Memorandum by the Institute for Public
Policy Research
Submitted to the House of Lords Select Committee
on Economic Affairs relating to oral evidence presented by Dr
Dhananjayan Sriskandarajah on 8 January 2008.
The Institute for Public Policy Research (ippr)
is the UK's largest independent policy think tank. In recent years,
the ippr has published several reports that cover the economic
impact of immigration and make, inter alia, the following observations
that may be of interest to the Committee:
— While the impacts of immigration
on GDP growth are well-rehearsed, some of the most important economic
benefits of immigration may lie in areas such as meeting acute
short-term skills shortages (e.g. carpenters), overcoming structural
or seasonal labour shortages in some sectors (e.g. agriculture),
allowing the cost-effective provision and/or rapid expansion of
public services (e.g. healthcare or education), in fuelling growth
in lagging UK regions (e.g. North East) and in boosting the international
links and competitiveness of key sectors (e.g. finance and higher
education).
— The UK's foreign-born population,
on average, makes a relatively stronger contribution to the exchequer
than the UK-born population.
— Most of the largest foreign-born
groups in the UK do relatively better on average than the UK-born
average on many of the socio-economic criteria for which data
are available.
— The arrival of A8 migrants in recent
years has helped boost the UK employment rate and has largely
been complementary to the occupational and spatial distribution
of the UK workforce.
— We estimate that there are more British
nationals living abroad than there are foreign-born people in
the UK, and that sustained emigration of British nationals will
have important economic impacts that cannot be ignored.
— Neither the assumption that the UK
only needs high-skill migrants nor that the UK will be able to
access sufficient numbers of low-skill migrants from within the
European Union hold.
— There is a risk that current Government
measures (and Conservative party proposals) will unduly restrict
or inflexibly manage key streams of highly skilled economic migrants.
— Regularising the status of some immigrants
who are living and/or working without permission is likely to
be the most fiscally and operationally efficient approach.
— There are very good reasons for early
and effective interventions to equip new migrants with the skills
needed to integrate into UK labour markets.
The reports from which these observations are
drawn are referenced at the end of this document, have been made
available to the Clerk to the Committee and can also be found
at www.ippr.org/migration.
In addition to the above points, we would welcome
the opportunity to discuss the following issues:
1. The lump of immigrants fallacy
One of the most persistent temptations when
discussing migration is to accept without question that "immigrant"
is a sensible category of analysis. As will have been abundantly
clear to the Committee, immigrants are a heterogeneous bunch:
they come to the UK for different reasons, have different immigration
statuses, have a range of socio-economic characteristics, and
so on. Unfortunately, the usual ways of categorising and collecting
data on immigration involve some major shortcomings: "foreign-born"
could include the child born overseas to two British people (a
sizeable proportion of German-born people in the UK are children
of British armed forces posted in Germany); "foreign national"
does not include those who have been naturalised; neither term
captures the British descendents of immigrants; and counting ethnic
minorities misses out on large numbers of white immigrants (especially
important when the largest country of origin of immigrants last
year was Poland).
More importantly, it is also assumed that "immigrant",
however defined, is a meaningful way of categorising people. The
immense differences between subgroups in the immigrant population
(eg country of origin or route of entry) and even bigger differences
within groups can often mean that lumping people together as immigrants
is almost meaningless. This is clear when we look at the socio-economic
characteristics of immigrants by country of origin. For example,
while American-born and Canadian-born immigrants have average
annual incomes more than one and half times the UK-born average,
those who are Turkish-born and Somali-born earn only two-thirds.
Similarly, seven of the largest country of origin immigrant groups
are half as likely as the UK-born population to be living in social
housing, while seven other groups are more than twice as likely.
Similarly, if we are to be sensible about explaining socio-economic
characteristics or identifying explanatory variables for socio-economic
outcomes, someone's status as an immigrant may not be nearly as
important as other factors. Taken together, this should be reason
to treat any claims about all or average immigrants (even, it
should be said, the observations from ippr's own work made above)
with great caution.
2. The economic impacts of non-economic immigrants
The heterogeneity discussed above has another
important implication for anyone interested in the economic impact
of immigration: should we consider the economic impacts of all
immigrants in the same way? In other words, is it right to assess
the economic impacts of someone in the UK for non-economic reasons
(eg a refugee who is genuinely fleeing persecution or a spouse
of a UK national) in the same way as someone who is here for economic
reasons (eg a work permit holder here to fill a vacancy)? Unfortunately,
again because of data shortcomings, most analyses of the economic
impacts of immigration inevitably end up considering the economic
impacts of all types of immigrants together. While it is sensible
to assess all immigrants taken together when questions of scale
are being discussed (eg to plan for the provision of public services),
it seems less wise to include all immigrants when judging the
economic impacts of immigration.
Indeed, it is little wonder that studies that
lump all immigrants together find that their characteristics and
therefore their economic impact differ only marginally from the
UK-born. While it may be reassuring that foreign-born people on
average earn more, work longer hours or make stronger fiscal
contributions than the UK, this should be viewed as a bonus rather
than an expectation. An assessment of whether those who are admitted
exclusively or primarily on economic grounds are contributing
to the economy, something that is sadly missing from public discussions
of immigration, is likely to reveal a more positive picture.
3. More British jobs, fewer British workers
There has been a lot of talk lately of migrant
workers "taking" British jobs, but the evidence suggests
that, due to an ageing population and high emigration, the British
working-age population has actually shrunk over the last year.
Initial research from ippr's new project on the "Economics
of migration" suggests that the fall in the number of UK-born
people in employment are more than accounted for by a fall in
the number of UK-born people of working age. As shown in the figure
below, the UK-born working age population fell by 272,000 between
Q2 2006 and Q2 2007. This fall is likely to be the result of a
relatively larger number of people reaching retirement age compared
to those entering the working age population, and because of the
net emigration of UK-born working age people. During the same
period, the total number of UK-born in employment dropped by approximately
230,000[1].
This suggests that demographic changes in the UK-born population,
rather than the arrival of immigrants, is likely to be driving
any reduction in the number of UK-born people in employment.
This hypothesis is confirmed by the fact that
the UK-born population has experienced a stable employment rate
of around 75% over the last decade, as shown in Figure 2. Despite
the higher number of immigrants in the country, the proportion
of UK-born in employment over the total UK born in working age
remains at the same level as 2001, without significant variations
during the decade. On the other hand, given that many recent migrants
are young and in work (only 3% of foreign nationals applied for
a benefit within six months of being issued with a National Insurance
number), the employment rate of the foreign born has increased
by almost 4 percentage points in the same period.
4. Zero net migration
It is also increasingly common to hear suggestions
that the UK should impose a policy of zero net migration; that
is, limiting the numbers of immigrants to the UK to the same level
as emigration in the previous year. While this suggestion may
seem sensible at first, it also lumps together all immigrants
as though they were the same (a retiree leaving the UK is unlikely
to have the same impact as a young worker entering the UK), would
result in inflexible restrictions on economic migration, and would
almost certainly result in substantial increases in tax if public
expenditure was maintained at current levels.
Given changing demographic characteristics and
what we know about the role of net immigration in adding to and
changing the characteristics of the UK population, it is likely
that zero net migration coupled with low fertility rates will
lead to a falling population in the coming decades and higher
dependency ratios. While it is certainly true that very high levels
of net immigration will be needed to make a substantial dent in
dependency ratios, commentators who call for zero net migration
seem not to have realised that the converse does not hold. Cutting
migration to zero would have dramatic results as the UK population
falls and ages.
A falling population leads to falling demand
for goods and services, which in turn is likely to lead to price
deflation as companies find themselves with fewer and fewer orders
and an over-supply of their goods and services. The great danger
of deflation, as recent experience in Japan shows, is that people
begin to expect it and delay spending because prices are expected
to be lower in the future. With depressed consumer spending comes
recession, and job losses follow.
With fewer births than deaths and zero net migration,
the proportion of retired people in the population as a whole
will rise, and the burden of looking after the elderly will fall
on a shrinking working-age population who pay taxes to fund public
services. The graph below draws on current work in progress at
ippr (Figure 2) and shows the dependency ratio (the number of
dependents per 1,000 people of working age) in each of the Government
Actuary Department's 2006-based population projection scenarios,
as well as the zero net migration scenario (where immigration
and emigration balance). It also presents projections of what
would happen with zero gross immigration, ie not letting anyone
into the country on a permanent basis.
Note to Figure 2: The calculations for Figure
2 are based on the assumption that working age for men and women
is defined as 16 to 64 years of age, and pensioners are defined
as aged 65 and over. This assumption is at variance with the GAD
estimates of dependency ratios which assume that the retirement
age for women is equal to the state pension age—ie 60 before
2010, followed by a gradual increase to 65 by 2020. This affects
the dependency ratio projections in the period up to 2020—for
example, GAD's estimate of the dependency ratio for 2007 is 607
dependants per 1,000 workers, whereas our estimate is 507. ippr
is currently revising its dependency ratio projections (and the
associated tax calculations shown in Figures 3a and 3b) to use
the official GAD assumptions on retirement age. Please note that
this is current work in progress at the ippr as part of our Economics
of Migration project.
There is relatively little difference between
the dependency ratios in the principal and low and high net migration
scenarios. In the high migration scenario, there will be 717 dependents
per 1,000 working-age people by 2076, whereas in the low migration
case, there will be 733. However, in the zero net migration scenario
the picture looks considerably bleaker, with 765 dependents per
1,000 people of working age. In the zero gross immigration scenario
the dependency ratio is much higher by 2076, at 837. The number
of children per 1,000 remains relatively stable between the cases,
and it is the retired population that is most affected by differences
in migration levels. In the zero net migration scenario there
will be 492 retirees per 1,000 working-age people by 2076, compared
to 445 in the high migration case.
ippr's analysis of what this might mean using
our tax/benefit modelling shows that a zero net migration policy
would require significant tax increases to maintain fiscal balance
making reasonable assumptions about spending per head of the population
compared to GAD's range of migration projections, in range of
an additional 0.4 to 1.2 pence on income tax by 2018, and 1.1
to 2.7 pence on income tax by 2028(see figure 3a below). A zero
gross immigration policy would lead to even higher tax increases
of between 3.4 and 4.9 pence on income tax by 2028 (see figure
3b below).
Figure 3a
AMOUNT OF EXTRA INCOME TAX (PENCE) PAYABLE
UNDER ZERO NET MIGRATION SCENARIO RELATIVE TO:
Figure 3b
AMOUNT OF EXTRA INCOME TAX (PENCE) PAYABLE
UNDER ZERO GROSS IMMIGRATION SCENARIO RELATIVE TO:
5. The missing counterfactual
What is sorely missing from almost all discussions
of the economic impact of migration is the counterfactual. While
there are heated discussions of whether this or that aspect of
migration is good or bad, it is rare for anyone to ask what would
have happened without migration. Recent discussions around whether
A8 migrants are crowding out local workers or keeping wages down
have completely ignored the question of what might have happened
had UK employers not had access to such highly motivated and hard-working
migrants. Nor are there discussions of the choice facing an economy
such as the UK's between importing workers or exporting jobs.
While this is in large part due to the lack of good quality analysis
of this sort, it is also testament to the lack of appetite to
consider immigration in a broad or global context. We hope that
this Committee's inquiry will be one such opportunity to consider
the economic impacts of immigration in such a sensible fashion.
11 January 2008
1 Only includes those in employment who are of working
age (Between 16 and 64 years for men and 16 and 59 years for women) Back
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