Business and Economics Blog

A revision blog on the economic impact of migration on the UK economy

Net migration is the net total of migrants during the period, that is, the total number of immigrants less the annual number of emigrants, including both citizens and non citizens

Net migration, United Kingdom from Timetric

Factors affecting the direction and scale of migration

Many economic and social factors affect the rate of migration. In general, the incentive to migrate is strongest when the expected increase in earnings exceeds the cost of relocation.

1. Differences between countries in wages and salaries on offer for equivalent jobs
2. Access to the benefits system of host countries plus state education, housing & health care
3. Employment opportunities vary between nations, in particular for younger workers
4. A desire to travel, learn a new language, pick up new skills and qualifications
5. A desire to escape political repression and corruption in the country of origin
6. The impact of satellite television and the internet in changing people’s expectations
7. The effects of cheaper trans-national phone calls and more affordable air travel and coach travel for example within the European Union
8. The unwillingness of people within the domestic economy to take certain “drudge-filled” jobs such as porters, cleaners and petrol attendants

The effects of labour migration on the labour markets of richer nations inside the European Union including the UK depend on where the main source of competitive advantage lies, according to research from Marques and Metcalf in a paper delivered to the Royal Economic Society. They argued that industries that source their competitive advantage from a large, skilled workforce will have gained from an influx of younger, well-educated workers. Industries such as high-knowledge manufacturing, transportation and financial services may well gain from an increase supply of skilled workers from Eastern Europe.

In contrast industries that rely on low-educated labour-intensive workers will lose out because production will gravitate to countries where unit labour costs are lower. Examples of include textiles and clothing and leisure sectors where there has been a shift of production towards emerging market countries in the Far East.

United Kingdom from Timetric

The impact of migration on the UK economy

Have migrant workers provided a boost to the competitiveness and supply-side capacity of the UK economy?

The debate will rage on for years and it is important to be aware that with this kind of controversial issue, many of those putting forward evidence will be using normative economics laden with value judgments and will often use data selectively to push their own point of view. 

Supporters of unrestricted inward labour migration have argued that migration provides numerous advantages:

1. Fresh skills: Migrants can provide complementary skills to domestic workers, which can raise the productivity of both (a Brazilian child minder provides good quality child care at an affordable price which allows a highly paid female magazine editor to continue to work.)

2. A driver of innovation and entrepreneurship: Inward migration can also be a driver of technological change and a fresh source of entrepreneurs. Much innovation comes from the work of teams of people who have different perspectives and experiences.

3. Pressure on government to reform: Labour migration can also put political pressure on failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe.

4. Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work and contribute to a nation’s GDP through a higher level of aggregate demand.

5. Reducing skilled-labour shortages and expanding the labour supply: Migration can help to relieve labour shortages and help to control wage inflation. Recruitment of skilled workers from outside the European Union is important to many businesses in the UK, and evidence indicates they currently make a positive contribution to UK’s GDP.

6. Making a country attractive to FDI: Availability and quality of labour is known to be a key investment location factor for many businesses. In a global battle for talent, if a country is not successful in attracting and keeping skilled workers then FDI in high-knowledge industries will eventually flow to other parts of the world.

7. Income flows (remittances): Remittances sent home by migrants add to the GNP of the home nations. And if these remittances boost spending in these countries, this creates a fresh demand for the exports of other nations. Remittances sent home by migrants exceeded $440bn in 2010, with more than two-thirds of these flows going to developing countries.
According to the economist Professor Ian Goldin from Oxford University, in Latin America and the Caribbean, more than 50-million people are supported by remittances, and the numbers are even higher in Africa and Asia.

8. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net contributors to the government’s finances.

Supporters of allowing free movement of labour argue that labour mobility is a positive-sum game rather than a zero-sum game.

United Kingdom from Timetric

On the other side there are several pressure groups campaigning for tighter restrictions on migrant workers. Some of the arguments include:

• Welfare costs: Increasing cost of providing public services as migrants come into a country.
• Worker displacement: Possible displacement effects of domestic workers
• Wage cuts: Migrant workers may lower the wages of people in other jobs.
• Social pressures: Social tensions arising from the problems of integrating hundreds of thousands of extra workers into local areas and regions.
• Pressure on property prices: Rising demand for housing which forces up prices and rents.
• Benefit claims: Many immigrants find it hard to get work
• Who really gains? The benefits of migration are focused mainly on employers, especially those who take on illegal workers at low wages.
• Poverty risk: Migration may have the effect of worsening the level of relative poverty in a society. And many migrant workers have complained of exploitation by businesses that have monopsony power in a local labour market.

United Kingdom from Timetric

Brain Drains

A brain drain is a term that describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. It has been used to describe net outward migration of people from several European Union countries in recent times (notably Ireland, Greece and Spain) – another phrase for this is human capital flight.

A sizeable brain drain can bring economic costs and benefits for the sending nation. One disadvantage is that countries lose out on the benefits that might have accrued from the resources used in educating people who leave. Add to this the loss of tax revenue from those who choose to live and work overseas. A sizeable loss of skilled workers (many of whom may be younger and therefore more geographically mobile) could lead to labour shortages in the sender country, putting upward pressure on wages and labour costs.

Some of this income earned overseas returns to the sender country in the form of remittances (adding to GNP) and many skilled migrants often leave only for a year or two – the percentage of permanent migration inside the EU is relatively small.

The benefits and costs of labour migration are hard to quantify and estimate. Much depends on

1. The types of people who choose to migrate from one country to another.

2. The ease with which they assimilate into a new country and whether they find regular jobs.

3. Whether a rise in labour migration stimulates capital spending by firms and by government.

4. Whether workers who come into a country decide to stay in the longer term or whether they regard migration as essentially a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to their country of origin.

Impact on the economies of source countries

An important evaluation point is that inward migration into the UK from Eastern European countries has affected not just the UK labour market but also the labour markets in the countries from which these migrants have come.  Many eastern European countries have suffered from a sustained reduction in the size of their populations – migration is one factor behind this although not the only one. There are many potential negative consequences among them the following:

• A reduction in the size of the available labour supply

• A possible reduction in the quality of the labour supply if skilled migrants leave

• A fall in aggregate demand for goods and services

• A worsening problem of labour shortages which could drive up wages, costs and prices

• A decline in the tax-paying population which will hit government tax revenues

The unemployed are people able, available and willing to work at the going wage rate but cannot find a job despite an active search for work.

Unemployment means that scarce human resources are not being used to produce goods and services to meet people’s needs and wants. Persistently high levels of joblessness have damaging consequences for an economy causing both economic and social costs.

Measuring unemployment

Claimant Count
The Claimant Count measure includes people who are eligible to claim the Job Seeker’s Allowance (JSA). The data is seasonally adjusted to take into account predictable seasonal changes in the demand for labour.

The chart below shows the level of unemployment as measured by the claimant count – note the y-axis, the number of people claiming the jobseekers’ allowance

Bank of England Target 2.0 from Timetric

Labour force Survey
The Labour Force Survey counts those who are without any kind of job including part time work but who have looked for work in the past month and are able to start work immediately. The figure includes those people who have found a job and are waiting to start in the next two weeks

The chart below shows the LFS unemployment rate is unemployment as a percentage of the labour force

Bank of England Target 2.0 from Timetric

On average, the labour force survey measure has exceeded the claimant count by about 500,000 in recent years. Because it is a survey – albeit a large one and one that provides a rich source of data on the employment status of thousands of households across the UK – there will always be a sampling error in the data. The Labour Force Survey uses the internationally agreed definition of unemployment and therefore best allows cross-country comparisons of unemployment levels among developed countries.

No measure of unemployment can ever be completely accurate since there are some people out of work but looking for a job who are not picked up by the official statistics. An example of this are discouraged workers who may have been out of employment for a lengthy time and who have lost the motivation to keep applying for jobs. Many may decide to leave the formal labour market and look to earn extra income through ‘cash in hand’ jobs in informal parts of the economy.

Economic inactivity

Economically inactive people are not actively looking for work – some of the reasons include

• The need to look after elderly or infirmed relatives
• Parents who are full-time carers for their children
• The retired

Bank of England Target 2.0 from Timetric

Note that in many countries the official data may ignore the extent of under-employment in an economy, for example people who are desperate for full-time work but who cannot find it and have to settle for a part-time job. In many lower-income countries the quality of the labour market data may be poor causing published figures to be inaccurate

Inflation is a sustained increase in the cost of living or the average / general price level leading to a fall in the purchasing power of money. The opposite of inflation is deflation which is a decrease in the cost of living or average price level.

How is the rate of inflation measured?

The rate of inflation is measured by the annual percentage change in consumer prices.

The British government has set an inflation target of 2% using the consumer price index (CPI). It is the job of the Bank of England to set interest rates so that aggregate demand is controlled, inflationary pressures are subdued and the inflation target is reached. The Bank is independent of the government with control of interest rates and it is free from political intervention

The process of calculating the rate of inflation in the UK

The cost of living is a measure of changes in the average cost for a household of buying a basket of different goods and services.

Price data is used in many ways by the government, businesses, and society in general. They can affect interest rates, tax allowances, wages, state benefits, pensions, maintenance payments and many other ‘index-linked’ contracts.

In the UK there are two measures, the Retail Price Index (RPI) & the Consumer Price Index (CPI).

The major difference between the two measures, is that CPI calculations excludes payments on mortgage interest (It’s thought that by excluding mortgages, the CPI is a better measure of the impact of macroeconomic policy

The CPI is a weighted price index. Changes in weights reflect shifts in the spending patterns of households in the British economy as measured by the Family Expenditure Survey

CPI for goods and services

Bank of England Target 2.0 from Timetric

Limitations of the Consumer Price Index as a measure of inflation

The CPI is a thorough indicator of consumer price inflation for the economy but there are some weaknesses in its usefulness for some groups of people.

The CPI is not fully representative: Since the CPI represents the expenditure of the ‘average’ household, inevitably it will be inaccurate for the ‘non-typical’ household, for example, 14% of the index is devoted to motoring expenses – inapplicable for non-car owners. Single people have different spending patterns from households that include children, young from old, male from female, rich from poor and minority groups. We all have our own ‘weighting’ for goods and services that does not coincide with that assigned for the consumer price index.

Housing costs: The ‘housing’ category of the CPI records changes in the costs of rents, property and insurance, repairs. It accounts for around 16% of the index. Housing costs vary greatly from person to person.

Changing quality of goods and services: Although the price of a good or service may rise, this may also be accompanied by an improvement in quality as the product. It is hard to make price comparisons of, for example, electrical goods over the last 20 years because new audio-visual equipment is so different from its predecessors. In this respect, the CPI may over-estimate inflation. The CPI is slow to respond to the emergence of new products and services.

Bank of England Target 2.0 from Timetric

Deflation

Price deflation is the opposite of inflation and happens when the rate of inflation becomes negative. I.e. the general price level is falling and the purchasing power of say £1,000 in cash is increasing. Some countries have experienced bouts of deflation in recent years; perhaps the most well-known example was Japan during the late 1990s and in the current decade. In Japan, the root cause of deflation was slow growth and a high level of spare capacity in many industries that was driving prices lower. 

Hyperinflation

Hyperinflation is extremely rare. Recent examples include Yugoslavia Argentina, Brazil, Georgia and Turkey (where inflation reached 70% in 1999). The classic example of hyperinflation was of course the rampant inflation in Weimar Germany between 1921 and 1923. When hyperinflation occurs, the value of money becomes worthless and people lose all confidence in money both as a store of value and also as a medium of exchange. The recent hyperinflation in Zimbabwe is a good example of the havoc that can be caused when price inflation spirals out of control. It has made it virtually impossible for businesses to function in any kind of normal way.

UK Retail Price Inflation

Bank of England Target 2.0 from Timetric

A revision blog on possible unemployment questions on AS and A2 papers

Bank of England Target 2.0 from Timetric

Key revision points on unemployment – AS macroeconomics

Make sure you are aware of the main UK measures of unemployment, i.e. the claimant count and the Labour Force Survey measure.
Be aware of how employment and unemployment may be determined by both demand-side and supply-side factors

Demand side factors include:

1/ Strength / weakness of aggregate demand in the economic cycle i.e. changes in C+I+G+X-M – e.g. effect on jobs of a fall in UK exports overseas
2/ Cost of employing workers including real wages, employers’ national insurance contributions – many economists now calling for a cut in NIC as a way of stimulating jobs
3/ Impact of changes in the exchange rate and growth in trading partner countries on demand for and output in our export industries
4/ How changes in government spending and taxation can change the incentive for businesses to employ more/less people – impact of fiscal austerity / sharp decline in public sector jobs
5/ Impact of foreign direct investment on the demand for labour in the UK economy
6/ Employment effects from policies designed to stimulate enterprise (long run employment creation effects)

Supply-side factors include:

1/ Incentives to search for and then accept paid work (frictional U)
2/ Skills of the labour force (human capital)  (structural U)
3/ Impact of changes in geographical mobility of labour (structural U)
4/ Impact of changes in net migration of workers into the economy
5/ Importance of the availability and cost of child care as a factor affecting the ability of parents to seek and find work
6/ Changes in state retirement ages and investment in further and higher education

*Students should be able to analyse and evaluate these determinants with the help of production possibility curves and AD/AS diagrams.
*Students should also understand the terms cyclical, frictional, seasonal and structural unemployment.
*There should be an understanding of the output gap in relation to economic growth, unemployment and the price level

It is likely that questions on unemployment will focus on the consequences of the slowdown / recession on the labour market and also on the policy options that will be most effective in stimulating growth and new jobs. Growth of real GDP of less than 2 per cent per year is often enough to trigger a rise in the number of people registered as unemployed and looking for work

Bank of England Target 2.0 from Timetric

Key revision points on unemployment – A2 macroeconomics

At A2 level the focus of study on unemployment switches more to the consequences of unemployment and economic inactivity. For example you need to understand and discuss the consequences for individuals and the performance of the economy

Consequences may include:

(i) Effects on the underlying trend growth rate
(ii) Impact on government finance and the budget deficit
(iii) Implications for relative poverty / inequality
(iv) Direct effects on demand and associated multiplier and accelerator effects
(v) Longer term impact on the skills / motivation / employability of the unemployed
(vi) Social implications

There is also a need to be aware of the determinants of the natural rate of unemployment and both the short-run and long-run Phillips curves, and to be able to discuss the implications of these for economic policy.

So crucial to your revision will be

1/ The dynamics of the natural rate (i.e. frictional + structural) and the most effective policies to bring down both types of unemployment
2/ Discussions about the efficacy of different demand-side approaches to limiting cyclical unemployment in a recession
3/ The basics of the original Phillips Curves and criticisms / variants of it including the importance of inflation expectations, money illusion and the NAIRU
4/ Understanding the factors that explain why there are persistent differences in unemployment rates between countries – not least within the 27 nations of the European Union
5/ Consideration of labour market flexibility and how it can impact on macroeconomic performance
6/ Long term unemployment / youth unemployment and other deeper policy dilemmas

Bank of England Target 2.0 from Timetric

Evaluation on unemployment policies

1. Unemployment policies are designed to
a. Improve skills / human capital of the workforce so that people can be flexible as the economy changes over time
b. Provide the right incentives to look for and accept work
c. Increase the occupational and geographical mobility of labour
d. Maintain a sufficiently high level of demand for goods and services to create new jobs
e. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities
2. There are always cyclical fluctuations in employment. If growth can be sustained and monetary and fiscal policy can avoid a large negative output gap then it should be possible to create a steady flow of new jobs.
3. An economic recovery creates new jobs, the issue is whether people in the labour market have the right skills, qualifications and experience to take them
4. Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the root cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation
5. Full-employment does not mean zero unemployment! There will always be some frictional unemployment – it may be useful to have a small surplus pool of labour available. Most economists argue that in a modern economy there will always be some frictional unemployment of perhaps 2-3% of the labour force.
6. There are still large regional differences in unemployment levels which causes significant economic and external costs. Urban and regional regeneration can take decades to achieve.

Economists agree that unemployment cannot fall to zero since there will always be frictional unemployment caused by people moving into the labour market and others switching between jobs. Full-employment might be defined as when the labour market has reached a state of equilibrium – i.e. when those who are willing and able to work at going wage rates are able to find work.

As the Eurozone continues to be bufferted by instability in Spanish Banks, and uncertainty over Greek membership of the single currency. Robert Peston fronts a programme on The Euro on BBC2 tonight.

It remains to be seen if he offers any answers to Mervyn King’s observation, that the UK biggest trading partner, the euro area, is “tearing itself apart without any obvious solution,”

We have been invited by several colleagues to organise a visit to the Middle East in April 2013 to provide a programme of CPD and student revision workshops. As part of our planning, we’d like to invite colleagues in the area to let us have their thoughts on the content of the programme. Please use this online survey to have your input into the tour planning!

https://tutor2u.wufoo.com/forms/2013-uae-qatar-programme/