Economics of immigration

Talk of immigration levels has been an ever-increasing feature of public discourse. In 2010, the newly-elected Conservative Party promised to cut immigration levels to the ‘tens of thousands.’ This promise was made largely due to the large increase in net migration that occurred during the previous decade, having risen from 50,000 to 250,000 between 1997 and 2010. However, immigration levels increased in the following years as net migration reached 325,000 in both 2015 and 2016. This raises the question of whether immigration is beneficial for the economy, the effects of different amounts of immigration and the type of immigration – whether high/low skilled labour is entering the country. Proponents claim that greater GDP growth occurs under mass immigration, alongside providing the UK with skilled labour and entrepreneurship. However, the negative effects of housing inflation, increased pressure on public services and wage stagnation that can occur with high immigration levels, have to be taken into consideration. Whilst there are most certainly drawbacks from immigration, controlled net migration levels have proven beneficial for the economy as a whole.

Benefits

Greater net migration levels result in GDP growth. As more immigrants enter the country, the size of the labour force increases. This increases the productive potential of the economy, as there are more workers are available to produce goods and services, resulting in GDP growth. This was witnessed during the 2000s, as a large increase in net migration levels coincided with large increases in GDP levels, despite little productivity growth. Therefore, it can be concluded that greater immigration levels lead to higher GDP levels, as the productive potential of an economy increases with a larger labour force. With this said, it can be argued that rising GDP levels from immigration don’t necessarily correspond with higher living standards and thus greater GDP levels that come with immigration is meaningless. This is supported by evidence GDP growth greatly exceeded GDP per capita growth between 2005-2009 in the UK, indicating that whilst economic output was increasing, civilians were receiving less of that increase in wealth than previously. However, even though the annual percentage increase in GDP per capita was decreasing relative to GDP, the figure was nonetheless still rising. As civilians experienced increases in wealth that may not have occurred had net migration levels decreased, it is clear that net migration is a positive for the economy on the GDP front.

Moreover, immigrants provide the UK with skilled labour. This is made evident by the fact that immigrants are more likely to have educational qualifications than native-born citizens. An LSE study in 2012 found that just 20% of UK citizens finished education at 21 or later compared to over 53% of immigrants. As a result, productivity levels of an economy should increase with positive net migration as high skilled individuals from abroad come to the UK thereby filling job vacancies. Therefore, it is clear that immigration provides skilled labour, thereby having a positive effect on the UK economy due to the workforce becoming more highly educated, resulting in productivity increases. With this said, proponents for more restrictions on immigration claim that much of the immigration into the UK is low-skilled, with this having a negative effect on the availability of jobs for British workers. The former has already been proven false by the LSE study, however, the latter is known as the ‘lump-sum fallacy,’ which is the belief that the number of jobs in an economy is fixed. However, this isn’t the case, as immigrants use their wages to spend money on goods in an economy, thereby creating more jobs through this increase in demand. As a result, it is clear that immigrants provide skilled labour for the economy, creating jobs for others through increases in demand.

Finally, entrepreneurship and innovation are both promoted by immigration. Many immigrants arrive with little wealth, resulting in a greater incentive to work hard and take risks. This has been exemplified by many of the tech giants, as Jeff Bezos is a son of a Cuban immigrant and Steve Jobs that of a Syrian immigrant. These individuals brought unbridled wealth and prosperity to all civilians, through their innovative skills, resulting in higher living standards and a greater choice of goods and services. At the same time, such individuals are rare with the majority of immigrants not becoming serial entrepreneurs, especially older individuals. This highlights the importance of distinguishing between good and bad immigrants, with those of elder or of little skill likely to contribute little to an economy, compared to younger immigrants. Therefore, it is evident that immigration potentially results in more ambitious individuals entering the nation, with the potential to create goods and services that otherwise wouldn’t have been produced. However, as this isn’t always the case, it is necessary to promote certain types of immigration, including that of younger generations as it increases the likelihood of greater entrepreneurship within an economy from immigration.

Drawbacks

Contrarily, opponents to increasing immigration levels frequently cite house price inflation as a result of positive net migration. As immigrants enter the nation, the demand for housing invariably increases given that immigrants need a place to reside. This creates demand-pull inflation if the supply of homes cannot keep up with the increase in demand for homes that results from immigration. In the UK, rising levels of immigration have coincided with rising house prices, with the house price to earnings ratio in London doubling between 1997 and 2010 under the Labour government as net migration reached record levels. In fact, the Ministry of Housing, Communities and Local Government found that immigration between 1991 and 2015 had contributed to a 20% rise in house prices. This has resulted in less disposable income for civilians as a higher proportion of their budget is dedicated towards housing costs, thereby reducing living standards for civilians. With this said, it can be argued that the shortage of housing stock relative to demand is a result of restrictive government policies. This is due to the planning laws and bureaucracy in place, that make it difficult for real estate developers to obtain planning permission to build more homes. Given the increase in consumer demand and spending that immigrants bring, it is entirely possible that the increased money velocity would result in real estate developers producing more homes, had it not been for housing red tape. Therefore, whilst immigration can be attributed as a cause for rising house prices, it is more likely that excessive government regulation has caused this, given the inability of investors and developers to enter a market with such high-profit margins.

Increased pressure on public services is often touted as a drawback of high immigration levels. An increase in demand for these services, such as schools, public transport and medical services, results from a higher population that comes with immigration. This causes a deterioration in the quality of these services as population growth exceeds that of the number of hospitals, schools etc. During the 2016 referendum, this was made particularly evident as areas that had experienced the highest influx of migrants from the refugee crisis of 2015, voted strongly in favour of leaving the European Union. With this said, this deterioration in public services is a likely result of government policy rather than immigration itself. This is due to the increase in tax revenues that immigrants bring, with a study from Oxford in 2018 concluding that immigrants from the European Union bring a £4.7 billion fiscal benefit to the UK, through tax contributions and limited benefit recipients. Were increased revenues to result in proportional increases in public services, the issue of deteriorating public services wouldn’t exist. Thus, increased pressure on public services from immigration is a result of poor government policy rather than immigration itself, with immigrants providing a net fiscal benefit to the economy.

Lastly, wage stagnation/decline is frequently argued as a downside to immigration. This follows from the argument that immigration leads to an increase in the supply of labour, creating a negative pull on wages given that firms can hire workers for lower pay. At the same time, immigrants are often touted as willing to accept work for lower pay, as these salaries would still be greater than that of their native country. However, many studies have concluded that high levels of immigration don’t necessarily correlate with declining wages. In fact, a study by the Economic Policy Institute, studying the period between 1994-2007, found that immigration raised wages for US-born workers by 0.4%. Rising immigration and salaries during the 1900s in the US also corresponded with an increase in real wages, further highlighting the lack of correlation between immigration and salaries. Therefore, it is clear that rising immigration doesn’t necessarily correspond with decreasing wages for civilians, as exemplified by studies and historical data.

Ultimately, immigration has a net positive effect on the economy as a whole. Increasing levels of net migration coincide with increasing GDP levels, an influx of skilled labour, alongside entrepreneurship and innovation. Many of the negatives touted by opponents to immigration are largely down to externalities, with the issue of immigration inducing declining wages a fallacy in itself. Both the failure of the housing stock to keep up with rising demand and the deterioration of public services that is attributed to immigration are a result of poor government policies rather than immigration.