Jonathan Portes writes: If you want to get serious about growth, you need to be positive about migration

On Monday, I did seven interviews on David Cameron’s immigration speech. Each time I’ve tried to get across one simple fact: that all the available evidence suggests that immigrants – and immigrants from the new EU member states, in particular – more than pay their way. That is, that they pay more in taxes than they cost in benefits and services; overall, from being a burden, they make it easier to finance our welfare state not harder.

It is that basic fact that all three party leaders should be explaining to their constituents. Instead, they seem to be engaged in a rather degrading contest to think up relatively minor and probably ineffective tweaks to eligibility for benefits or services, in turn designed to address what they all privately know full well to be relatively minor problems.

But in some sense discussing the short-term fiscal costs and benefits, where the basic facts are well known and fairly obvious (of course young immigrants who mostly have jobs pay in more than they get out) misses the point. For anyone who thinks of themselves as an economic “liberal”, whatever their political views, the economic benefits of migration, like free trade, are much greater than the short run impacts on taxes and benefits.

It is often argued that the economic impacts of migration — positive or negative — are likely to be small, with the main impact being to increase both population and GDP, but with little impact (over the medium- to long-run at least) on GDP per capita or unemployment and employment rates. However, this is a very static view of the world; it does not reflect how economies actually work, or where growth really comes from — at least if you believe in the dynamic potential of market economies. To see this, we merely need to observe that exactly the same is true of trade.

But, of course, most economists believe that the economic benefits of trade are quite considerable, and that these static estimates are not the whole story or even the main point; the benefits are dynamic and arise from competition and specialization rather than simple static comparative advantage. We do not gain from free trade in, say, cars with the EU because either we or the French or Germans have a fixed and static comparative advantage in different types of car, so we can produce one type of car better and they can produce another. Rather, we gain because trade increases competition between different producers, diversification of the supply chain across the EU, the incentive for technological innovation, and all sorts of other difficult-to-measure but important effects that increase productivity in the medium- to long-term.

The same is, in principle, likely to be true of immigration. Immigrants don’t just fill specific short-term gaps in the labour market. They can bring different skills and aptitudes, and transmit those to non-immigrant colleagues (and vice versa); they can increase competition in particular labour markets, increasing the incentive for natives to acquire certain skills. Immigrant entrepreneurs can increase competition in product markets. And workplace diversity — across a number of dimensions — can increase (or decrease) productivity and innovation.

Of course, not all of these impacts are necessarily positive: for example, it is well known that immigrants are substantially more likely to be entrepreneurs or self-employed. This could be because they are self-selected, so enterprising people are more likely to migrate; but exclusion or discrimination might also force some migrants into low-productivity self-employment.

So what does the evidence say? Well, in contrast to the well-established economic literature on the impact of migration on labour markets, we have much less research on these topics. But it does seem that immigration is associated with increased innovation. Meanwhile, NIESR research for the Migration Advisory Committee found that “rather than migrants substituting for home-grown talent, there is evidence of complementarities between skilled migrants and skilled resident workers.”

This research agenda is still in its infancy; we still do not know precisely the channels through which immigration impacts on growth. Nor will we ever be able to put precise numbers on it, any more than we can identify the contribution of Britain’s history as a trading nation to our current prosperity. But we do know enough to set a clear direction for policy.

So what should we do? It is simply not credible for the Prime Minister to claim that the UK is “open for business” and for the Chancellor to say that he is prepared to take the “difficult decisions” to boost growth, while at the same time making the primary objective of immigration policy the reduction of net migration.

So the first priority for politicians of all parties should be simply to make clear that immigration, like trade, is indeed central to making the UK open for business, and hence to our growth strategy. The next step would be then to examine each aspect of immigration policy – but in particular those relating to students, skilled workers, and settlement – with a view towards reorienting them towards growth. Sadly, that is not what any of the party leaders said in their recent speeches on this topic — quite the opposite.

There are many specific policy changes, major and minor, that are required. But in my view, more important is a change of attitude and mindset on the part of government and policymakers. If we want to be serious about growth, we will need to be positive about migration.

* Jonathan Portes is the Director of the National Institute of Economic and Social Research. Previously, he was Chief Economist at the Cabinet Office. He blogs at Not The Treasury Point of View.

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23 Comments

  • On this, as on other areas of economics, I strongly disagree with Jonathan Portes.

    NIESR asked a whole load of employers and employers organisations whether they would like to be able to import lots of skilled people from abroad. This is presumably rather than having to (1) train up UK people and (2) pay more to recruit, motivate and retain those people. Hardly surprisingly, those organisations said yes, they wanted lots more migration and that it was the best thing since sliced bread and of course it created lots more jobs. Of course they are going to say that, aren’t they?

    When are we going to see through this kind of biased research in favour of immigration and see that:
    1) Yes, in limited circumstances, in the short term, immigration can be used to fill temporary skill gaps;
    2) On a long term basis, it is not a substitute for upskilling our own population;
    3) If taken to extremes, it can result in major social problems, housing shortages etc as population density increases;
    4) The UK is left paying benefits to support less employable members of the UK workforce and young people who are displaced from employment by better qualified incomers ;
    4) It can be used by employers to drive down wages and conditions generally, which is now having major adverse effects for economic growth by reducing consumer demand.

  • 5) It can be used by employers to drive down wages and conditions generally, which is now having major adverse effects for economic growth by reducing consumer demand.

  • Richard Dean 26th Mar '13 - 2:47pm

    I agree with all of RC’s points. And it seems very strange indeed to link immigration to growth. Are all of Europe and the US’s economic problems caused by a lack of immigrants? Is immigration the only way this huge economic area can regain growth? Nonsense.

    For “increase competition in labour markets”, read “take jobs away from the natives”. If immigrants rely less than natives on benefits, then it must mean that immigrants are better at getting jobs than natives. I’d be happy if these statistics turned out to have been manipulated, because in their present form they are ammunition for the people who like to hate.

  • If we want to be serious about growth, we will need to be positive about migrationThis just about sums up the issue. There have been waves of migrant influx that have transformed economic activity. A clear example was the arrival of East African Asians in the early 70s. In many towns local shopping was transformed. Doubtless there was a negative impact for indigenous small shopkeepers, whose livelihoods were already under threat from the growth of supermarkets. The overall effect of this contribution alone was an increase in economic activity.

    Last night Farage was on Newsnight again, stoking up his depressingly successful anti-immigrant politics. The responses from the main parties has only served to validate this man’s poison. It really is difficult to understand what Nick Clegg thinks he will achieve by his contribution to the ‘me-too-ism’. As on the anti EU agenda, no one (well hardly anyone – there is no accounting for some) will vote for Lib Dems on account of their anti immigrant stance; if Liberals will not speak up for the virtues of free movement of people within the EU and more widely, a liberal approach to migration, who will?

  • Thanks for the support Richard. Resorting to immigration to fill our skills gaps is effectively social dumping by our employers. As such it should be seen alongside all the other ruses they have come up with over the past few years to shed their social obligations like ending defined benefit pension plans and using offshore tax havens to shield their profits from taxation.

    If there is one thing that the growth model in the run up to 2008 teaches us it is that using immigration to overcome skills gaps rather than ensuring employers have to invest in good quality training and apprenticeships to make UK born workers more employable stores up major problems for the future. It leads to an excluded UK born underclass who are not incentivised by the benefits system to seek work and are not incentivised by good wages, training and the prospect of promotion to remain there if they do find it.

    Reliance on immigration for the UK’s skills base is just one of the multiple unfairnesses heaped on young people and less skilled workers in this country, alongside impositions like zero hour contracts and weakening of employment law protections.

    Until we can start seeing questions like this from the viewpoint of the UK’s workless and the working poor, then we can never lay claim to be a party the promotes equality and fulfilment of everyone’s best potential.

  • @ Martin

    “There have been waves of migrant influx that have transformed economic activity. A clear example was the arrival of East African Asians in the early 70s. ”

    But Martin, the current situation is on a massively different scale. We are talking about millions rather than tens of thousands.

    Even if we accept the premise that immigration favours growth, it also has highly negative distributional effects.

    In practice, what it means is that the poorest people in this country are forced to compete for their livelihoods with less well off workers worldwide. Is it any wonder then that inequality increases, their standard of living falls and has to be made up using tax credits and other benefits?

    This current wave of immigration is effectively facilitating social dumping by UK employers who are being relieved of their duty to train and upskill UK workers.

  • Skill shortages do represent an issue. The low level of UK Maths for example confers an automatic advantage to migrants from Eastern Europe and educated migrants from further afield. Although optimistically this could be described as a temporary factor (don’t try holding your breath), the demands for the economy are much more immediate than any change in the education system could deal with. Arguably, immigration could reduce the imperative to rectify the skills shortage, though it is as likely that the expectations of immigrants could do more to push up standards of Mathematical attainment in the UK.

    William Hobhouse appears to have uncritically accepted the “People from other countries coming to the UK to benefit from our welfare state ” trope. Who are you referring to and what evidence do you have that this is a significant problem?

  • RC, you seem to oscillate between ‘worldwide’ and and ‘the current wave of immigration’ which I assume is within the EU single market. Are we really talking ‘millions’ when the population of Romania is about 19 million and that of Bulgaria is 7.3 million? What proportion do you think will leave and of those how many will go to the UK?

    You are right about working conditions and standards. Without agreement on common standards, there is a clear risk of a race to the bottom. Odder still that many who most vehemently wish to repudiate common standards in the workplace are most vociferous about immigration, still UKIP and the Tory right are not noted for consistency.

  • @Martin
    It is millions into the UK, although not every year yet…

    Official figures show that about 13% of population in 2011 were foreign-born, this is approximately 7 million people, which is almost a double the number in 1993, of which approximately 2.5M arrived after 2001.

  • To paraphrase Gordon Brown, I would say “British Jobs for British Workers and legal immigrants”.

    If an immigrant has attained permanent resident status then they should be entiitled to exactly the same opportunities and benefits as UK citizens. Students and work permit holders do not have indefinite leave to remain and already have no recourse to public funds.

    I would advocate a complete overhaul of the tax and benefit sysyem that makes work the only practical and sustainable route out of poverty for able-bodied UK citizens and permanent residents alike.. The steps are relatively straightforward.

    1. Replacement of personal tax allowance, JSA, ESA, child and working tax credits and child allowance with Citizens income for all resident UK Citizens and permanent residents.
    2. Introduction of mimimum wage job guarantee scheme to replace workfare etc; both to address youth unemployment and long term unemployment.
    3. Restriction of entitlement to housing benefits and social housing to employed tenants (including those on the job guarantee scheme), the disabled and pensioners.

    Newly arrived Immigrants would maintain access to universal education and health benefits, but would not be eligible for Citizens income until they had earned permanent resident status (normally after ten years of employment and paying taxes) or eligible for social housing or housing benefit if they were not gianfully employed in the public or private sector or had taken up an offer in the job guarantee scheme.

    Such an overhaul, buttressed by a beefed up illegal immigration enforcement agency made-up of newly recruited officers on the job guarantee scheme should start to address both the reality and the perceptions that appear to be the principal source of current social tensions and fears.

  • Michael Parsons 27th Mar '13 - 9:43am

    Pretty much off the beam, this article.

    (1) If you want to be ‘positve’ about immigration you need to know who is coming, who is staying and who is leaving (eg native skilklked and professional people in sciebce and technology?) and why. We can’t even count our migrations!
    (2) the old saws about free trade are trotted out again: it leads to specialisation and so can trap countries into reliance on too few industries mainly from the past, like UK by 1914. Dynamic countries like Germany and later France used protection to develop new technological advances aimned at changing relatrive comparative costs, not entrenching them.
    (3) If we are to have faith in the marvels of ‘free market economics’ we need to believe that controlled economies like China are rapidly falling behind dynamic old Uncle ‘Trade Deficit’ Sam. Fat chance!

  • Dane Clouston,

    policy initiatives have to both practical merit and politically feasibility if they are to have any prospect of serious consideration.

    We are currently undergoing substantial changges to the adminstration of the tax and benefit system. From next month real time reporting of PAYE is coming online. Universal credit and monthly payment of benefits is to follow shortly. A review of combining the administration of income tax and national insurance is underway.

    I have outined in prevoius articles the basic arguments for citizens income and Job guarantees in addition to writing down my thoughts on Immigration policy.

    To be politically practial, the introduction of Citizens Income should be revenue neutral and replace both the personal tax allowance and much of the existing means tested benefit system. Similarly, a job guarantee program should be largely self-funding.

    I believe a Citizens or basic i ncome has distinct advantages over a universal inheritance program. Although a Universal inheritance might be used to purchase an income annuity this would be tiny e.g. a £1000 universal inheritance at 25 years of age might purchase an immediate annual annuity income of £30 per year or so.

    A citizens income administerted by way of a negative income tax would enable no tax or NI deductions to be made from the income of those earning up to the minimum wage and direct monthly payments (by way of tax credits) to supplement the income of those earning below the minium wage.

    Citizens income does not need to be enough to live on , anymore than JSA or income support is. It is a security net, set at a level to enable people to subsist during temporary periods of involuntary unemployment.

    The job guarantee scheme is the way out of poverty and a major step towards reducing inequality. Establishing both a right to work for all those willing and able to do so. Reintroducing the need to be in regular employment to secure a social housing tenancy or housing benefit restores the link between work and state welfare assistance for the able-bodied.

    The Citizens Income should be payable to UK Citizens and legal immigrants that had established a tax domicile in the UK. The mimimum wage job guarantee scheme should be available to all who are eligible to work in the UK.

  • @JoeBourke
    “A citizens income administerted by way of a negative income tax would enable no tax or NI deductions to be made from the income of those earning up to the minimum wage and direct monthly payments (by way of tax credits) to supplement the income of those earning below the minium wage.”

    I’ve not really give the idea of a citizens income much consideration, however, I have some practical concerns based on this statement. Taxation has been at times heatedly discussed, particularly tax credits, where some have argued that these are just another benefit and hence represent lost revenue to HMRC and so should be minimised, whereas others have argued that they represent taxes that shouldn’t of have been collected and hence should not be regarded as lost revenue.

  • Roland,

    My thoughts on this are largely based on practicality.

    I think we need to make a distinction between tax credits that are part of the progressive tax sysyem and so called ‘tax expenditures’ i.e. the reliefs, such as higher rate tax reliefs on pension contributions, that can be claimed as deductions against taxable income.

    I believe the great majority of Libdems would support the following principles:

    1. The tax and welfare sysytem should be as simple to deal with and as transparent as we can make it.
    2. Those earning at or below the minimum wage should be relieved of obligations to make payments of income tax amd NIc’s.
    3.Those whose income is below minimum wage should be supported in the welfare sysytem and in accessing work opportunities.
    4. Higher earners should make a proprtionally greater contribution of their income to funding public services and welfare.
    5. Equality of opportunity following education is best achieved by access to jobs and training.
    6. Welfare dependency and high marginal rates of benefit withdrawal should be avoided.
    7. Rights come with responsibility.

    In my view the taxation system is best used to equitably collect the revenues needed to fund our public services and welfare systyem and not distorted to incentivise behaviours – whether that be sin taxes, savings, investment or whatever the current vogue may be.

    Where the state wishes to encourage specific business or individual activity that should be done directly by way of grants and/or low cost or matching loan finance for business and index linked savings accounts or other such saving products for individuals.

    In the case of a citizens income equivalent to the rate of income tax and employee Ni on the minimum wage without any personal allowance, this will approximate to the current level of JSA. It would not make sense to pay the Citizens income or collect the tax and NI due. It is simply offset by way of a tax credit via the PAYE code. For the self-employed the tax credit has the same function and effect as the personal allowance and is taken into account in tax payments (or refunds) on account made every six months by the taxpayer. For the unemployed and low earners it is paid monthly as part and parcel of any other univeral credit payments due.

    It eliminates the entire means-tested structure of JSA, ESA etc. Job Centres would instead adminster a voluntary minimum wage job guarantee program for those seeking work. Anyone, other than the disabled or pensioners, applying for a social housing tenancy or housing benefit would need to be employed or enrolled in the job guarantee program.

  • Joe,
    Perhaps I didn’t make myself totally clear, although I think you sort of got what I was alluding to.

    Yes we do need to distinguish between tax credits and tax reliefs, however, my concern is that money is still collected by HMRC and then returned by way of tax credits. The problem is that having collected the money, it becomes highly visible and as we have seen in recent years, some have argued that these visible sums are actually tax revenues that belong to the Treasury (since they have been collected through taxation) rather than being a redistribution of income which the tax office is merely facilitating. Hence my concern is whilst this may start off with good intentions, penny pinching governments may not look at it in such favourable terms and so take actions that devalue the citizens wage so that monies can be allocated to pet projects…

  • Roland,

    I take your point. To implement a welfare policy that is immune to penny pinching governments or reallocation to pet projects, the setting of the level of Citizens income would have to be delegated to an independent body. That is by no means a panacea in itself as we would have an unelected body controlling a substantial element of public spending.

    I think our best route is to establish a precedent that the Citizens income should be equal to the combined level of income tax and NI on a full-time minimum wage without any personal allowance. A future government would then need to be able to convince the electorate that it was justified in reverting to a position of effective taxation of minimum wage earners.

  • Dane Clouston,

    “what happens during longer periods of unemployment.” The job guarantee scheme is the fall back for extended periods of unemployment.

    The point you make about the benefit of getting a start with a small capital sum early in life is well made. I am reminded of a story that the actor Pierce Brosnan told about his youth. He was living in a bedsit in Fulham tying to get a break in the West End theatre scene. Reading the News of World one Sunday morning in the 1970’s he came across an advert offering cheap loans for central heating installations. He duly applied and when the funds arrived he bought two airline tickets to Los Angeles for himself and his girlfriend and as they say the rest is history.

    Not every young person will turn a small grubstake into a Hollywood career as an International film star, but there must be one or two future James Bond’s somewhere out there just waiting for their bit of good luck at the right time.

  • Immigration policy is economic policy. Agree wholeheartedly with this view. One reason glossed over, I guess, because its an inconvenient truth, is because people in their droves are leaving the uk. Educated and appropriately skilled but with little incentive to stay. For example, the best academics may up sticks to the US.

    They may not even leave but just experienced people may retire but spending on training and education in those skills had been cut back for the generations after. If anything, in the short term, these people do need replacing as it takes years to train up.

    The other is that immigration offsets the immesirisation of economic growth due to trade. At a high level, net inflows of people coming to the UK ensuring it remains productive helps ensure the country benefits from being an open economy. Affluent immigrants who help the uk keep its purchasing power may also be immigrants coming in the uk, working hard and succeeding sometimes where they couldn’t in their home countries. Closing the door on this pathway to growth is just opening it in the other direction for xenophobes and bigots.

  • Mick Taylor 30th Mar '13 - 3:31pm

    The real poser is in the original title, If we want growth….

    Even if there wasn’t a problem with fossil fuels, our position as a party should surely be to pursue prosperity without growth? Or at least to say that developing countries need growth and we don’t. The major problem with migration has nothing to do with being in favour of or against immigration. In developing countries at least, it has to do with the very people who their country needs to build their economies and provide the entrepreneurs of the future are the very entrepreneurs, doctors, engineers, nurses and teachers that are emigrating.

    The people who keep our NHS and many public services going do so by denying their expertise to their own countries. As Lib Dems, surely we should be seeking to assist developing countries by ensuring our aid goes to help their own people remain there and develop their own countries?

    I have always welcomed people to our country and will continue to do so. But building a better more equal world must become a higher priority than it is.

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