Select Committee on Economic Affairs Minutes of Evidence


Examination of Witnesses (Questions 510 - 519)

TUESDAY 15 JANUARY 2008

Mr Liam Byrne, Mr John Elliott and Mr Jonathan Portes

  Q510  Chairman: Welcome, Minister and gentlemen. Thank you for your time. I would like to thank both sets of witnesses today for the written evidence that they have sent in. Could I ask you just to speak, if possible, fairly slowly and clearly for the benefit of the stenographer and indeed for the Members. I think this session is being televised so it might be useful, Minister, if you could just introduce yourself and your colleagues and then if there are any introductory remarks that you wish to add, you can do that or we can go straight into questions.

  Mr Byrne: My Lord Chairman, I just wanted to start by saying how grateful I am that the Committee is looking at this question. The question in front of you is a question that is generating a debate across the West at the moment. We saw it writ large in the French elections last year, we are seeing it writ large in many of the primaries in the American presidential race at the moment and we see it in our own debate every day. I am particularly grateful for the timing of this because in about 80 days' time we introduce the points system in the UK and it is obviously crucial that we understand the right mix of economic migration that maximises the UK's national interest. So this is an extremely important Committee report that we are looking forward to. On my left is Jonathan Portes who is the Chief Economist at the Department for Work and Pensions, and on my right is John Elliott who is the Chief Economist at the Home Office.

  Q511  Chairman: Thank you. Could you tell us why the Government has chosen to focus on the overall gross domestic product when assessing the economic impact of immigration, rather than the GDP per capita or the income per head of the preexisting population? Would you agree that a focus on GDP per capita would imply much smaller economic benefits of immigration for British people than the Government has suggested in recent years?

  Mr Byrne: I do not think we did just focus on the contribution of migration towards GDP. We did try to look at the contribution of migration to GDP per capita as well. We tried to put about a page into the evidence that we submitted. As the Committee will know, understanding the impact of migration on GDP per capita is a little bit harder. Perhaps I can elaborate with three quick points before my colleagues might want to chip in. The theory is actually fairly straightforward. In a wider labour market it should be easier for employers to find a better match for the kinds of labour that they are seeking and, on the other hand, that kind of specialisation which becomes possible should in theory allow native workers to play to their strengths too. That should create a positive contribution towards productivity growth and we know that that in turn is good for British wages. We think there is a pretty close relationship between productivity growth and wage growth; in fact, it is probably a one-to-one relationship. Let me give you one point of evidence and one study which I think may be helpful. The point of evidence is, if you look at the wages of foreign-born nationals in the UK, which is the definition which we prefer because we think it is probably the best indicator of whether somebody is a migrant or not, a foreign-born national in the UK will earn on average about £424 a week in the final quarter of 2006. That compares to about £395 for a UK born person. So the wages are higher. Also, if you are looking at GDP per capita you should be looking at the fraction of foreign-born workers to their total population and if we look at that figure, it tells us that the employment rate of the foreign-born is higher too. So with higher employment rates and higher wages the averaging effect should be a positive contribution to UK native wages. The study which I think is useful here is the study by Dustmann, Preston and Frattini which was undertaken for the Low Pay Commission. It is only one study, but what that study did conclude is that a 1% cent increase in migrants as a share of the working age population should produce a 0.4% increase in average native wages. One of the key studies that exist points to a positive relationship between migration and GDP per capita. In the long run there will be more important effects, particularly from spilllovers. Do you want to talk about the longer run spillover effects?

  Mr Elliott: I agree with the points you made about the short run averaging, but in the longer run we will expect more dynamic effects to come into play. We can think of migrants contributing to the productivity of native workers directly through spillover effects. One might imagine a migrant surgeon standing next to a domestic surgeon and them learning from each other. Secondly, there will be indirect effects because some migrant workers will allow domestic workers to do what they do best. For example, to use a common current example, if we have more plumbers then the chief executives, surgeons, judges, et cetera, do not need to be at home sorting out their plumbing, that can be done for them as those vacancies are filled.

  Q512  Lord Lamont of Lerwick: Is what you are saying that the larger the labour market the more optimal the outcome? Is that in effect what your first point meant?

  Mr Byrne: No. Growth will come from a couple of different sources. Obviously a bigger labour market will contribute to growth, but it may not necessarily contribute to GDP per capita. That is why what we have to do when the points system is introduced is make sure that the mix of migrants coming into the UK is economically beneficial. What I am offering is a calculation based on one of the key studies that has been conducted. It concluded there is a positive relationship of about 0.15% growth, that is a 0.15% increase in GDP per capita. What I thought would be helpful for the Committee is to try and put that in context and entrust it to other Government interventions. If you look at the contribution, for example, of skills of UK workers to GDP per capita, the Treasury said in 2006 that in the five years to 2000 the impact of improved skills was around 0.37% improvement to GDP per capita. The Dustmann study implied that the contribution of migration to GDP per capita was 0.15%. That gives you a sense of how migration is an important contributory factor.

  Mr Portes: That is absolutely right. The Dustmann figures that you referred to are an average over the 10 years. Over the 10 years to 2007, the share of migrants in the working age population increased by a little over 5%. Using the estimates in the Dustmann paper, that would imply an increase of close to 1.5% of GDP per capita of natives. That is over and above the extra GDP per capita that comes from the fact that the migrants themselves are paid better and more likely to be in work, which is the first effect. The second effect, which is this indirect spillover effect, increases the GDP per capita of natives on average over that period—to take the crude estimates from the paper—by 0.15% per year. That is not as large as the impact of upskilling the native population, but it is a pretty significant factor in overall productivity growth and it is certainly not one that we would regard as trivial or negligible.

  Mr Byrne: It is probably worth about £300 in GDP per capita growth over the decade.

  Q513  Lord Lawson of Blaby: May I just try and get you to clarify this because I think we are getting some kind of focus here. You seem to be conceding now, which I would have thought was self-evident, that it is GDP per capita that matters and not overall GDP. As you said, your points system is designed to get the mix which is most economically advantageous to this country. Mass immigration will inevitably lead to an increase in overall GDP, but you have now conceded in fact that is not what matters, it is GDP per head. As you well know, calculating that depends partly on the mix but it also depends on a whole lot of assumptions which are questioned and I do not want to go into that now, but inevitably the effect is relatively small. It is GDP per head which we need to focus on. We are thinking of the economic impact, I am not talking about non-economic issues. There are a whole lot of non-economic issues which are very important in the whole question of immigration. On the economic issues, which is our remit, you have now conceded that it is GDP per head and not overall GDP that we need to focus on and which tells us whether there is an economic benefit or not.

  Mr Byrne: It is not necessarily a surprise to conclude that the impact of migration on GDP per capita is relatively small because the fraction of foreign-born workers in the workforce is approximately 12.5%. In any given year, the new flow of foreign-born workers into the workforce will only be a very, very small fraction of the total workforce, and so it is not a surprise that each year the impact of migration on GDP per capita growth is small and that obviously contributes to the difficulties in calculating it. I personally do think that GDP per capita is the key thing to focus on. I would not concede for a moment that an overall contribution to economic growth is unimportant and, my Lord, you would appreciate this more than most. If you look at some parts of our economy, eg the City of London and the huge growth that has contributed to our economy overall, that has been important in the tax base growing at the pace that it has grown. The City now contributes something like 24% of corporation tax receipts. Overall growth and, in particular, growth of certain kinds of sectors are important, but I think it would be a mistake to remove any kind of focus from the GDP per capita because, ultimately, if we want our country and our people to grow richer, that is going to be the key metric that I would look at.

  Q514  Lord Lawson of Blaby: That is the quality thing which you were talking about earlier, the mix. The people who come into the City are people who are contributing a great deal economically. If you take another example, say when West Germany absorbed the former Communist East Germany, there was a considerable increase in overall GDP but this did not improve the living standards of the German people.

  Mr Byrne: That is absolutely right. What I am saying is that I do not think we should ignore the contribution of migration to economic growth overall. That contribution towards economic growth has got to be an important element in our overall assessment of the cost-benefit analysis. It is perhaps not the one thing on which you would judge the success or failure of policy because that growth can contribute to increasing levels of tax which I would argue can then be recycled productively into certain kinds of investment. On that point I know we might also perhaps differ. I would agree with the point that GDP per capita is probably, amongst indicators, first amongst equals.

  Q515  Lord Lamont of Lerwick: I was not very clear about one of the points you made at the beginning. Like Lord Lawson, I think it is GDP per capita we should be focussed on. Could you just explain a little bit more clearly the theory behind what you said? I am not in any way wanting to rubbish the study. You have produced a lot of statistics. What I would like to understand is actually the theory that you think allows migration to contribute to GDP per capita. You gave two effects, one was the spillover effect, which I think I understand, but I am not sure what the first effect was that you were saying would increase GDP per capita. You were saying it was not just the effect of a wider labour market allowing the matching of skills from the biggest possible pool. What was the first mechanism that gives you the reason to think that GDP per capita might be favourably affected even by unskilled migration?

  Mr Byrne: It is good old fashioned "Adam Smith". It is back to the wealth of nations and pin factories and the concept of the specialisation of labour. In a wider labour market it should and it is—

  Q516  Lord Lamont of Lerwick: That is why I asked you if it was just the wider labour market to which you said no.

  Mr Byrne: In a wider labour market it will obviously be easier for employers to find a better match for their particular skills need and in theory that will free up native workers to focus on things that they are very good at.

  Q517  Lord Paul: Has any work been done on if you had not allowed the migration, what would be the GDP per capita?

  Mr Byrne: Good question!

  Mr Portes: If I can just supplement your answer to Lord Lamont. The first effect is indeed the standard effect. I think it is very important, if you draw the analogy with trade, to point out that the first effect is indeed the simple one of specialisation. Immigrants are not perfectly identical or perfect substitutes to natives, they are likely in many respects to be complements. The second effect goes beyond that and is analogous with the new trade theory which is based on the observation that there are dynamic effects from trade which go beyond those that simply come from the static model of things being either substitutes or complements, and that is illustrated in the data on trade by the example that we gain far more from trade with the European Union even though the European Union is quite similar to us in terms of economic structure than we do from trade with Africa even though Africa is very different in terms of economic structure. Similarly, I think we would expect from that theoretical perspective there to be dynamic effects in terms of increased competition, possibly cluster effects. The City of London is an obvious example of where you might have clustering effects that will generate gains which are quite difficult to quantify in short-term economic studies but do come through in things like the Dustmann work, even though we can only speculate on the precise transmission mechanisms.

  Q518  Chairman: Could I have a quick response to Lord Paul?

  Mr Portes: It is impossible to say what would have happened to Britain if there were no immigration. I think it is exactly the same as the answer to people who say, "If you look at simple trade models, the gains from trade are not that big," to which the answer is, "That is true in the simple model—but compare North Korea and South Korea." The same thing is true of migration. Zero immigration would almost certainly have very substantial negative effects that a simple model will not give you but are almost certainly there if you compare the experience of countries with radically different policies.

  Mr Byrne: Not least because of its impact on inflation.

  Mr Elliott: I agree it would be impossible to estimate what the impacts of zero migration would have been, given that migrants are such an integral part of our labour market, but NIESR have produced a paper that estimates the impact of A8 migration over the next ten years under certain quite strict assumptions and they show that GDP per capita in that exemplification is about 0.27% higher after ten years than would otherwise have been the case.

  Mr Byrne: If you compare that 0.27% to the 0.37%, which we think is the contribution from upskilling the labour force, you can see how the contribution towards GDP per capita could in relative terms be quite significant.

  Q519  Lord Layard: I wanted to ask about family reunion. This is obviously quite a major category of immigration, with impacts on housing demand and so on. This is not much discussed in the public debate and not much covered in your evidence. Could you give us a note on the statistics of immigration for family reunion and the rules governing it? Secondly, if there is a worry about the impact of immigration on housing demand or whatever, do you think there is any scope for varying the rules for family reunion?

  Mr Byrne: This is a very good question. It was something I was going to raise a moment ago. It goes to the terms of reference of your debate. I think the scope of this inquiry is about the economic impact of migration, but there are types of migration into Britain on which it is very difficult to put a price or estimate a value. What value would you put on the right of freeborn British citizens to marry whoever they like wherever on earth they were born? What value would you put on Britain honouring its tradition of providing humanitarian protection to those who are in need? Many of the people who come into the UK through those different routes will have potentially quite big impacts on the overall business case for migration. We know, for example, that the labour market participation rates of many people who will have come to Britain as spouses can, in some communities, be much lower than the national average and in some cases very much lower than the national average. Equally, we know that many of those who have been granted refugee status or humanitarian protection or asylum by the UK will also have lower labour market participation rates, not least because they may well be suffering trauma or other mental health problems. What I think is great about this Committee's debate is that it is looking at the economic impacts of migration overall and it does throw up some of these quite profound questions about the value that we put on different kinds of routes. I will happily provide that note to the Committee. The Committee will know that as we now move towards the start of the points system—it starts in under 80 days' time—we are looking at other routes too. The Home Secretary has gone into consultation on some of the rules around marriage, for example, such as whether we should require an English test before people are granted a spouse visa. In some parts of the country that will be quite controversial, but actually we know that if you can speak English it has a very positive impact on your labour market success rates. Wages are much higher if you can speak English—you integrate and assimilate into the labour market much earlier. But we are also looking at short-term visitor routes as well. We are trying to systematically work our way through the different channels into the UK at the moment. I would be very happy to provide a note on that because it is a very important part of the overall analysis that you will have to pull together.


 
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