Price adjustments and other alternatives
to immigration
109. Professor David Metcalf, Chairman of
the new Migration Advisory Committee (MAC) that advises the Government
on immigration and labour shortages, told us that "the whole
notion of shortages is a bit of a slippery concept" (Q 557).
Basic economic theory suggests that labour shortages occur when
the demand for labour exceeds the supply of workers who are qualified,
available and willing to do the job. Vacancies exist because employers
wish to recruit more workers than are willing to work at the prevailing
wage. In a simple economic model of a competitive labour market,
where demand and supply of labour are critically determined by
the price of labour, most labour shortages are temporary and eventually
eliminated by rising wages.
110. In practice, labour markets do not always
work as the simple textbook model suggests. How, and how quickly,
prices clear labour markets can depend on the source of the labour
shortages, which could include sudden increases in demand or inflexible
supply (because, for example, it takes time to train local workers).
Moreover, how local labour supply reacts to a change in wages
varies across sectors and occupations. A 10% wage increase may
be enough to encourage more British workers to fill vacancies
in hospitality, but it may not be enough to increase domestic
labour supply in sectors such as agriculture and others that involve
work that some workers consider as "low status". In
a few sectors, wages may have to rise significantly to attract
local workers. However, Professor Rowthorn argued that "there
may be one or two jobs like that but markets exist … if wages
are higher, eventually people will be drawn into occupations"
(Q 17). The recent ITEM Club report notes that "we do not
know how the domestic labour supply would have reacted to rising
growth in 2004-06 in the absence of increased immigration. It
might have proved surprisingly [responsive] via increased participation
rates in marginal groups".[53]
111. Most of our witnesses from employer organisations
were explicit about low pay being a key explanation of the difficulties
employers have with recruiting local workers and of the high share
of immigrant labour in their sectors. For example, explaining
the reasons for shortages in the social care sector, Mr Hadley
of the REC, said that "we just cannot get enough people on
our books to fill the need and part of it is the pay is actually
quite low and is a factor possibly" (Q 145). Josie Irwin
of the Royal College of Nursing argued that "if nurses were
paid a fair salary, then they clearly would have an economic impact
in attracting domestic trained nurses to join the workforce"
(Q 296). Ms Irwin further suggested that there would be a
greater supply of domestic trained nurses if the Government had
provided more training places and made nursing more attractive
by offering higher salaries and better employment conditions 10
to 15 years ago (Q 299).
112. The NFU said that wages in agriculture are
significantly lower than in other sectors and that "migrants
perform tasks, at rates of pay, which most domestic workers would
be unwilling to work at" (p 100). This last comment
illustrates a key issue, namely, that employers' expressed "need"
for immigrant labour is often a demand for labour that can be
employed at current rates of pay, rather than at higher wages
that are generally necessary to attract labour in a competitive
market.
113. Immigration keeps labour costs lower
than they would be without immigrants. These lower labour costs
also benefit consumers, who then pay less than they otherwise
would for products and services (including public services) produced
or provided by immigrants.
114. A number of witnesses argued that raising
wages for workers employed to provide services in or for the public
sector is severely limited by cost pressures in the public sector.
Lesley Rimmer of the UK Home Care Association told us that "two
thirds of employers say it is difficult or impossible to recruit
locally at current rates of pay and these pay rates are primarily
a reflection of what councils are willing to pay since they make
up 80% of the purchasers of care services" (Q 300).
Dr Anderson argued that increasing wages to attract local
workers would require a reform of the UK's social care system.
"If there were no immigration, there really would have to
be a big re-think about how social care and care of the elderly
was organized; really big, back-to-first premises" (Q 30).
115. Dr Borman of the BMA explained how
the UK public health sector benefits from the employment of immigrant
doctors. He said: "Migrants are carrying their primary qualifications
and their expertise to the United Kingdom effectively for free.
It costs in the order of … a quarter of a million pounds
to qualify a doctor within the United Kingdom medical school system
and clearly, having a doctor who has qualified abroad, bringing
those qualifications means a net gain to the United Kingdom"
(Q 300). Making a similar point, Ms Irwin of the Royal College
of Nursing suggested in her evidence on the employment of foreign
nurses in the UK that "in general terms, the employment of
migrants is a deliberate policy choice to employ a workforce at
a lower cost" (Q 294).
116. It is clear that various low-wage sectors
of the UK economy (in both private and public sectors) are currently
heavily dependent on immigrant labour. Increasing wages to attract
more British workers to produce or provide a certain product or
service can be expected to lead to an increase in the price and
thus affect consumers of that product or service. In the public
sector, higher labour costs could result in higher taxes and/or
require a restructuring of the way in which some services such
as social care are provided. Nevertheless, the fundamental point
remains that labour demand, supply and thus the existence and
size of labour shortages critically depend on wages—the
price of labour. Arguments about the "need" for migrant
labour that ignore price adjustments are meaningless and misleading.
117. Increasing wages is only one among various
potential alternatives to immigration for responding to perceived
labour shortages. The list of potential options for employers
includes:
- increasing wages and/or improving working conditions
to attract more local workers who are either inactive, unemployed,
or employed in other sectors;
- changing the production process to make it less
labour-intensive, for example, increasing the capital and/or technology
intensity;
- relocating to countries where labour costs are
lower;
- switching to production (provision) of less labour-intensive
commodities and services;
- employing immigrant workers.
118. Although not all of these options will be
technically feasible for all employers—for instance, the
work of waiters in the hospitality sector cannot be off-shored—many
employers will face a number of options. An employer's decision
on how to respond to a perceived labour shortage will naturally
depend on the relative costs of each of the alternatives. Just
as immigration may discourage employers, including those in the
public sector, from raising wages and investing in training and
skill development of the domestic workforce (see the discussion
in chapter 3), the ready access to cheap migrant labour may
reduce employers' incentives to consider other options, in particular
changing production methods.
119. Professor Chiswick noted that, if there
were fewer low-skilled workers in the harvesting of field crops:
"Farm managers would pay higher wages to attract native-born
workers and this would speed up the mechanization of the harvesting
of field crops. The technology is there, but with low wages for
farm labourers there is little economic incentive for the growers
to mechanize or invest in other types of new technology"
(p 425). This was precisely the experience of the US tomato-processing
industry where growers argued that the industry could not do without
migrants. But subsequent mechanization increased productivity
and reduced prices.[54]
120. Professor Christian Dustmann pointed
out that "there is evidence that technology adjusts to the
availability of labour in particular parts of the skill distribution"
(Q 175). He gave the example of "the wine industry in
Australia and California, which is highly labour intensive in
California and highly mechanised in Australia, the reason being
that it is very easy to get unskilled workers in California but
not in Australia" (Q 175).
121. Mr Ratcliffe of the Construction Confederation
suggested that off-shoring certain types of production, or importing
certain products, is possible in the construction industry but
critically depends on the cost incentives that employers are confronted
with: "... [offshoring] is quite feasible but it is a question
of economics as to whether it is cheaper. Certainly in Catterick
they are doing some military accommodation up there and all the
bathrooms are simply transported in, having been made in factory,
so certainly one of the responses to skills shortages will be
more off-site prefabrication; it is an idea which is catching
on quite nicely in the industry" (Q 143).
122. We recognise that many public and private
enterprises currently rely upon immigrants—from the NHS
to City institutions, from the construction industry to residential
care. We do not doubt the great value of this workforce from overseas
to UK businesses and public services. Nevertheless, the
argument that sustained net immigration is needed to fill vacancies,
and that immigrants do the jobs that locals cannot or will not
do, is fundamentally flawed. It ignores the potential alternatives
to immigration for responding to labour shortages, including the
price adjustments of a competitive labour market and the associated
increase in local labour supply that can be expected to occur
in the absence of immigration. Each of the alternative ways
of responding to labour shortages involves its own economic costs
and benefits. Rather than deducing a need for immigrant labour
from the existence of vacancies in the economy, the discussion
about how to respond to labour shortages should be based on analysis
of the feasibility and net benefits to the resident population
from the various alternatives including immigration.
123. Immigration encouraged as a "quick
fix" in response to perceived labour and skills shortages
reduces employers' incentives to consider and invest in alternatives.
It will also reduce domestic workers' incentives to acquire the
training and skills necessary to do certain jobs. Consequently,
immigration designed to address short term shortages may have
the unintended consequence of creating the conditions that encourage
shortages of local workers in the longer term.
124. We recognise that there is a case for
enabling employers to hire significant numbers of highly-skilled
foreign workers. But whether this implies net immigration is an
issue to which we return later.
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