Sunday, October 28, 2007
Migrants ease the inflation pressure
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

Immigration is not an easy subject for an economics columnist, and not just because it is hard to write about it without offending somebody. It is difficult because the economic impact of immigration is hard to quantify and much disputed.

Not only that but any economic benefits have to be set against what some would see as the significant social costs of a fast-rising immigrant population.

That rise is now estimated at a net 190,000 a year, according to the latest projections from the Office for National Statistics, with more than 90% of that, 171,500, going to England, 9,500 to Wales, 8,500 to Scotland and 500 to Northern Ireland. This is in the context of a population expected to rise to 65m by 2016 and 71m by 2031.

In net terms, immigration will add the equivalent of the population of Northampton each year, or 1m extra people every five years. For this small set of islands, these are significant numbers.

So let me try to steer a course through the economics of this. One reason for doing so is that the House of Lords economic affairs committee is conducting an investigation into the economic impact of immigration and has assembled an impressive array of written evidence. Those who want to dig further should look at its website, which can be accessed through

There are contributions from business, with the Institute of Directors saying that three-quarters of its members believe that foreign-born workers make a big positive contribution to the economy and, more controversially, that they “significantly outperform the existing workforce across a whole range of measures, including productivity, education and skills, work ethic, reliability and the amount of sick leave”.

The City of London Corporation waxes lyrical about the historic contribution of immigrants, noting that “City street names such as Lombard Street date back to the reign of King Edward I, when land was given to goldsmiths from the Lombardy region in Italy”. More recently there has been a significant City influx from the Continent and America and the corporation notes that London’s overall foreign-born population rose from 1.17m to 2.23m between 1986 and 2006.

J Sainsbury says it has used migrant labour to fill “pressing gaps in both skilled and unskilled areas” and praises the work ethic of such staff.

This kind of thing would be a red rag to the unions, it might be thought. But the Trades Union Congress, in its submission, is also strongly supportive.

“The overall economic impact of immigration is limited but positive,” it says. “Migrant workers contribute more in taxes than they receive in services, and migration probably leads to slightly higher levels of employment and wages for native workers. Migration may possibly be linked to an increase in wage inequality in this country, but the evidence is not conclusive.”

The government’s take on the economic impact of immigration is also reassuring. It believes that in the short term the impact of immigration on the public finances is positive, though the last official study was some years ago. It concluded that migrants paid £2.5 billion more in taxes than they took out in benefits and the use of public services. This net gain to the exchequer is likely to have grown, the government suggests.

The long-term impact of migrants is more difficult to assess, it accepts. An American study pointed to a large overall positive impact but any conclusion for Britain is sensitive to the number of dependants each migrant has, and whether they remain in Britain until retirement. As it is, the effect of migration will be to ameliorate the consequences of Britain’s ageing population.

The dependency ratio – the ratio of dependants to working-age people – is 61% and will rise to 74% over the next 50 years. With zero net immigration it would increase to 82%.

The arrival of migrant workers has meant employers have not had to outbid each other for scarce labour. This has helped the Bank of England by delivering lower wage rises for a given rate of economic growth than would otherwise have been the case. Interest rates have thus been lower in recent years than they might have been.

But have migrant workers, by helping to keep a lid on wages, merely impoverished some groups of workers in Britain, particularly the unskilled and the young “Neets” – not in education, employment or training – setting up huge social problems?

David Blanchflower, the Bank of England monetary policy committee’s labour-market expert, says not, though in his submission he argues that fear of unemployment prompted by the arrival of migrants may have helped restrain wages. In general, however, the detailed research suggests that migrants have not been taking “our” jobs.

So why, apart from the fear factor, have migrants helped keep wages down? Traditionally, foreign workers earned more on average than the native-born population, the figures being bumped up by well-paid foreign workers in certain sectors like the City.

The recent arrivals from eastern Europe have changed that. They earn less, on average, than the native population. Their numbers, we know, have been significant. Their effect, therefore, may genuinely have been benign – allowing most native workers to still enjoy reasonable pay and salary increases while reducing the rate of average earnings growth sufficiently to reassure the Bank.

We do not know, of course, how long this effect might last and it will not convince the doubters, of which there are many. Bob Rowthorn, emeritus professor of economics at Cambridge, argues that the economic benefits of immigration, to the extent that they exist, are “minor” and “transient”.

In the meantime, he suggests, “the interests of more vulnerable sections of the domestic population may well be damaged, and any economic benefits are unlikely to bear comparison with its substantial impact on population growth”.

It would be good to be able to refute this with proof that the economic benefits of migration are large and overwhelming. So far, however, that proof does not exist.

PS: Ever since the publication of the infuriatingly successful Freakonomics, people have been looking for intriguing links between apparently unconnected things. The one that stood out in the book was the apparent link between the change in American abortion laws in the 1970s (making it easier for expectant mothers to get rid of unwanted children) and the fall in crime in the 1990s. Many others have challenged the link, but it was intriguing.

The authors of Freakonomics, Stephen Dubner and Steven Levitt, are still at it. Recently they wrote a piece asking whether Jane Fonda was responsible for global warming. The argument was that a 1979 film in which she starred, The China Syndrome, put a generation of Americans off nuclear power, and thus ensured that the world’s biggest emitter of greenhouse gases carried on emitting.

That set me thinking that there must be other links like that. Did the classic 1987 film Wall Street, starring Michael Douglas as the lizard-like Gordon Gekko, precipitate the October 1987 crash? Sadly no, though it might have contributed to investment bankers being permanently unloved. The film was not released until December that year. Likewise, the news that a sequel to Wall Street is in preproduction, but will come out after the current market turbulence, supports the view that art imitates life, not the other way round.

But there must be other examples where movies have anticipated important real-life events, or changed behaviour in a way that brings those events about. Any suggestions gratefully received – and if there’s a bestselling book in it, I promise to share the spoils.

From The Sunday Times, October 28 2007


If you are going to consider the social costs of immigration, why not the social benefits? Imagine Britain without Indian food and its influence, to take a minor example. What about the cultural impact of an inflow of hardworking people offsetting the dole and entitlement culture of Britain?

Also, plenty of countries have a higher population density. Most of them do not feel crowded (look at Sri Lanka, with swathes of open space, and its wildernesses). The problem in Britain is that everyone wants to live in a few areas like the South East - but that is as much the fault of the migration of Scots and Northerners as that of East Europeans.

Posted by: Graeme Pietersz at October 28, 2007 07:52 AM

I find the problem with most economists that look at the effects of immigration is that the take such a narrow view of the subject. In the UK over the past 10 years, an increase in levels of unskilled immigration has been matched by a massive increase in government spending in order to counter income inequality. Increasing the supply of unskilled labour, according to the most basic tenets of economics, should decrease wages of native unskilled labour and increase income inequality. Whether you support a bigger state sector and a more equal society or you're for a more free-market approach, it's hard to argue that increasing government spending and taxation levels doesn't incur huge efficiency costs. Sadly, though, if you compare the amount that the Labour government has increased government spending to trends in inequality, you'll see that most of that spending has had very little effect on inequality, quite possibly due to the concurrent increase in immigration. Yet in all the studies produced by the government showing the economic benefits of immigrants to the UK, how many have actually included the effect of the increased government spending required to reduce income inequality?

Posted by: RichB at October 28, 2007 02:53 PM

Fair point from Graeme about the social benefits.

On RichB's point, the reason economists don't count the cost of the Labour's government's inequality-reducing policies as an immigration effect is because there is no evidence that those policies would have been in any way different in the absence of immigration. It may have been that such policies would have been more successful, though that is also debateable.

Posted by: David Smith at October 28, 2007 04:46 PM

Hi David, maybe the article in the FT today, page 3, could throw a spanner into your thinking?
Seems the market is taking notice of it anyway!

Posted by: James Trouble at October 29, 2007 11:41 AM

Haven't got a paper copy of the FT so I don't know which piece you are referring to, but if it is the one about the experimental average earnings series, I can't understand why the markets should be responding to it. Not only have we known about that series for many months but the gap between it and the ONS's preferred average earnings measure has been narrowing.

Posted by: David Smith at October 29, 2007 12:19 PM

The question is how will this migration develop in the next year or so, if it slows down inflation may rear its ugly head.

Posted by: JohnofScribblesheet at October 29, 2007 01:22 PM

David, that's just what I thought, I didn't take much notice of it (FT), but now short sterling has been sold off 10 ticks and all the talk is of this FT article.

As is usually the case, I agree with you sir ;-D Doesn't seem the market does though LOL

Posted by: James Trouble at October 29, 2007 01:23 PM

Saying that, short sterling has made back half it's losses since you've posted that comment, maybe the market does listen to you! X-D

Posted by: James Trouble at October 29, 2007 01:55 PM

Increasingly in my profession (IT/Software Engineering) the local workforce is being pushed aside by Indian, Chinese, Russian, etc., labour. And sometimes British firms will try to manoeuvre positions to avoid paying loyalty and performance bonuses when weilding the axe. I think we are not far off seeing careers ending before 40 years of age for indeginous folk, as things are playing out. So, the ability of businesses to act like 'fagans' in the short term with migratory labour is shifting native porn people into unproductive work like property BTL landlording or out altogether by emmigration. It is quite ironic now that I spend periods of the year working in the far east as a lectureur in my field but I would never be allowed to settle for any length of period within their nations. No, the current globalisation, migrant labour policies of the UK is all about big business reverting to the victorian era with the blessing of a 'labour' government cosying upto big business. It didn't work in the Victorian era, it will not work now. Social exclusion and inequality bought the Empire to its knees and simmering social tensions echoing from that era led to outright crises by the seventees. Many economists have little grasp of sociology and its pivotal iinterplay with economics. I feel sorry for many younger folk now who will be expected to hand over nearly half their salaries in taxation and a compulsory state welfare system that they will probably have no access to in the future as a result of an increasing population size from immigrant and baby boomer forces starving an burgeoning, inefficient and nearly corrupt political state system. Will the last person turn out the lights?

Posted by: Jason Keller at October 29, 2007 05:10 PM

Good points there by Jason. I too am in the IT field and have been for over 30 years. It is a well known fact that (in IT at least) there has been a shift of work offshore or even a little known method of on shore-off shoring where multinationals bring people into the UK and pay them in such a way as to avoid NI and TAX (details supplied if anyone asks).

Another aspect of all this is the assumption that immigrant labour are doing jobs locals refuse to do for the money. It is never asked if they, the locals, are willing but employers will not select them for whatever reason (age, prejudice of any sort). Another irony is how the likes of the CBI etc trumpet the skills of the eastern europen people but conveniently forget that those same people were educated and trained (the latter of which we see little of in UK employment) by a socialist system much criticised by those same folk who employ them!

Is it sensible to get all your skilled workers from outside the UK and deny those origin countries their own skilled labour? I think I read somewhere how there are more Malawien doctors in Manchester than Malawi.

Posted by: IanG at October 29, 2007 07:39 PM

Fears about offshoring were always a hotter topic in the US than here, particularly in the IT and software industries. Interestingly, recent studies show that US-based employment in the sector has risen well beyond the highs that existed before the offshoring boom. The loss of jobs, in other words, appears to have been temporary.

As for skilled labour, it is a two-way street. The UK is the second biggest supplier of nurses to other OECD countries, after the Philippines, and the third biggest supplier of doctors, after India and Germany.

Posted by: David Smith at October 29, 2007 07:53 PM

Hi David,

Immigration is usually destined to follow places that offer opportunities, Whether you or anyone else for that matter assumes that the next 10 UK Plc years are going to provide an environment of opportunity( growth if you like) just like the last 10 years is not only a subject of great debate but also of optimism and perhaps wishful thinking.
I have heard recently that quite a few ethnic minorities have returnees to their respective homelands, not too mention the baby boomer brits that are leaving in droves for sunnier climates.
after the boom & bust there will be again equilibrium, albeit briefly and no doubt under the tories.

Best wishes
Arik Schickendantz

Posted by: Arik Schickendantz at October 30, 2007 02:24 AM

That's a fair point. Net inward migration assumes that Britain's labour market will continue to be a magnet for foreign workers, in a way it clearly wasn't in the 1970s and first half of the 1980s, when there were significant net outflows.

Posted by: David Smith at October 30, 2007 11:05 AM

Hi David, sorry, ignore my comments about short sterling yesterday, it seems the market reaction was to do with Ms Barker's very sensitive comments that she decided to release in the Guensey press, instead of national press. As you do. Off topic, but it does make me wonder what certain members of the MPC are doing releasing such sensitive market moving information in two bob publications like she and many other members do. The Grimsby Evenning post is another favourate soup box for memebers of the MPC.
Sorry to interrupt this good discussion...

Posted by: James Trouble at October 30, 2007 11:15 AM

It may well be right that “Migrant workers contribute more in taxes than they receive in services", as the TUC apparently believes; but of course when considering the effect of migration you have to bear in mind not just the migrants but the indigenous population - are their demands on services greater, for example because their wages are lower than they might otherwise have been? What is the impact on the indigenous population's use of services because of the extra demand for housing?

"Migration may possibly be linked to an increase in wage inequality in this country, but the evidence is not conclusive”; that's surely a no-brainer. And I once saw a Polish lady on TV who ran an accomodation agency in Blackpool for Polish immigrants; she said there would be 15,000 Poles working in the town last summer, and that many of them would be working for below the minimum wage. No really!

It's interesting to consider what would have been the impact on the economy of the higher interest rates that would surely have resulted from lower immigration. One obvious effect - lower house prices.

New Lab's policy of using immigration to allow the economy to run hot without inflation reminds me rather of the old Icelandic proverb - peeing in your own shoe won't keep your foot warm for long. Seeing the social consequences of ten years unrestricted immigration, my sense is that we are now getting cold feet.

It's an interesting example of the damage excessive political correctness does to politics. We haven't had this debate until recently because everyone is terrified they will be labelled racist.

Posted by: bears all at October 30, 2007 11:22 AM

On Kate Barker - this is part of the MPC's regional mission, and it does produce strange outcomes of this kind. The Bank says that MPC members rarely say anything new in such interviews but that ignores the fact that anything one of them says can be newsworthy for the markets, particularly on a quiet day.

In response to Bears All, one of the points I was trying to make was that these calculations are inherently difficult and uncertain. It is also the case that through two routes, pressure on population and an easing of inflationary pressures, migration has contributed, and continues to contribute, to high house prices.

However, the point about pay was a more subtle one than is usually made. It was that the recent wave of migrant workers, by working for lower wages than the indigenous population, have brought down average earnings growth without necessarily squeezing pay rises for the vast bulk of the indigenous population. Average pay rises are lower, in other words, because much of the increase in employment has been among those working for lower wages. The point comes over a little more clearly if you see the charts accompanying the Sunday Times article. Typically, foreign-born workers have earned more than locals on average. The recent wave has been unusual in that it earns less.

Posted by: David Smith at October 30, 2007 11:45 AM

I agree David that "these calculations are inherently difficult and uncertain"; and that through "pressure on population and an easing of inflationary pressures, migration has contributed, and continues to contribute, to high house prices."

These are things we have all known about for years, but been afraid to talk about.

"Average pay rises are lower, in other words, because much of the increase in employment has been among those working for lower wages." Yes. But also surely because the lowest paid haven't had increases as large as the better off. Because employers haven't had to compete for their labour.

And this from a government that regulary beats its breast about inequality and about child "poverty". I don't know whether to laugh or cry.

Posted by: bears all at October 30, 2007 12:53 PM

Yes, I accept that - both effects are there but the purely statistical effect is on that is not often commented on.

Posted by: David Smith at October 30, 2007 01:06 PM

im not too sure about the end to your article david, "It would be good to be able to refute this with proof that the economic benefits of migration are large and overwhelming. So far, however, that proof does not exist."
Some of the benefits that immigrants bring with them is that they do not require any costs to start working, most have already received their elementary education and they often come with a mentality to work rather than to abuse the benefits' system as some believe. Its also relevant to point out that emigrating is not as simple as some think, and whilst it is easier now for eastern europeans to emigrate, there are 'social magnets', such as leaving part of the family behind, that make the act of leaving one's country all the harder.
the first thing that a legal migrant worker does is pay taxes, "migrants paid £2.5 billion more in taxes than they took out in benefits and the use of public services". usually making usage of public services is something that comes with the longer term for immigrants, probably because the immigrant is not fammiliar with the system from the first day of arrival. in many cases the immigrant doesn't even get to the stage where they claim benefits, or start receiveing a pension, because they often go back to their country of origin at this point.
i think allowing such levels of immigration from eastern europe has many benefits, not only the ones described above, but also the fact that it discourages illegal immigrants who, without documentation, have to compete against these legal workers. This leads to more revenue for the government. so why complain?

Posted by: Francisco at October 30, 2007 02:22 PM

"On Kate Barker - this is part of the MPC's regional mission, and it does produce strange outcomes of this kind. The Bank says that MPC members rarely say anything new in such interviews but that ignores the fact that anything one of them says can be newsworthy for the markets, particularly on a quiet day."

So it seems sir! Top secret regional missions delivering stealthy strikes to the markets seems to be the norm these days for Mervin's men...

But they kind of remind me of Dad's Amy at the moment... "Don't panic Mr King, no need to cut rates, we've got our bunker in Grimsby and a look out in Guernsey making sure the economy is safe from the sub prime invaders!"

Posted by: James Trouble at October 30, 2007 03:17 PM