Under new management
Immigration has been billed as both a driver of, and a cure for, a low-wage, low-productivity economy. With big economic changes like Brexit, the recovery from Covid-19 and the transition to net zero emissions coming down the track in the 2020s, this note looks at recent changes in the UK’s immigration system in order to understand how they will – and won’t – help the UK to navigate towards a high-wage, high-productivity economy by 2030.
Although migration has had substantial effects on the UK economy over recent decades, claims that the move to a new immigration system (which occurred after the UK left the European Union’s Single Market and customs union in 2021) will drive the UK towards a new high-wage economic strategy are overdone. In order to do so, the country will need a clear economic strategy, not just a migration strategy.
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Looking back at recent decades marked by high levels of immigration, the Prime Minister stated last autumn that the UK’s “old broken model with low wages, low growth, low skills and low productivity” was “assisted and enabled by uncontrolled immigration.” By shifting to a new, post-Brexit system of controlled immigration from the European Union (EU), the UK would move “towards a high wage, high skill, high productivity and yes, thereby low tax economy.” At the opposite end of the spectrum to the Prime Minister are concerns that, as a result of moving to this new migration regime, with fewer EU citizens moving to the UK for work, the UK’s rate of economic growth, innovation and productivity will all begin to slow.
Both lines of reasoning infer that immigration strategy is a – if not, the – defining element of an economic strategy. But if policy makers are to successfully navigate the UK through the decade of economic change that is the 2020s, they will need a clearer assessment, of both the scale, and the nature, of the impact that the UK’s new immigration strategy will have on the economy. We set out the key features of that assessment in this note, starting with the ways in which immigration has helped change the size and shape of the UK labour force since the mid-1990s.
The UK swiftly transitioned from a country with net outward migration in the early 1990s to one with consistent net inward migration by the early 2000s, significantly impacting both the size and the shape of the UK workforce. Non-UK born workers comprised just 7 per cent of the 16-64-year-old workforce in 1995, rising to 12 per cent in 2007, and over 18 per cent in 2019. This sharp rise in migrant labour led to the workforce to growing faster in the early 21st century than it would otherwise have done: between 1994 and 2019, migrant workers accounted for nearly three-quarters (77 per cent) of the growth in the labour force, roughly evenly split between workers born in the EU (accounting for 41 per cent) and non-EU workers (36 per cent).
Migrant workers are significantly more likely than their UK counterparts to live in London: 10 per cent of the UK-born labour force resides in London, compared with 19 per cent of those from EU-8 countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia), and 37 and 42 per cent from EU-14 countries (member states that were part of the EU prior to 2004) and the rest of the world (RoW), respectively. EU migrants in particular have higher employment rates, across nearly all age groups, than their counterparts from the UK and other non-EU countries. Finally, EU-born workers are more likely to work in occupations classed as requiring less formal education. For example, the proportion of EU-born workers in an elementary occupation (classed as requiring lower-levels of formal education and training) is 9 percentage points higher than their UK-born counterparts.
It appears likely that migrant workers have, since the mid-2000’s, shifted the UK workforce towards London and slightly boosted the share of UK employment in lower-skilled work. However, migrant workers’ own location and employment choices might also have had an impact on what their UK-born counterparts do.
The number of immigrants moving to the UK from the EU began to fall shortly after the 2016 EU Referendum: between June 2016 and March 2020 the annual number of migrants moving to the UK from the EU fell by 111,000 and the number emigrating ticked up. By December 2017, net migration among people from EU-8 countries had in fact turned negative, with more moving from the UK than moving to it. The Covid-19 pandemic has further limited immigration levels (and could have boosted the number of migrants leaving the UK). And, crucially, a new work-related migration system – effective from January 2021 – will have begun to reshape the size and composition of migrant workers moving to the UK.
As a result of the UK leaving the EU, ‘freedom of movement’ to live, work and study between the UK and EU countries came to an end. In most cases, EU workers wanting to move to the UK either have to be eligible for a family-related visa or have a UK employer to sponsor them for a skilled worker visa (SWV, an employer sponsored route that’s limited to mid- and higher-skilled occupations). Separately, the Government opened up a visa route for British National Overseas (BNO) – a status held by some Hong Kong residents – for them to live and work in the UK. For non-EU workers, the SWV route represents something of a liberalisation: the number of eligible occupations has grown under the new system, and the cap on the number of SWVs that the Government can issue in a given year has been abolished.
But for EU workers, this is a significant tightening, given their previous rights to work in any occupation had been unimpeded under freedom of movement. In fact, 47 per cent of EU-born workers already in the UK during 2017-2019 worked in occupation that would not be eligible for the new SWV, equivalent to 4 per cent of the total 18-64-year-old labour force. (In practice, the new system only applies to incoming migrants, and EU workers already in the UK before 2021 will have been allowed to settle. Moreover, most migrants who come to the UK – regardless of whether they enter on a family, study, or work-related route – will have some right to work, and that is unchanged.) The introduction of visa requirements could also put off higher-skilled EU migrants from moving to the UK now more so than in the past.
The relative liberalisation of work visas for non-EU workers, and the introduction of the BNO route, is likely to boost the number of people from these countries moving to the UK and working. The extent to which this will balance out the fall in the number of workers moving from EU countries is of course uncertain. But we do expect future flows of work-related migrants to be more highly qualified and, despite the uncertainty, smaller in size than they were in the 2010s, before the 2016 EU referendum (when immigration levels from EU-8 and EU-2 countries – i.e. Bulgaria and Romania – had been rising).
The shift to this new system won’t affect all sectors equally. In the near term, some industries – namely those with high staff turnover that are reliant on workers who would be ineligible to come to the UK for work under the new rules – are likely to experience a labour-supply pinch in short order. Sectors like transport and storage, food and accommodation, manufacturing and domestic services, where EU-born workers in SWV-ineligible occupations form between 6 and 16 per cent of new starters (workers with their firms for fewer than two years), stand out.
In fact, there is evidence that these ‘at risk’ industries are already experiencing a migrant-induced labour supply pinch: vacancies in highly EU migrant-reliant sectors like administration and support, food and hospitality, and transport and storage have grown by much more than other sectors on average since before the pandemic (Autumn 2019). The correlation between migrant reliance and a sharp increase in vacancies isn’t perfect however: vacancies are also up significantly in sectors that have a lower than average share of migrants working in SWV-ineligible roles. Wider labour supply issues, like early retirement and long-term health conditions, are also probably likely playing a role here.
In the short-term, it’s highly likely that reduced levels of immigration from the EU will play a role in driving up labour shortages in specific sectors. But, in the medium-term, its effects are likely to be somewhat subtler. Over recent decades, the ability of UK to be able to freely hire migrants from the EU will have increased the ability of the workforce overall to meet shifting economic needs.
By virtue of their mobility into the country, and once here, being more likely than UK-born workers to move across the country and across sectors and occupations, migrant workers help the UK economy respond to change. Just over one-in-four (26 per cent) of UK-born workers reported being with their employer for less than two years during 2017-2019, compared with more than a third (35 per cent) of those born in EU-8 and EU-14 countries, and closer to half (46 per cent) of those from EU-2 countries. Migrants, and especially those EU migrants working in SWV-ineligible roles are also more likely to change both job and region, as well as to change occupation and sector. For example, 11 per cent and 10 per cent of 25-34-year-old EU-2 and EU-8 workers, respectively, reported changing industry division in the year to 2019, compared with just over 8 per cent of their counterparts born in the UK.
However, it’s not as simple as immigration only helping growing sectors to access labour: in some cases, migrant workers have also played a role in sustaining shrinking sectors – potentially slowing change down. Over recent decades, the share of migrants newly entering work (i.e. migrants with less than 2 years employer tenure) did indeed increase in some growing, mostly higher-skilled sectors, like science and research professionals. However, migrants also played a role in shoring up declining sectors: they increasingly flowed into some mid- and lower-skilled roles that were declining as a share of employment over recent decades – like elementary administrative occupations.
As with the previous immigration system, most migrants moving to the UK on a non-work visa route will have some working rights, without restrictions on the types of occupations that they can enter into. But because nearly half of EU migrants arriving in the UK over recent years moved for work-related reasons, and would now need a visa to do so, the new system will likely reduce both the number of migrants moving to the UK, compared with the pre-EU referendum period, and for those arriving on a work visa, the system will restrict the occupations they go into. Given that migrants are more likely than average to change both where they live, and the sectors they work in, the combined effect of comparatively lower levels of work-related immigration and more restrictions on their destinations will likely reduce the economy’s ability to shift labour across industries and occupations. This is worrying in the context of changes to the structure of the economy – like those brought about by Covid-19 recovery, Brexit and the transition to net zero emissions – coming over the course of the 2020s.
So, how will the shift the to this new migration system affect the UK’s economy in the longer-term? The new rules are unlikely to do much to shift the regional composition of the UK labour force away from London. Migrant workers in roles that wouldn’t be eligible for a work visa are significantly more likely than their UK-born counterparts to live in London. But even under an extreme ‘thought experiment’ in which the current stock of EU-born workers in SWV-ineligible occupations were not counted in the labour force (in other words, were the new immigration rules applied ex-post to the stock of EU migrants already working in the UK, rather than only to the flows of migrants now moving into the UK), the regional composition of UK employment wouldn’t shift by a large amount. For example, the share of UK workers accounted for by outer London would fall from 8.4 to 8.2 per cent; in Wales it would rise from 4.5 to 4.6 per cent. If anything, the fact that EU migrant workers in SWV-eligible roles are already significantly more likely to live in London than their counterparts in ineligible occupations (36 and 22 per cent, respectively) suggests that new system may do even more to concentrate migrant labour in the capital in future.
By design, the system will shift the occupational composition of migrant workers moving to the UK towards higher-skilled roles. Were we to run a similar thought experiment, where the stock of EU workers in SWV-ineligible roles are not counted in the labour force, the overall impact on the composition of UK employment would be to boost the share of UK employment in higher-skilled occupations, slightly: for example, a 0.8 percentage point increase in the share of employment taken up by corporate managers (a higher-skilled occupation); a 1.1 percentage point fall in the share that work in elementary administration (a lower-skilled occupation). Given that the rule change will, in practice, work its way through the labour market by changing the composition of flows rather than changing the entire stock of migrants at once, it’s fair to expect these smaller changes to be gradual, too.
But how will these changes affect other, big picture outcomes like the public finances and productivity? Although some fear that the public finances will suffer if migration levels fall, given the fact that the income tax receipts would fall too. In the short-run at least, the impact of lower migration on the public finances is likely to be positive given public spending would fall too – within the realm of +£2 billion by 2024-25. Despite being a positive figure, its impact is still small in comparison public spending in the round. In the longer-term, the effects of the new migration system on the public finances hinge on a number of assumptions made about migrant workers’ personal lives, and whether – the longer they live in the UK – their family, employment and earnings trajectories become more like their domestic-born counterparts. Assuming that work-related migrants have higher earnings and higher employment for their working lives suggests the impact will be positive on a per-person basis, but the size of that positive impact could fall or rise depending on personal factors, like how many children they have or what that generation goes on to do.
If the new work-related migration regime causes lower-wage, lower-productivity sectors to decline by dint of a smaller labour supply, the overall level of productivity in the UK economy will rise, by virtue of a ‘batting average’ effect. Similarly, as the new work-related migration regime shifts the educational and occupational composition of incoming migrants upward (towards skilled and higher-productivity sectors) then we would also expect average productivity levels to grow. Beyond the ‘batting average’ effect, there are questions about whether migration itself has intrinsic benefits for productivity: for example, if the presence of migrants – or a particular type of migrants – generates higher levels of productivity of their own accord.
There is a wide body of research that suggests migrant (and especially those in higher-skilled occupations) do indeed have a positive ‘spillover’ effect on productivity levels, but the size of the effects varies substantially. Overall, the likely effect of the move to a new work-related migration regime (where migration flows are smaller than before the EU referendum but more concentrated in higher-productivity occupations) on productivity is likely to be positive – certainly by virtue of compositional effects and possibly via induced effects. But policy makers shouldn’t expect big productivity gains from the move to a new migration system, as there is no strong cross-country relationship between changes in the share of workers that are migrants across countries and productivity growth.
However, there is a sense, at least according to the Prime Minister, that any migrant-induced labour shortages that do transpire will result in higher wages in the longer term. So far, the evidence suggests this is unlikely: research finds that an increase in the proportion of migrant workers only had a small, negative, impact on the wages of domestic born workers in lower-skilled occupations. Therefore, we shouldn’t expect a reduction in migrant workers to automatically drive up wages for UK-born workers in these same sectors. In practice, the impact of a few migrant workers on pay and productivity will depend on whether firms can replace workers with labour-saving technology. In some sectors there will indeed be short-term wage pressure. And the evidence suggests that where firms can replace labour with technology they will do so – pushing up measured productivity and pay for the few remaining workers. Where they can’t, they need to choose between raising wages and raising prices (and therefore lower wages for everyone else), with production falling over the medium-to-long term. There are few potential situations in which a shortage of migrant workers will drive up wages without reducing employment or production in the long term.
The difficult choices faced by sectors at risk of losing their labour supply also highlights the trade-offs policy makers will have to confront. They will need to decide where the lower production in return for lower migration is – and isn’t – an acceptable trade-off. For example, they will need to decide whether a decline in domestic farming and food manufacturing (and its implications for food security) are an acceptable price to pay for lower levels of lower-paid migration. In some cases, policy makers may decide the trade-offs from reduced labour supply are too big to bear, and will make exceptions to the rule, through expanding the size of routes like the Seasonal Agricultural Workers Scheme (SAWs). In others, they may accept higher prices and lower production in return for lower-levels of migration.
However, these decisions should be grounded in a firm assessment of just how much migration policy affects the country’s wider economic outcomes. Although the new system is likely to result in lower levels of immigration, it’s unlikely to move the dial very much on big-picture economic outcomes like the shape of the economy, or even the regional distribution of workers. Decisions on industrial policy will be needed in order to understand which sectors can, and those which are likely to, drive economic growth; decisions on trade strategy have to happen in order to decide which goods are better produced at home and imported from abroad. And stemming from all of these choices are key decisions on domestic policy: on how build the country’s human capital, boost innovation and encourage job mobility. In other words, migration policy complements, but it certainly doesn’t drive, the course of a country’s economic model. In order to navigate the UK towards a high-wage, high-skill economy by 2030 the country will need a clear economic strategy, not just a migration strategy.
Over recent decades international migration changed the size and shape of the UK labour force: the large increase in migrant labour that occurred between the mid-1990s and 2010s led to the workforce to growing faster in the early 21st century than it would otherwise have done. Migrant workers have been significantly more likely than UK-born workers to live in London, and workers from countries that joined the EU from 2004 have been more likely than their UK-born and other EU counterparts work in lower-skilled occupations.
As a result of the UK leaving the EU, the ‘freedom of movement’ to live, work and study between the UK and EU countries came to an end in January 2021. In most cases, EU workers wanting to move to the UK either have to be eligible for a family-related visa or have a UK employer to sponsor them for a skilled worker visa – a new type of work visa which is mostly limited to mid- and higher-skilled occupations. Although there is high degree of uncertainty, we expect immigration levels to be smaller, but more highly qualified, than they were just before the EU referendum in 2016.
In the short term, the new migration regime will cause some sectors, like food manufacturing, transport and storage and hospitality (which have high turnover and are reliant on EU-born workers in occupations that wouldn’t be eligible the new skilled visa) to experience an acute labour supply pinch.
Over the medium term, the effects of changing migration patterns could render the UK less able to manage big economic changes like Covid-19, Brexit and the transition to net zero emissions. This is in part because migrant workers are, on average, more likely to respond to changes in the economy by moving across places, industries and occupations.
But over the longer term, the shift to a new migration regime will not have large effects for the overall UK economy. Estimates suggest that it will have a positive but small impact on the public finances over the short term. Evidence shows it’s unlikely to yield any big productivity gains. Nor is the reduction in the number of migrant workers in highly-affected sectors likely to drive up wages over the longer term.
To get to a high-wage, high-productivity economy, policy makers also need to take key decisions on Industrial policy, trade strategy and the domestic policies that will support their success.
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