a beneficial flow to the UK. I was in Germany
the other day discussing this and basically the German Government
were talking about how foolish they were to allow this flow of
workers to come to the UK and how they have messed up so badly
and the UK were so lucky to have this flow of workers and they
would have liked them. So well done.
Q328 Lord Best:
Do you feel that the Government's submission to us was helpful?
Would you agree with it and what do you think about the new points-based
system for managing migration?
Professor Blanchflower: I read the two submissions.
I am not going to say whether I agreed or I disagreed with it.
It stated the set of economic arguments pretty well and laid out
the data quite well. In fact, in some of the tables I viewed they
expanded them quite well. Perhaps the strength of the report was
the idea that we need to improve the statistics. The weakness
of it was: well, what are you going to do with those statistics
once you have produced them? It was singularly lacking. The resources
have been put in to collect data on this, that and the other for
members of this Committee. Well, so what? What is the data actually
going to tell us? I thought it was somewhat lacking in "Let's
analyse it and work out what is going on".
Q329 Lord Best:
The last bit was what you thought of this new points-based system
for trying to manage immigration?
Professor Blanchflower: I do not have a particular
view on that. It does make sense to try to think about matching
flows of workers, migrants to available jobs, and the idea of
having a Migration Advisory Committee staffed with labour economists
is a good idea. David Metcalf is a good appointment and I am going
to pass, as you might expect me to.
Q330 Lord Layard:
I just wanted to go back to a couple of things you just said which
might be related. One is the increasing or non-decreasing rate
of non-participation, especially among young people in the labour
market. I suspect that that is particularly more in London than
elsewhere; I am not sure. That is certainly a possibility. Secondly,
you pointed out that having immigrants has held down wages, that
there is some link between participation and wages. Is it not
possible from the two things you have just said that the volume
of immigration has actually reduced the level of participation
on the part of domestic residents?
Professor Blanchflower: That is a thought that
I have had for quite a long time and I have been trying to see
whether I can find something in the data to sustain that. We and
members of the staff at the Bank have been trying to look for
that. We do not, at this point, see any patterns. The argument
you have made is a clear one and a good one. At the moment, it
is hard to see it in the data and there is an example in the submission
I gave you. Can you look at changes in participation rates by
area? There is one little graph which is quite interesting and
has to do with the youth unemployment numbers. You have this growth
in youth unemployment, to what is it due? Is it due to these changes?
It turns out that there is nothing in the data I can show you
to suggest that where the growth in youth unemployment has been,
it is not because of the growth of migrants. We have been trying
very hard to show you that. I cannot see much evidence that that
is true and I do not have a good explanation as to why it is that
that youth unemployment number is jumping. You might think it
has to do with the way the Minimum Wage operates, you might think
it has to do with jumping from the youth to the adult rates, but
when you try to plot it across areas and you think maybe in the
north it might be greater, you cannot see anything in the data.
So your arguments are good ones. I have been trying to see whether
we can sustain it in the data and maybe it will come but at this
moment I cannot see it and I do not have an explanation in the
data. That is not to say you are not correct.
Q331 Lord Turner of Ecchinswell:
I just want to be absolutely clear. You have suggested that there
is a beneficial impact of immigration but I wanted to return to
a previous question. Are we just talking GDP or GDP per capita?
There is a tendency of some people to assume that a faster rate
of increase in GDP is a good thing but you could argue that the
only thing that matters is GDP per capita and we have no interest
in GDP. There are certain circumstances in which you could have
significant immigration but no impact on GDP per capita. If immigration
were in precisely the same skill mix as the native population
and if we imported capital to employ it, then it is easy to show
that certainly at the GNP per capital level, once you have paid
for that capital, we would simply have a bigger economy but nobody
would be any richer. Are you, however, saying that you think in
a sense British people on average get richer and is it sustainable?
It must be some comparative advantage effect. What is it?
Professor Blanchflower: It is some comparative
advantage effect, but the way I have tended to look at it is,
let us say, we make a number like half a million folks come in
at any one time who are productive, and the proportion of those
people who are working is, let us say, 100 per cent, and 50 per
cent of the existing workforce are working, what you are bringing
into the calculation are twice as many people who are actually
being productive in that group. If you ask me a separate question
about migration from other places, I would give you a somewhat
different answer but if we are focusing on this flow, this flow
of workers who are not here for benefits, do not get benefits,
have not claimed benefits are disproportionately in work—
Q332 Lord Turner of Ecchinswell:
The core fundamental is just that the ratio of workers to dependents
in this immigrant population is higher than in the existing population
both because they have high preference to be in employment and
they are in the age groups which tend to be in employment. That
is the core of it rather than the comparative advantage effect.
Professor Blanchflower: Yes, the comparative
advantage is one point, but for this group that second argument
is just cleaner.
Chairman: Thank you very much. It was
very helpful.
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