Examination of Witnesses (Questions 510
TUESDAY 15 JANUARY 2008
Mr Liam Byrne, Mr John Elliott and Mr Jonathan Portes
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
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.
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
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 periodto take the crude estimates from the paperby
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
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 modelbut 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
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
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 systemit starts in under 80 days' timewe
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 Englishyou
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.