Memorandum by Mr Anthony Scholefield
1. The argument of this paper is that the
impact on the wealth of natives of the economic effects of immigration
is more important than the small effects on the total GDP of existing
natives, but that there is a substantial impact on the distribution
of income among natives.
2. Adam Smith entitled his famous work,
An Inquiry into the Nature and Causes of the Wealth of Nations
and Karl Marx called his work, Capital. The effects
of capital and wealth matter.
3. The issue of the impact of immigration
on wealth is rarely discussed. It is this—when an immigrant
worker arrives without capital and earns the same as the average
native worker, that means the wealth of the country is being shared
among more people and, therefore, wealth and capital per head
are reduced and the native suffers a loss of wealth and a lower
ability to produce income.
How can an immigrant worker finance his initial
stake in society—the same amount of wealth that the native
workers have been building up over generations and centuries?
How is the loss of wealth to the native to be
made up? Is it possible to make it up?
Much of the debate on the effects of migration
in such areas as "the public services" and housing is
inchoate because it does not have an intellectual framework.
4. The fundamental economic benchmark relating
to the economic effects of immigration is that put forward by
the National Research Council[40]
of the USA, which states that "if immigrants have exactly
the same skill distribution as domestic workers and if they have
brought sufficient capital with them to maintain the US capital/labor
ratio, then natives will neither benefit nor lose from immigration".
5. From this, my analysis (using 2004 figures)
concludes that immigrant workers who bring £141,000 of capital
per head into the UK (ie the amount of total British wealth divided
by the total number of British workers), or £282,000 for
a family of four; who make no foreign remittances; and who have
at least the mean average skills of natives can possibly be of
economic benefit to native Britons (this excludes fiscal and national
identity costs).
The average migrant worker contributes only
£2,235 to the annual increase in the wealth of the country
(£988 after foreign remittances).
6. Immigrant workers without £141,000
of capital must have that amount of capital instantly provided
for them, or else they crowd in and appropriate part of the wealth
of natives.
7. To answer the question, what should an
immigrant earn in the UK in 2006 to add to GDP per head, an estimate
is attached showing it should be £67,000 per annum for a
family, exclusive of fiscal and cultural costs.
WEALTH AND
IMMIGRATION
1. The argument as to the effect of immigration
on native wages is binary: either the wages of competing natives
fall after the arrival of immigrant workers or they do not.
Free market economists, such as those at the
National Research Council of the USA [NRC] and Professor Borjas,[41]
believe that the wages of workers competing with immigrants do
fall, and indeed this is the basic law of supply and demand; but
they also appear to believe, without much analysis however, that
the process of capital adjustment means that the capital-labour
ratio is subsequently restored, and that wage rates return to
pre-immigration levels but not above that level. This argument
has never been properly worked out and the likelihood is that
the capital adjustment process will not provide more than a fraction
of the £282,000 of wealth required by each immigrant family.
The alternative argument—that wages do
not fall, and that the effect of increased supply has no effect
on price—runs counter to the analysis of the American experts.
However, if we take the view that immigration
has no depressing effect on native wages, then, as Borjas indicates,
we are in for a shock:
... there is no immigration surplus, if the native
wage is not reduced by immigration.
In other words, if some workers are not harmed
by immigration, many of the benefits that are typically attributed
to immigration—higher profits for firms, lower prices for
consumers—cease to exist. As I pointed out earlier, no pain,
no gain.
This also has further interesting effects since
if wages of competing natives do not fall, there can be no extra
returns to capital following immigrant-induced fall in wages,
no capital adjustment and, therefore, immigrants' capital must
be appropriated from natives. Those who say that there is no fall
in wages when the supply of workers increases should be asked
to explain where the capital requirements of immigrants are to
be generated.
2. In this submission, it is assumed that
immigrants do not bring capital with them. It is also assumed
there is a free market, constant returns to scale, and existing
investment is exactly right for natives. It assumes each worker
has one dependant (as the current UK has). It does not consider
fiscal or cultural costs.
3. The argument is that any addition to
the population, whether through increased fertility or immigration
without capital, must require capital and wealth to be provided
for the newcomers. Either this is supplied by the newcomers alone
after their arrival (in which case, assuming wages similar to
those of natives, they can never catch up with natives, who have
already accumulated wealth) or it is appropriated from natives,
by a process called "assimilation", and apportioned
to newcomers, in which case the natives suffer a loss of wealth.
In one case, newcomers never catch up with natives and so cannot
add to natives' wealth; in the other, the natives suffer an outright
loss of wealth.
The only exception to this would be if newcomers
were so skilled or so wealthy that they could provide for themselves
the wealth the natives have accumulated over generations and centuries.
Such newcomers to the USA and Britain do exist, but they are few
in number. Only five out of 582,000 new arrivals in Britain in
2004 came under permits issued to persons "of independent
means". As for the USA, in The New Americans the NRC
quotes data from the US Immigration and Naturalization Service,
showing that in 1995 10,465 visas were available for allocation
to investors and their families, but only 540 were taken up—within
an immigration total of 720,461.
4. The subject of the cost of immigration
cannot be discussed without also discussing the costs of emigration.
All the arguments put forward for the benefits of immigration
are also arguments to discourage emigration. Indeed, more so since
there are generally cultural and transitional costs in admitting
one immigrant which do not apply when one emigrant is discouraged.
5. Most economic discussion on migration
has concentrated on the impact of migration on income or GDP;
but this is only part of the picture.
To take a simple point, all that is reflected
in GDP figures for housing is the annual addition, which in Britain
is around 135,000 houses (net) per annum, plus the cost of repairs,
etc. The existence of 20 million houses plays no part in GDP calculations,
but does play an immense part in wealth and "standard of
living". All other "created assets", such as roads,
schools, factories, etc, play the same role.
To consider the standard of living of a country's
inhabitants, we must not only take account of the income and expenditure
account, or GDP, but also the wealth or balance sheet. Standard
of living does not depend solely on GDP: it also depends on the
use of the accumulated wealth, such as houses, buildings, roads,
factories, water supplies, power stations and a myriad other items.
These are not reflected in GDP, except in the form of marginal
annual additions.
Income and wealth are, of course, closely interconnected,
with more income increasing wealth, and wealth in turn helping
to increase income.
As the great American economic journalist, Henry
Hazlitt, wrote:
Almost the whole wealth of the modern world,
nearly everything that distinguishes it from the preindustrial
world of the 17th Century, consists of its accumulated capital.
6. Here are some relevant figures:
The wealth of the British people was estimated
by National Statistics to total £4,245 billion in 2004 (this
excludes consumer durables, except houses, and it also excludes
land).
The accumulation of capital is dependent on
many sources: the intensity of the labour force, numbers, skills,
time, efforts, technology, entrepreneurial skills, etc. What we
have to do is isolate the impact of migratory labour on capital
accumulation.
Total fixed capital formation in 2004 was £190
billion, and capital consumption was £123 billion. This meant
a net addition to capital stock of £67 billion, or 1.58%
of wealth. In other words, the wealth of the UK amounts to roughly
60 years' worth of capital additions.
Some of this wealth—for example, machinery—depreciates
quickly, but other capital stock has been accumulated over centuries,
such as Oxbridge colleges, railways, dams, sewage works, etc.
In the case of dwellings, there were 20.9 million in 2003, including
a net addition of 134,000, or an addition to the capital stock
of 0.64%, which means the capital stock is about 150 years' production.
The Independent newspaper once calculated—and it
seems a realistic estimate—that 95% of British roads were
laid down before 1900, and, of course, the same applies to railways.
With 30 million workers in Britain, one can
say that the total wealth per worker is £4,245 billion divided
by 30 million, which is £141,000 per worker. In the following
calculations, each worker is assumed to have one dependant.
Each worker contributes £2,235 per annum
(£67 billion divided by 30 million) to improve the country's
capital, taking his share of capital additions either direct or
via enterprises he works in.
7. The arrival of a migrant worker means
that he instantly requires £141,000 of capital in order to
bring his stock of wealth into line with that of natives, yet
he contributes (assuming he is an average worker) only £2,235
per annum to capital formation. If the newcomer does not instantly
supply the £141,000 capital, there is wealth dilution for
natives.
A further point is that overseas remittances
from Britain totalled £3.8 billion in 2003. If the foreign
born constitute 10% of the workforce, as estimated by the Home
Office, they should contribute 10% of £67 billion to capital
formation, which is £6.7 billion; however, if the £3.8
billion of remittances is attributed solely to the foreign born,
then their contribution to capital formation is only 44% of the
£2,235 required, or £988 per worker.
One can consider the matter like this. A native
worker has a capital bank account of £141,000, and adds £2,235
to it each year. A migrant worker has a capital bank account of
nil and adds £988 per annum. It takes the immigrant 150 years
(ignoring interest effects) to accumulate the capital the native
has at the outset. In those 150 years, the native adds a further
£336,000 to his capital bank account, making a total of £477,000.
Of course, a small number of high-earning migrants
will pay for their requisite stock of wealth of £141,000
immediately or over a very short period; but the average immigrant,
who, according to Home Office estimates, earns the same as natives,
contributes only £988 per head per annum to the £141,000
required to bring him up to the native's wealth. Moreover, the
native worker is already backed by £141,000 and is adding
£2,235 per annum, so the wealth gap is widening.
The conclusion is that only those immigrant
workers who a) bring in £141,000 of capital per worker with
them, b) make no foreign remittances, and c) have at least the
mean average skills of natives do not dilute the wealth of natives.
8. What happens when the immigrant worker
does not have £141,000 of capital with him? We then have
the phenomenon of "crowding-in". Immigrants use dwellings
more intensively; they overload transport, water resources and
all the other accumulated capital (we assume the native economy
is in equilibrium). Production per head decreases, because there
is capital dilution and so each worker has fewer "tools of
production". As the National Institute Economic Review
(No 198, October 2006) pointed out: "For each extra pair
of hands income rises less in proportion because there is no extra
capital." This diverts some capital from the job of intensifying
the wealth of natives to that of supplying the needs of immigrants—either
voluntarily, by the means of capital readjustment described below,
or through government taxation. So, the increase in the capital
backing of the natives is reduced, and there may also be some
diversion of natives' consumption into supplying capital to immigrants.
Immigration, therefore, reduces the wealth and consumption of
natives.
Thus, not only is the per capita GDP of the
new, combined workforce of natives and immigrants reduced below
the previous per capita GDP of natives by the effects of immigration
without capital, but so is the accumulation of the wealth of natives,
their standard of living, and also, therefore, their future production.
The NRC and Professor Borjas use such words
as "assimilation" and "capital adjustment"
to describe the merging of immigrants into the economy. In fact,
the process is one of appropriation of capital from natives, either
by means of taxation or through diversion of capital. While the
appropriation of capital for immigrants in housing, education,
etc may be visible in extra taxation and council taxes, diversion
of capital is less obvious, though it is no less powerful.
The diversion of capital investment occurs as
capitalists re-rank the profitability of investments after immigration.
Where increased returns are available because of immigration,
some investment will be made in these areas and, therefore, some
investment will not be made in the lower-return areas that increase
native wealth or production. Of course, one reason why there are
lower returns in some areas is that native wages and spending
power have been depressed by immigration, so native workers who
are in competition with migrants suffer not only from lower wages
but also from diversion of capital.
This phenomenon is similar (though more accentuated)
to that engendered by an increase in the native population of
workers through increased fertility. It also suggests why the
employment of non-workers in the native population (the unemployed,
women workers, the retired) is so beneficial, as their employment
is a pure gain, since, as dependants of the workers, they are
already users of capital. The transfer of a person from being
a dependant to a worker means there is an extra contributor to
capital formation each year but no extra requirement for wealth
use, except for the tools of production.
9. Up to now, the analysis has been largely
static, with capital and wealth regarded as fixed. It is necessary
now to look at the dynamic effects on capital and wealth.
Any arguments that migration benefits native
workers centre on the increased returns to capital following falls
in the wages of competing native labour, which create a fresh
demand for workers and a new equilibrium, with higher levels of
capital and employment (but not higher amounts of capital per
head).
It should be noted that the leading American
academics, such as the NRC and Professor Borjas, do not claim
that the increased returns to capital will do any more than restore
native wages to the pre-immigration level. In its second major
study, entitled The Immigration Debate, the NRC stated:
"We are not, of course, suggesting that immigration caused
an improvement in real wages." This fits in logically with
the NRC analysis quoted earlier, demonstrating that, once immigrants
acquire skills and capital similar to those of the natives, the
economy will simply enlarge pro rata.
This must be the logical conclusion.
Furthermore, the NRC states:
As already mentioned, in the short run the influx
of new labor is likely to depress the capital-labor ratio before
it is restored through new investment. If the capital stock is
disproportionately owned by native-born residents ... then native-born
owners of capital will benefit temporarily from higher returns
to capital. Indeed, it is this higher return to capital that (in
part) is thought to induce an increased volume of investment that
ultimately restores the capital-labor ratio to its pre-immigration
level.
The theory of capital adjustment makes it clear
that money taken away from native workers is used to fund the
capital required by immigrants. Capitalists are an intermediary
in this process.
The argument that immigration benefits natives
through the mechanism of capital adjustment has formidable hurdles
to surmount. To start with, nearly all economic theorists believe
migration in the short run, with capital fixed, reduces the earnings
of natives and increases the return to capital.
In its study, the NRC outlines the mechanism
by which migration restores the capital-labour ratio: by initially
depressing natives' wages, increasing returns to capital, drawing
in more capital, and thus establishing a new equilibrium. In other
words, for native labour earnings to stabilize, they must first
fall. This seems a wayward path. Nor is there much academic support
for it. As the NRC reports: "The second key point—the
impact of immigration on capital formation—has been left
largely to assumption and speculation."
In any event, the capital adjustment process
centres on restoring the amount of tools of production, not on
total wealth.
To say that immigration benefits natives in
Britain today, the following logical hurdles must be cleared:
(1) The immigrant must accumulate the same
amount as the average wealth held by native workers. This figure,
in 2004 in Britain, was estimated to be £141,000 per worker.
(2) The immigrant must then pay interest
on the wealth appropriated from natives (or elsewhere) to support
him for as long as it takes him to accumulate the requisite £141,000.
(3) He must then also match the further capital
additions generated by native workers during the period when the
immigrant is generating his stake capital of £141,000 (plus
interest). (The native worker adds £2,235 per annum.)
(4) Only then does the immigrant reach
a point of equality of contribution with natives. For him actually
to benefit natives, he must generate a further increase
in capital, beyond the native's yearly increase in capital
that he must match.
There are two sources (excluding non-measurable
costs and benefits) of an immigrant's contribution to wealth accumulation:
— savings by the worker out of his
own wages directly or in the form of profits to the enterprise
in which he is employed; and
— savings by capitalists out of the
extra returns to capital, due to a fall in the wages paid to native
labour.
By definition, the first of the sources of contribution
(for the average worker) can only be item (3) above, less overseas
remittances. So the whole burden of generating the remainder of
the wealth required in items (1), (2) and (4) falls on the added
return to the extra savings of capitalists, which, of course,
are also reduced by the lesser savings now being made by native
workers out of their reduced wages. (Workers are also capitalists
in relation to their own savings, pension funds, etc).
Professor Borjas also notes:
as the capital stock inevitably adjusts to the
changed economic environment, the immigration surplus will tend
to become smaller and smaller and, in the end natives may be neither
better off nor worse off because of immigration.
So, for natives, the whole process of immigration
means initial losses, immense dislocation, reduced production
per head, a reduction in the standard of living due to wealth
dilution, with the ultimate result that the capital-labour ratio
is restored to its pre-immigration level—or, put another
way, "as you were". This is not a good deal for natives.
10. Professor Borjas calculates that the
10% of the US workforce that is immigrant in 1995 would, in his
central projection, generate an increase of 3% in the total income
of capitalists in the USA at the expense of labour. Conveniently
for calculation, this is approximately 1% of US GDP (capital takes
about one third of US GDP).
If one transposes this extremely rough calculation
to the UK, which also has an immigration labour force that totals
10% of the whole and a similar split in returns between capital
and labour, 1% of the UK GDP in 2004 would be £9 billion.
This is the amount workers lose to capital. Approximately 50%
of capital's returns are used for capital formation, so, following
Borjas, one could generally estimate the increased capital formation
due to the immigrant-induced fall in native labour wages to be
about £5 billion.
The target required for immigrant wealth to
match native wealth is 10% of the total national wealth (remember,
immigrants are taking care of the £2,235 annual increase
required out of their wages and enterprise profits, unless they
are making foreign remittances), which is £424 billion; at
£5 billion per annum, this would take 85 years to reach—85
years to achieve equality with natives.
However, there are three further problems.
The first is a simple interest effect. It is
clear that the interest effects on £424 billion alone would
swamp the £5 billion capital formation.
The second problem is that, as Borjas points
out, the immigrant surplus, which causes distribution from native
wages to capital, shrinks as immigrants and their children take
up native skills—in his example, the skills of US workers.
Third, as the immigrants become better equipped
with capital (at £5 billion per annum) this also shrinks
the immigration surplus and the extra returns to capital caused
by immigration. As Borjas says, "the immigration surplus
will tend to become smaller and smaller".
Simultaneously, there will be a fall in savings
by native workers and this should be deducted from the amount
available to generate capital adjustments.
The theory of capital adjustment by which the
labour-capital ratio is restored is speculative and involves very
long-term projections to recover initial losses and probably never
does so. At best it restores the status quo ante. What is certain
is that there is immediately a fall in native wealth and capital
per head and, therefore, ability to maintain earnings and standard
of living.
Anthony Scholefield
(This evidence is submitted on an individual basis)
ESTIMATE
What should a migrant earn in the UK in 2007 to
make a contribution to the economy?
Migration Watch calculates (Briefing Paper No
1.11) that the required income "to make a positive contribution
to GDP per capita" is about £27,000 per annum (2006).
Migration Watch is to be congratulated on making an estimate,
and this study has followed its methodology in part.
The Migration Watch estimate is calculated in
three parts:
1. The amount of UK GDP classified by National
Statistics as "compensation for employees" in the year
2003 was £613 billion and there were 27.6 million workers.
This gives average earnings per worker of £22,200. There
is also earned income included in the category "mixed income",
but this is ignored for these rough calculations.
2. This is then increased to 2006 rates by
allowing three years of wage inflation at 4% per year, making
roughly £24,850 per annum.
3. Migration Watch then allows a 10% margin
requirement for the costs of additional infrastructure at £2,485
per annum, making £27,335. (Migration Watch rounds this to
£27,000 per annum.)
All the income calculations seem reasonable,
but a 10% margin for the costs of additional infrastructure is
not realistic and there seems to be no basis for using this figure.
This study shows that a worker requires instant
wealth of £141,000 on arrival (2004 figures), so the question
is to determine how many years should be allowed to pay this off
and, second, the rate of interest that should be imposed.
For this exercise, we have taken an interest
rate of 3% and spread the cost of financing the instant wealth
over a working life of, say, 35 years. These are, of course, assumptions
only.
In order to do the calculation, we must first
bring our wealth figure for 2004 up to date for the end of 2006.
(It will be noted that this figure was originally at 2003 prices
in the National Statistics tables.) So, three years of inflation
need to be added to bring the £141,000 up to 2006 prices.
This can be estimated at 9%, making the figure £153,600.
There have also been two further years of capital additions, which,
we will assume, were at the 2004 rate of 1.58% of wealth. These
additions add a further, say, 3%, or £4,500, making total
wealth per head at the end of 2006 around £158,000 in 2006
prices. We thus now have the total wealth at the end of 2006 in
2006 prices per worker.
Compound interest tables inform us that, to
pay off £158,000 with an interest rate of 3% over 35 years,
there must be a yearly payment of capital and interest of £7,300.
So, instead of the £2,485 per annum estimated by Migration
Watch, the real figure to be added to average earnings is £7,300.
The income required to be earned by a migrant is, therefore, £22,200
(the average earnings in 2003) plus 12% wage inflation of, say,
£2,650—which totals £24,850—plus £7,300:
this equals £32,150. Looking at Inland Revenue taxation figures
for 2004-05, the latest year available, 5,769,000 out of the 27,020,000
taxpayers who paid tax on earned income from employment and self-employment
earned over £30,000 per annum (or 21.35% of taxpayers paying
tax on earned income).[42]
So the calculation is that an immigrant would
have to be in the top 20% of earners, with taxable earnings in
2006 of £32,150, for him to contribute to increasing the
average per capita GDP of natives.
Should foreign remittances be made, these would
have to be added to the above figure. We saw earlier that, in
2003, £3.8 billion was remitted abroad. This means the average
remittance per immigrant worker is £1,247 per annum; £32,150
plus £1,247 makes a grand total of £33,397.
When considering family migration, a family
of four requires £282,000 (in 2004) of instant wealth in
the original calculation. The requirement for income is, therefore,
£33,397 x 2 = £66,794, ie double what an individual
worker requires.
These calculations leave out any fiscal costs,
transitional costs and long-term national identity costs.
October 2007
40 All references to the National Research Council
are to the report of the Commission set up by the US Congress:
National Research Council of the National Academy of Sciences,
The New Americans: Economic Demographic and Fiscal Effects of
Immigration, Washington DC, National Academies Press, 1997. Back
41
All references to Professor Borjas refer to George J Borjas, Heaven's
Door, Princeton, N J: Princeton University Press, 1999. Back
42
Source: Table 3.6 of Income Tax & Personal Incomes, Inland
Revenue Statistics for 2004-05. Back
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