What effect does immigration have on the Uk Natives Labor Market

Introduction

On November 23, 2010 the Home Secretary Theresa May set out a raft of new measures to control the numbers that will be allowed into the UK job market from outside Europe. The approach not only aimed to get immigration down to sustainable levels but also to protect the UK unemployed labor force. Following this announcement, immigration has become topical debate in the UK. Dustmann et al (2005) observes that while the balance of public opinion is to reduce immigration, the numbers migrating to Britain has increased sharply over the last decade. The November 23, 2010 announcement and other series of changes in immigration policy in the resent years heighten interest in research findings that can help to guide policy in the future.

The annual immigration inflow to the UK increased from 329,000 in 1991 to 567,000 in 2009 according to the estimation published by Office for National Statistics (ONS [1] ).

Graph 1: Annual immigration inflow to the UK

Source: Office of National Statistics- long term International Immigration [2] 

Blanchflower and Shadforth (2009) documents that, “the increase in the net flow of workers to the UK since the turn of the millennium coincides with changes in UK immigration policy and the relative attractiveness of the UK’s economic position over the past decade. Most recently the increase in the inflow rate of migrants is in large part attributable to immigration policies that accompanied the accession of the A8 [3] countries on May 1st 2004, and the A2 [4] on January 1st 2007”. Individuals from the A8 countries obtained free movement and the right to work in the UK. Although they have to be registered on the worker Registration Scheme (WRS) and also register to obtain National Insurance Numbers. But the A2 nationals’ access to UK labour market is restricted and they are not allowed to apply for WRS.

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The UK labour market has been remarkably stable with employment rising consistently over the last 11 year period between 1993 and 2004. At the time of accession, the UK labour market was healthy by both historic and international comparisons, with an employment rate of 72 per cent and an unemployment rate of around 5 per cent (Portes J. and French (2005)). This followed the downward trend observed between late 1989 and 1992.

Graph 2: UK Jobs status between 1989 and 2004

Source: Office of National Statistics- UK Employees Jobs

After accession in May 2004, the UK labour market continued its robust performance up to the third quarter of 2008 gaining 1,049,000 jobs between the first quarter of 2004 and third quarter of 2008.

Graph 3: UK Jobs status between 2004 and 2008

Source: Office of National Statistics- UK Employees Jobs

However, in 2008 the UK labor experienced a downturn due to the global financial crises that began in December 2007. The market lost a total of 333,000 jobs in the fourth quarter of 2008. The trend continued worsening until by the third quarter of 2010, a total of 1,241,000 jobs had been lost.

Graph 4: UK Jobs status between 2008 and 2010

Source: Office of National Statistics- UK Employees Jobs

This paper highlights some of the recent key findings and examines how the immigration has affected the UK Labor Market. The questions addressed include what is the effect of immigrants on employment, participation and wage rates for non-immigrant workers? How does the identified effect of the immigrant from the EU compare with the rest of the Immigrants? What likely impacts will immigration have on Labour market in the future? These issues are of direct interest to policy makers.

Theory

Economic theory is helpful to understand the possible impacts of immigration for native economies. Theoretical economic models suggest that changes in the size of Labour force population resulting from immigration could harm the Labour market prospects of some native workers.

The textbook model of a competitive labor market predicts that immigrant influx should lower the wage of competing factors. The laws of supply and demand have unambiguous implications for how immigration should affect labor market conditions in the short run. The shift in supply lowers the real wage of competing native workers. Further, as long as the native supply curve is upward sloping, immigration should also reduce the amount of labor supplied by the native workforce (Borjas 2003).

Fig 1: Labour market effects of immigration in the neoclassical model

e

c

b

d

Employment

Wages

S1

S2

D3

D2

D1

W1

w2

L2

L1

L3

0

a

Figure 1 allows us to analyse the income and distribution effects of immigration. Before immigration occurs, the country produces an output, which is described by the area abL10. The income of native workers can be described by the area w1bL10. And the income of capital owners by the area abw1. Immigration leads to an increase in the output of the country from abL10 to acL20. The income of the immigrants is described by the area ecL2L3. Because of the immigration, the income of the native workers decreases to w2eL30, and the income of the capital owners increases to acw2. To summarize, immigration leads to an increased output and to a redistribution of income from native workers to the owners of capital.

In using this model, it has been argued that the negative effects of immigration for native workers are overemphasized, as the model neglects indirect labour demand effects. First, immigrants are consuming goods; thus, the demand for goods increases. This increased demand leads to an increase in the demand for labour, which is shown as a shift of the labour demand curve to the right. Due to this shift, the employment of natives and wages increase. Whether the indirect effect is able to compensate the direct effects of immigration depends on how much the labour demand curve shift to the right.

Immigration has strong effects on relative supplies of different skill groups. This is because immigration only affects wages of resident workers if the skills distribution of immigrants differ from that of the native workforce. In that case their inflow will lead to changes in the relative supply of different skill groups and thus to a disequilibrium in the labour market of the host economy.

Lalonde and Topel, (1991) argues that if the skill composition of immigrants does not match the skill composition of natives, it leads to disequilibrium between supply of and cost-minimising demand for different labour types at existing wages and output levels. Restoration of equilibrium should be expected therefore to involve short-run changes in wages and employment levels of different skill types and may or may not require long-run changes.

If the skill distribution of immigrants is equal to that of natives and capital supply is fully elastic, then immigration will simply lead to an increase in the scale of the economy through an increase in output with no effect on wages and employment of natives in the long run ( Dustmann, Frattini and Glitz 2008).

A key lesson of economic theory for employment and wages is that the labor market impact of immigration hinges crucially on how the skills of immigrants compare to those of natives in the host country: first, labour market effects may occur only if the skill composition of immigrant labour differs from that of the native workforce. Second, if the economy has sufficient scope to adjust to increased migration by changing output mix, no effects should be expected in the long run.

Literature Review/Evidences

Quantifying the effects of immigration on wages and employment of resident workers has been a concern of a number of economic studies. There is however, disagreement about how local labour markets adjust to immigration and therefore whether (and how much) immigration should matter for the economy as a whole. The belief that labour market competition posed by immigration affects natives’ opportunities is still a controversial issue in the USA.

Dustmann et al (2008) argue that the evidence that immigration does in fact depress wages or leads to large negative employment effects is at best mixed. They observe that what is certain, however, is that wage responses to immigration, if they occur, will not be distributed evenly across the distribution of resident wages, but will be more pronounced in those parts of the distribution in which immigrants compete with native workers.

Analyzing the impact of immigration on the USA wages and employment, Card (2005) found out that although immigration had strong effects on relative supplies of different skill groups, local labour market outcomes for low skilled natives were not much affected by these relative supply shocks. The evidence suggested that this was due to adjustment within industries, rather than across industries, to skill-group specific relative supply shocks. Also his analysis on immigrant assimilation concluded that first generation immigrants do not on average catch up with natives in terms of economic performance, but shows a strong educational progress of second generation immigrants, where most catch up with children of natives.

However, Borjas (2003) argues that the negative wage effects from immigration can be observed at the national level. He observes that immigration is not evenly balanced across groups of workers who have the same education but differ in their work experience, and the nature of the supply imbalance changes over time.

He introduces a new approach, different from the conventional spatial correlation approach mostly used, for estimating the labor market impact of immigration. His analysis builds on the assumption that similarly educated workers who have different levels of experience are not perfect substitutes. The analysis indicates that, in the USA, immigration lowers the wage of competing workers: a 10 percent increase in supply reduces wages by 3 to 4 percent. He therefore concludes that immigration reduces the wage and labor supply of competing native workers, as suggested by the simplest textbook model of a competitive labor market.

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However, in Europe, some cross-country evidence indicates that immigration has greater negative effects on employment, where the labour market is less flexible (Angrist and Kugler, 2003). This implies that the answers for one country may not simply be applied to another. Hence the impact of immigration for the UK must be analyzed on UK data rather than being inferred from the results for other countries such as the USA. This is due to the differences in the immigrants they receive and in the structure of their labour markets.

Dustmann et al (2005a) observes that recent studies [5] shows that, unlike in the USA, the education and skill composition of older as well as recent immigrants to the UK resembles, on average, that of the native population as summarized in table 1.

Table : 1 Educational and Occupational Distribution, Immigrants and Natives:

Education

Advanced education

Intermediate education

Low education

Natives

0.509

0.318

0.172

Immigrants

0.423

0.393

0.183

Recent immigrants

0.304

0.551

0.145

Occupation

Skilled

Semiskilled

Unskilled

Natives

0.246

0.397

0.356

Immigrants

0.313

0.361

0.326

Recent immigrants

0.312

0.363

0.324

Source : Labour force survey 2000

Furthermore, analyzing the immigrant experience prior to coming to the UK, most of them were professionals and managers followed by students. The semiskilled and unskilled are third in the category.

Graph 5: Immigrants occupation prior to immigration to the UK

Source: Office of the National Statistics

r The 2001-2007 estimates were revised following changes to source data in February 2010. Therefore they may not agree with estimates published previously.

Hatton and Tani (2005) found that, across all 11 UK regions, immigration flows into a region are negatively, but often insignificantly, associated with net inward migration from other regions. These results are compatible with the hypothesis that the labour market effects of immigration are spread beyond the gateway cities and regions (Dustmann et al 2005b).

Frijters et al (2005), identify the concerns whether immigrants take jobs away from natives as a major issue in the immigration debate. They present evidence on the job search methods used by immigrants, and their relative success in gaining employment in the UK. They found that: (1) immigrant job search is less successful than that of natives; (2) immigrants are as likely to gain employment through informal methods as via verifiable routes; (3) the probability of success increases with years since migration. They observe that the findings that immigrants do not effectively compete for jobs help explain why immigration has little impact on native employment.

On the UK labor force market effect by immigrants from the EU, Blanchflower et al (2010) found out that the flow of workers from the A10 has had little or no impact on unemployment. It appears to have had some direct effect on the relative wages of the least skilled. Their main impact has been to raise the fear of unemployment, which has had the effect of containing wage growth.

Discussion:

Starting with the argument that letting in immigrants to the UK is going to hurt the natives as you have a whole bunch of supply of other people; this is going to increase the supply of labor, which will reduce wages. That is a popular political statement but it lacks sufficient empirical evidence to sustain it. The actual empirical evidence of what the effect is suggests that immigration as whole benefits the economy as the total economic output increases. Theory makes an assumption that before immigration the labor market was at equilibrium. In reality that is not true; for immigration itself is as a result of disequilibrium. The massive immigration to UK and indeed Europe in the late 1990s is as a result of lack of adequate native labor force to satisfy the economy. And as long as the system is at disequilibrium, the market forces will always tend to operate in such way that the systems tends to move back to equilibrium.

Unlike the USA where the most anti-immigration of all the respectable researchers, George Borjas estimates the long-run immigration effects on the wages of American high school dropouts as wage reduction about 5 percentage points, the UK evidence presented emphasize that there are no effects of immigration to be expected on labour market outcomes of natives in the long run if immigration does not affect the skill composition of the native labour force, and if capital supply is perfectly elastic. The empirical analysis in most of the literature finds no evidence that immigration has effects on employment, participation, unemployment, or wages at the aggregate level in the UK. There is some evidence that effects are different for different educational groups.

Frijtzers et al (2005) findings on first generation limitation in competing with the natives on job searches offer a very important insight. The UK natives have an advantage over immigrants in finding employment. Holding all other factors same; a first time immigrant who has same skill and qualification will not pose a direct competition to a matching native. When he gets a job, he is not taking the native’s vacancy but rather filling a gap that the supply of natives’ labor force could not fill. This is healthy for the economy.

Suppose we applied Borjas’s approach intuitively to the UK labor force, and allowed for the fact that immigrants and natives have different skills and therefore not substitutes, you wind up getting not only a smaller effect on the natives wages, you end up getting a positive effect. Basically, the UK natives will specialize in areas where they have comparative advantage. The result of this, just like in other areas of trade: people specialize and trade and they all get richer (Caplans EconTalk). Because the immigrants’ skills are different from the natives, their skills are complementary–they enhance the natives’ productivity rather than hurting them.

The empirical evidence in literature, suggest that the immigration effect on the UK natives’ labor force does not differ significantly with the immigrants country of origin or nationality. The immigration policy, discriminating between the EU and other immigrants is therefore not based on different effect of those groups of immigrants have on the UK labor force as may appear, but rather on political reasons.

Conclusion/ policy implications:

The empirical analysis finds no evidence that immigration has effects on employment, participation, unemployment, or wages at the aggregate level in the UK. Also the effect of immigration on the UK natives’ labor force does not differ significantly with the immigrants’ country of origin nor nationality. There is a strong evidence empirical studies which imply that immigration has a positive effect on the output of the UK’s economy in the long run. The probability that immigrants increase unemployment is low in the short run and zero in the long run. Most area analyses and time-series analyses fail to find a significant influence of immigration on unemployment probabilities.

In determining how local labour markets adjust to immigration and therefore whether (and how much) immigration should matter for the economy as a whole, the policy makers should be conscious of the long term economic effects of such decision and should not only be guided by political expedience but also proven empirical evidence. The question of causality of the presumed adverse effects of immigration on the natives’ labor market should be carefully researched on and sound conclusions made based on observed evidence and not biased heresies.