Memorandum by the Chartered Institute
of Personnel and Development
The Chartered Institute of Personnel and Development
(CIPD) has130,000 individual members and is the UK's leading professional
institute for those involved in the management and development
of people at work, including recruitment and selection, pay determination
and skills training, We have members in every sector of the economy,
working for organisations in total employing half of all UK employees.
The CIPD welcomes the opportunity to submit
this memorandum to the Committee. The memorandum outlines the
CIPD's assessment of the economic impact of the recent high level
of immigration to the UK and the implications for public policy.
The assessment is based in part on views and evidence drawn from
surveys and focus groups of CIPD members, primarily our quarterly
Labour Market Outlook survey of approximately 1000 employers (conducted
jointly with KPMG) and our annual survey of recruitment practice.
Section 1 provides an overview of the CIPD's
position on immigration and related public policy issues. Sections
2-7 outline our analysis of the economic impact of immigration
in a manner that addresses most of the questions contained in
the Committee's call for evidence. Given the CIPD's specific interest
as a professional body, the memorandum focuses mainly on labour
market and employment related aspects of immigration.
1. The CIPD's overall view on immigration
to the UK and managed migration policy
1.1 Surveys of CIPD members show that one
in three UK employers are actively recruiting migrant workers
to fill job vacancies at all skill levels and in many sectors,
ranging from agriculture and food processing to IT, shops, hotels,
bars and restaurants, private care homes, and the public services.
1.2 The vast majority of CIPD members report
that migrant workers make an important contribution to the organisations
that employ them, their customers and clients and the economy
as a whole. Migrant workers help employers meet skill shortages
and overcome broader recruitment difficulties.
1.3 However, the CIPD acknowledges that
immigration can be a mixed blessing—it conveys potential
costs as well as benefits to the economy and the various benefits
and costs are not evenly distributed.
1.4 Immigration can potentially give rise
to beneficial macroeconomic outcomes and by increasing the ratio
of people of working age to people of state pension age (the so-called
"support ratio") alleviate the financial burden of population
ageing.
1.5 On the cost side of the equation large
scale immigration can put pressure on economic and social infrastructure,
notably housing, transport, benefit payments, schools and hospitals
and the natural environment. There is also a risk that immigrant
labour can serve as a palliative to deep-rooted structural problems
in the economy. This might deter some employers from investing
in skills and improving recruitment and wider management practices
in order to make better use of non-migrant labour, whether employed
and in need of training, unemployed and actively seeking work,
or economically inactive but potentially able to work.
1.6 As for the distribution of costs and
benefits, employers, consumers and migrants accrue most of the
benefits while some local communities and people at a disadvantage
in the labour market incur most of the potential cost. The overall
scale and distribution of benefits and costs will be determined
by a combination of the level and composition of the immigrant
population (notably the degree to which the skills and employability
of migrant workers either complement or instead substitute for
those of non-migrants).
1.7 The CIPD's view, based on what our members
tell us plus an assessment of available evidence, is that the
recent high level of immigration to the UK—boosted mainly
by immigrants from the central and eastern European accession
(or A8) states that joined the enlarged EU in 2004—has had
a clearly identifiable positive macroeconomic impact but an uncertain
and possibly negative impact on some local communities and disadvantaged
non-migrants. In other words there are both winners and losers
from large scale immigration. The losers are most often young
and less skilled non-migrants, often from the UK's own less advantaged
ethnic minorities, ironically the descendents of earlier waves
of immigration.
1.8 Migration is a net benefit to the public
purse. But any beneficial impact on the support ratio is marginal
in comparison with other measures to tackle the financial consequences
of population ageing such as increased saving for retirement and/or
delayed retirement. The CIPD is not aware of any evidence that
either supports or refutes the suggestion that the availability
of migrant workers deters employers from investing in training
or improving management or working practices.
1.9 On the basis of this assessment the
CIPD concludes that the composition of immigration should be managed
in a way that maximises the positive economic contribution of
migrants and minimises the negative impact on non-migrants, especially
those at a disadvantage in the labour market.
1.10 The policy implication of the CIPD's
conclusion, in the current UK context of (mostly) free movement
of labour within the EU, is that government should allow entry
of economic migrants from outside the EU who wish to work in the
UK and who have specific skills or general abilities not readily
available in the UK or broader EU labour. However, entry of less
skilled or non-working non-EU migrants should be more tightly
controlled. The CIPD's conclusion is consistent with the Government's
impending point based system (PBS) for managing migration which
will start to be introduced in 2008.
1.11 The CIPD recognises that this will
inevitably frustrate some employers who wish to recruit workers
from outside the EU who are unskilled or who have occupational
skills but are unable to "score" the points required
for legal entry to employment in the UK. However, the acid test
of any policy for managing migration is that it meets reasonable
and legitimate employer need without detriment to the common good.
1.12 In this respect the CIPD's principal
concern is that migration should be managed in a way that achieves
the most favourable composition of migration for the UK economy
and labour market in terms of the relative share of skilled and
less skilled migrants. The CIPD takes no institutional view on
the appropriate level of migration.
1.13 A judgement of whether the overall
level of immigration is "too high"—and should
thus be limited in scale as well as composition—will depend
largely on consideration of the impacts on economic and social
infrastructure and the environment. The CIPD has not undertaken
analysis that would enable an informed opinion on this matter.
Neither has the CIPD undertaken analysis either of the so-called
"brain drain" effect of skilled migration to the UK
on the home countries of migrants nor of the benefit to these
countries of financial remittances that they receive from migrants
employed in the UK.
1.14 It is likely that the PBS will in practice
have some effect in limiting the overall scale of immigration
but it need not do so in principle. It is nonetheless possible
that substantial immigration flows composed largely of skilled
migrants might still place undue strain on economic and social
infrastructure, not to mention the fact that demand for less skilled
services generated by skilled migrants could at some point result
in shortages of less skilled workers that could not be met from
within the UK or wider EU. The introduction of the PBS therefore
leaves open the possibility that it might at some point in the
future be combined with an explicit numerical cap or quota on
migrant numbers.
1.15 The CIPD believes that to be effective
the PBS must obviously be well administered and secure necessary
compliance without excessive bureaucracy. The PBS also needs to
operate flexibly especially if at any point it were to be attached
to some form of annual immigration quota. In a dynamic labour
market it is difficult to plan for even short-term labour needs
with precision. Fixed quotas thus run the risk of being set so
high as to be meaningless or so low as to be prone to unforeseen
shifts in demand. An annual quota system would thus require some
mechanism to allow for reasonable adjustment to unexpected circumstances.
1.16 A PBS (with or without a quota) inevitably
requires enforcement machinery to counter the possibility that
some employers will try to recruit migrant workers illegally.
Such machinery may increase recruitment costs to employers. The
CIPD stresses the need to keep these costs as low as possible
but accepts that some extra cost is necessary in order to balances
the interests of employers with the wider public interest.
1.17 Alongside the PBS the CIPD believes
that more must be done to ensure that young people entering the
labour market, less skilled adult non-migrant workers and jobless
non-migrants are better placed to compete for available job vacancies.
The CIPD is encouraged by recent developments in welfare-to-work
and skills policies but is critical of the Government's decision
to link these developments to its managed migration policy under
the banner "British jobs for British workers"—this
slogan runs the risk of being heard as a political "dog whistle"
which appeals to elements in society whose views and activities
undermine the common good.
2. Analysing the economic and labour market
impact of immigration
2.1 The aggregate economic impacts of immigration
are higher employment if, in the absence of immigrant workers,
some job vacancies would otherwise remain unfilled, less inflationary
pressure if employers are able to fill vacancies without bidding
up wage levels, and higher labour productivity if migrants are
particularly skilled, relatively hard working or entrepreneurial
and/or if the availability of workers with these attributes provide
an incentive to employers to invest in improved techniques and
management practices in order to make use of them. It is also
often possible that the effort and performance of migrant workers
is a stimulus to improved productivity and performance of non-migrant
workers.
2.2 Each of these effects, or some combination
of these effects, will raise the potential level of output of
the economy and, if sustained, the trend rate of growth of output.
The labour market corollary is a reduction in the rate of unemployment
consistent with whatever inflation target is set by government
(in other words a lower sustainable rate of unemployment).
2.3 In addition to these macroeconomic outcomes
there are potential distributional impacts. The prime beneficiaries,
other than migrants themselves, are employers of migrants—who
are able to maintain or expand output at constant or lower cost—and
consumers of the goods and services produced by migrant workers
if these would otherwise only be available at higher prices. Potential
losers are non-migrant workers, or non-migrant jobless people
for whom migrants are substitutes, who may experience downward
pressure on pay rates or reduced work incentives. Unskilled or
less skilled non-migrants are those most likely to experience
this potential disadvantage.
2.4 The positive macroeconomic impact will
be maximised and the negative distributional consequences minimised
if immigrants participate in the labour market, are highly skilled
or relatively productive, are able to meet genuine labour shortages
rather than substitute for non-migrant workers or obtain employment
that would (or could potentially) otherwise have gone to non-employed
non-migrants. It is therefore important to know the composition
as well as the size of the flow of immigrants.
3. Migrants in the UK labour market
3.1 Well known data deficiencies complicate
understanding of the precise size of the expanding migrant workforce.
The CIPD hopes that developments underway at the Office for National
Statistics (ONS) will in due course overcome these deficiencies.
ONS figures nonetheless provide useful information on the composition
and labour market status of foreign born people living in the
UK (this group in total currently comprising around 10% of the
resident population).
3.2 The annual gross inflow of known immigrants
to the UK has in recent years reached record levels and exceeded
0.5 million. There is generally thought to be an additional, but
by definition uncertain, inflow of illegal immigrants. Accounting
for known emigration (also at record levels) the annual net inflow
of migrants is at present around 0.2 million. Roughly half of
known immigrants enter for work related reasons, some ostensibly
temporarily others with the intention of obtaining permanent residence.
3.3 Immigrants are predominantly of working
age and mostly aged under 50 years. According to the Labour Force
Survey (LFS), foreign born people living in the UK are on average
less likely than UK born people to participate in the labour market
and have lower working age employment rates (68% compared to 75%).
However, there are considerable differences between different
groups of immigrants and the average difference is largely accounted
for by differences in the labour market activity of women, especially
Pakistani/Bangladeshi women.
3.4 The employment rate of recent migrants
from the EU accession countries of central and eastern Europe
(from now on referred to as the A8) is much higher (82%) than
that of UK born people. The arrival of A8 migrants has therefore
helped to narrow the average gap in UK born and foreign born employment
rates.
3.5 The LFS also shows that foreign born
people in the UK are on average somewhat more likely to be relatively
highly skilled (to degree level) than UK born people (27% compared
to 22%) and somewhat more likely to have no formal skills (11%
compared to 9%). Again, however, the skill make-up of A8 migrants
is considerably different—only one in 10 is educated to
degree level while one in six has no formal skills. This is reflected
in relative pay levels with foreign born people earning on average
more than UK born people but A8 migrants, being mainly employed
in less skilled jobs, earning considerably less than the UK born
average. A8 migrants are mostly concentrated at the lower end
of the earnings distribution and fare less well in terms of pay
even than other groups of less skilled foreign born workers, notably
those from Pakistan and Bangladesh.
4. Why employers recruit migrant workers
4.1 Surveys of CIPD members commonly find
that skilled migrants are hired primarily for their employable
skills (this reason being typically cited by two-thirds of employers
as the most significant factor in recruiting migrants) their formal
qualifications (cited by 46% of employers) and relevant work experience
(55%). For less skilled or unskilled migrants work commitment/willingness
to work is the most important factor (cited by two-thirds of employers).
4.2 It is reasonable to assert that some
employers might be deterred from investing in training either
because of the availability of skilled migrant labour or because
the availability of unskilled migrant labour is a disincentive
to introduce higher value production or management practices that
require skilled workers. Unfortunately, the CIPD has no evidence
to either support or refute this assertion.
4.3 Around half of employers surveyed by
the CIPD in 2005 stated that they required migrant workers to
be proficient in English (whether recruited to skilled or less
skilled jobs). Only 2% of employers stated that they recruit skilled
migrants in order to reduce wage costs. However, this purpose,
while still relatively low, is almost five times more important
for employers hiring less skilled workers (9%).
4.4 Surveys by the CIPD also confirm the
view held by many employers that, at whatever job or skill level
employed, migrant workers score higher than UK born workers on
such performance criteria as productivity (43% of employers score
migrants higher), reliability (38%), absence (37%) and quality
of work (25%). It should be noted, however, that such views are
inevitably subjective and unlikely to be based on rigorous comparisons.
5. The impact of immigration on output and
economic growth
5.1 The net economic impact of the various
combinations of skills, employment rates and productivity of immigrants
is a matter of empirical investigation. The CIPD does not conduct
its own econometric studies but instead relies on those undertaken
by or on behalf of government departments, other public agencies
or independent analysts.
5.2 On the basis of a review of available
estimates of the impact of the recent A8 immigration to the UK—all
of which appear in the evidence collated for the Select Committee's
inquiry—the CIPD concludes that immigration has a positive
impact on output and increases the trend rate of growth of output.
The NIESR, for example, estimates that immigration during the
period 1998-2005 contributed to a rise in real GDP of around 3%,
and that the contribution of the A8 migration has been relatively
large (though the CIPD concludes that it is not entirely clear
that the impact of the A8 migration holds for either past or possible
future waves of immigration given the varied characteristics of
different groups of migrants).
5.3 Despite this immigration overall seems
to have an uncertain and probably no more than neutral impact
on output per head (ie adjusting for the corresponding impact
of immigration on total population) which is the best measure
of the impact on economic well being. However, the relatively
high employment rate of A8 migrants suggests that the A8 migration
has probably had a positive impact on output per head. But given
the employment composition of the A8 migrants and the absence
of any clear sign that their arrival has had a positive effect
on labour productivity the impact on output per head is likely
to be small. An assessment of the contribution of non-A8 migrants
to output per head is complicated by the fact that while on average
they are relatively productive they are also relatively less likely
to be in paid employment. A neutral impact would seem to be the
most reasonable assumption.
5.4 The macroeconomic impact of immigration
can also be gauged by the net contribution of migrants to the
public finances. This involves a comparison of the contribution
of migrants to tax revenues and what is spent on providing them
with social welfare benefits and public services. Such comparison
is sensitive to assumptions about the composition of migrant populations,
in particular numbers of non-working dependents.
5.5 The CIPD has not attempted its own calculation
and accepts the often quoted Home Office estimate that first generation
migrants make a net fiscal contribution of £2.5 billion per
annum. This figure is based on research conducted in 1999-2000
ie prior to the A8 migration. Given that A8 migrants are more
likely to be in work than other migrants and have fewer dependents
it is possible that their net fiscal contribution is higher although
this effect will be deflated by the higher incidence of A8 migrants
in lower paid employment.
5.6 It is also worth noting that because
migrant populations are not generally spread evenly across the
UK some localities may bear more of the fiscal burden than others.
This is evident from reports that some local authorities are struggling
to meet the cost of providing public services to migrants and
suggests a need to improve the allocation of public resources
to adjust for the uneven burden of the social infrastructure costs.
5.7 As a consequence of the relative youth
(and relative fertility) of migrant populations, immigration helps
to offset population ageing. Recent immigration to the UK has
added to the population of working age and is already serving
to reverse a previous trend decline in fertility rates. ONS projections
indicate that immigration will help maintain the support ratio
above three until the late 2020s. However, on the central ONS
projections even relatively large scale immigration cannot prevent
some decline in the support ratio. Immigration is not therefore
anything like a panacea to the financing of increased longevity,
the prime solutions to which are increased lifetime savings and
an extension of working lives.
6. The impact of immigration on unemployment
6.1 Net immigration since the late 1990s
has greatly increased the supply of labour, with the greatest
impact being felt as a result of the A8 migration. This represents
a beneficial supply side shock to the economy. The CIPD concurs
with the conclusion of some economists that the shock effect of
the A8 migration has lowered the UK's underlying sustainable rate
of unemployment. However, this conclusion can be only tentative
since the A8 migration has occurred alongside an overall increase
in actual unemployment as measured by the LFS.
6.2 Unemployment has risen because the demand
for labour has not yet increased sufficiently to absorb the increase
in labour supply resulting from the A8 migration. As a result
the UK labour market has in the past two years experienced a period
of excess supply sufficient to contain the rate of growth of average
earnings comfortably below that consistent with the Government's
inflation target. This is good news for future growth and employment
prospects since it indicates that there is scope for further non-inflationary
economic expansion—in other words the full benefit of the
A8 shock is still to be felt, assuming of course that the supply
of A8 workers is maintained.
6.3 The particular macroeconomic significance
of the A8 migration is that it helped contain inflationary pressure
in 2006 and early 2007 by preventing workers from obtaining wage
rises to match (largely energy related) increases in the cost
of living. However, while this helped the economy avoid what might
otherwise have been a marked increase in inflationary wage pressure
the outcome will not have been directly appreciated as a blessing
by the bulk of wage and salary earners who will have felt a squeeze
on their real incomes. Profit earners rather than wage earners
have therefore benefited most from the A8 migration even though
the real wage squeeze will have been beneficial for growth and
employment. However, the CIPD contends that in addition to keeping
pay growth in check slacker labour market conditions also made
life tougher for the least employable non-migrant job seekers.
6.4 The CIPD's contention that is since
the start of the A8 migration context migrant jobseekers have
generally fared better than UK born jobseekers. A big factor in
hiring decisions is the basic employability (or job readiness)
of jobseekers. CIPD surveys of employers' perceptions of the employability
of school leavers and the "core jobless" on benefits
find that in the same way that many employers subjectively score
migrant workers higher than non-migrant workers so too with non-migrant
jobseekers, especially those with few soft skills or who suffer
some other disadvantages such as a poor health record.
6.5 The problem of inadequate soft skills
seems to be a particularly evident when employers are considering
migrant workers alongside less skilled (or less experienced) young
non-migrant jobseekers ie the group that has seen the largest
increase in unemployment during the period since the A8 migration.
Indeed the comments of employers on the relative merits of migrant
workers are often based on a comparison with UK born younger workers,
the majority of A8 migrants themselves either being of a similar
age or, if older, able to bring a slightly more mature attitude
to jobs that might otherwise have employed UK born youngsters.
6.6 In view of the widespread casual empiricism
relating to this matter the CIPD is surprised that available econometric
studies seem to find no negative associations between the A8 migration
and the job prospects of less employable UK born people. The CIPD
is nonetheless prepared to defer to detailed econometrics though
we reject the criticism that our casual empiricism falls prey
to the well known "lump of labour" fallacy.
6.7 The CIPD fully accepts that there is
not a fixed number of jobs in the economy and thus that a flexible
labour market will adjust to make use of additional labour. Other
things being equal, demand for labour will expand and as noted
earlier we expect that the market will eventually settle at a
lower sustainable rate of unemployment than would have been possible
without the A8 migration. Adjustment takes time, however, and
it is perfectly reasonable to expect that in periods of excess
supply, such as that now being experienced, employers find it
easier to be choosier in their recruitment practices, pushing
the least advantaged non-migrants to the back of the queue.
6.8 It is probable that this tendency has
been intensified by the activities of specialist recruitment agencies
that make it easier for employers to make use of pools of migrant
workers on an "on demand" basis without having to resort
to traditional recruitment channels for less skilled workers,
such as public Jobcentres.
6.9 It is important to stress that the aggregate
rise in unemployment in recent years and the associated problems
faced by disadvantaged non-migrant jobseekers is primarily due
to a relative deficiency of demand for labour rather than an inevitable
consequence of the arrival of the A8 migrants. The full strength
of the A8 migration simply happened to coincide with the last
UK economic slowdown in 2005 and the effects of the aftermath
of that downturn.
6.10 The CIPD's surveys show that at the
time there was a major cutback in recruitment activity but no
substantial increase in redundancies, resulting in a marked degree
of labour hoarding. Economic recovery in 2006 in 2007 saw only
a modest increase in recruitment activity as employers made use
of hoarded labour and sought wider improvements in productivity
to offset increased non-labour cost inflation. Labour demand has
therefore failed to expand sufficiently to absorb available supplies
of labour, which explains the current state of the labour market.
At present a combination of previously tight monetary policy and
tight commercial credit conditions indicates that demand for labour
may well soften in 2008. This could exacerbate the outcomes discussed
in this section although it remains uncertain what effect an economic
slowdown might have on the inflow of migration workers.
7. Distributional impacts of immigration
7.1 Assuming that the economy will at some
point adjust to an increased supply of immigrant labour, the critical
distributional issue is the impact of immigration on the structure
of earnings at the full employment level of output. This in turn
may have additional implications for less skilled jobless non-migrants.
7.2 The long-run impact of immigration on
the wage structure depends on the degree to which migrant workers
complement or substitute for non-migrants. Outcomes will therefore
depend on the characteristics of migrant flows, with different
combinations of skill capabilities potentially giving rise to
different wage effects at any point in the pay distribution. But
as mentioned earlier the A8 migrants appear to substitute for
less skilled labour. This is evident from both the skill characteristics
and pay rates of A8 migrants.
7.3 In addition it is worth noting that
the greatly increased supply of A8 migrants has had no marked
effect on the difficulty of recruiting skilled and experienced
workers. CIPD surveys find that the proportion of employers reporting
recruitment difficulties increased in both 2005 and 2006 and has
since remained at a constant high rate. Although it is probable
that recruitment difficulties would have worsened further in the
absence of A8 migrants—not to mention the fact that migrants
are themselves consumers of services and add to labour demand
as well as supply—it seems evident that A8 migrants have
been mostly meeting demand at the bottom end of the skill range.
This observation still holds although there is some indication
that A8 migrants are now "trading up" along the skill
and experience ladder having gained an initial foothold in the
labour market and improved their proficiency in English.
7.4 Correspondingly, the CIPD finds that
there has been upward pressure on the pay of workers with skills
or experience in short supply, despite which, as noted above,
growth in average earnings has been muted. This suggests that
the effect of the A8 migration has been to limit the impact on
total pay bills exerted by pay pressure at the top of the pay
distribution by containing pay growth at the bottom end. The fact
that this occurred during a period when the National Minimum Wage
(NMW) was rising relative to average earnings, and thus supporting
pay at the bottom of the distribution, gives some indication of
the power of the A8 wage effect.
7.5 It is again important to stress that
this outcome does not necessarily imply, as sometimes suggested,
that employers are actively dismissing non-migrant workers in
order to hire migrants at lower wages. Although there is anecdotal
evidence that this does indeed happen sometimes the CIPD has no
evidence to indicate that such practice is widespread. What is
happening is that the increased supply of A8 workers has shifted
wages levels for less skilled employment toward the NMW. While
very low relative to average pay levels the NMW may be attractive
to migrant workers, especially those from the A8 countries who
have limited access to welfare benefits.
7.6 Since migrants are prepared to work
at low rates there is downward pressure on the pay of less skilled
non-migrant workers who effectively face a choice between low
wage employment or non-employment. To date increases in the NMW
have alleviated this trade-off between low pay or no pay, though
it is likely that further increases in the NMW relative to average
earnings will at some point begin to pose a threat to the creation
of less skilled employment. Indeed as anecdotal evidence also
suggests, some unscrupulous employers are already flouting the
regulations by employing workers at below the NMW. This usually
occurs if migrants are unaware of their rights, perhaps because
of language difficulties, or if vulnerable to exploitation because
they have gained illegal entry to the UK. The CIPD is keen that
such practice is stamped out though we have no evidence of how
widespread the problem might be.
7.7 The depressing effect of migration at
the bottom end of the labour market can serve to reduce work incentives
and, in interaction with the benefit system, raise rates of unemployment
and inactivity on the part of less skilled people. If so this
will to some extent offset the beneficial impact of immigration
in reducing the sustainable rate of unemployment as discussed
above. The losers in this situation are individuals capable only
of gaining low wage employment. These often include people from
the UK's more disadvantaged ethnic minority groups, themselves
the descendents of earlier waves of immigration.
7.8 The appropriate policy response to assisting
those who lose out from immigration is to combine restrictions
on unskilled immigration with a combination of welfare reform
measures, work incentive measures and employment and training
measures. In reducing the negative distributional impact of immigration
the net cost to the taxpayer of financing such measures will,
other things being equal, also reduce the net fiscal benefit of
immigration.
7.9 The prime objective of such measures
should where possible be to improve the ability of less skilled
or jobless people to enter skilled employment. Where this is not
possible the objective will be to improve the basic job readiness
of less skilled or jobless people in order to make them better
competitors for available vacancies. If successful, such measures
will reduce the need of employers to recruit migrant workers.
The Government describes its developing policy to achieve this
outcome in terms of "British jobs for British workers".
The CIPD agrees with the policy objective and the general thrust
of the Government's policy strategy but is uncomfortable with
a slogan which might appeal to protectionist and xenophobic sentiment.
29 November 2007
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